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FEDERAL AND STA?E LEGISLATION
NECESSARY !Q.:!NCREASE MEMBERSHIP IN !.JiE.
FBDErtAL
pESERV~
FEDERi.L
fdW STATE LAVv'S.
SYSTEM
* * * * *
FECOM1!£NDATIONS .Q[
C0u1~SEL
!Q. .1]j! FEDEHAL RESERVE BOARD.
X-799
FEDERAL AND STATE LEGISLATION 11ECESSARY TO
INCREASE r.illviBERSHIP IN THE FEDERAL RESERVE SYSTEM, .AND TO BRING ABOUT UNIFORMITY IIJ ITIJSBAL AND STATE LAWS.
The Federal Reserve Act is designed, a.r.1ong other
things, to make it pos::;i'ble to create a. conpact banking system out
oi the savara.l ti10usa.nd i~1ll.Elper~dent and unrala.ted banking institutions in the United Sr.a.tes.
The Pnsid.3nt £1a.s a.p:,;ealed to all eli(.,ible banks to
enter the syster.1 in ord.ar th:l.t the ba.~J.king resources of the United
Sta.tes r.:ta~' be ilseli to the f,;rcatest adv-a.nr.abe in the ;rasent eLier;ency ..
Under existing ia;;;s, t~IlY bank.s are 'W".c.Lble to enter
the .;ystem, ·.-;hUe o"Lh.;;rs are deterred frotl doing so because in the
opinion of tL'leir oi;;:'icers a.nci. directors r.1erabership would restrict
the OlJerations oi such ba.:ol:::s, or ·..rould. ir.1pose additional burdens
·,-Ji th.out acle-...u--...ta COi,•l.J<=mss.ting <:~.dv<:.ntages.
r·hne :'di'cher Federal nor State legisl.:;~.tion can r.Ja.ka
it possible Io:;.· .:;~.ll oan:..:li'\; instit'l:,tions to' becar.le l~l&i-Oers ;·vitnout
rao:ce or less r.:;~.a.ic.:;~.l chc.mbas in t;.1e syst<;r;l, r..any or' the soc.:;~.lled obstaclas to t1er.1barBhip can be rer;wved by c~.Clendments to the ll~edera.l
Re;;erve Act C:~.nd to v.:;~.:;,~ious Std.te la>Js.
In sde~:ine; to frocure this
nacessC:~.ry lat.,isl.:;~.tion, it is ir;::c.;orta.nt tit...d.t ·nills introc.:tuced should
be dr.:;~.·.a'l v.-ith c1. vie·;• of bringi:;,;; .:;~.i:Jou.t greatar coora.i!1cl tion in the
J?O-."lers or' n;.l.·~ionc.l. a.::1d. St""ta ·o.:;~.r.li'.::.;;;, d.~'la. 6 reater unii'or•.. ity in Faderal
0:1.nd State la,;s r-:: 0 --.lld.tli'lz; t:1e bc:!.:"i.::ing bu~inass.
In tne s1:.c:..ter:1ent r.i:l.a.e public thr01.;:,h the :2ederal Res~rv3 :Scc.rd. on Jc·co'J~:..· l), 1)'17, the Pr;:;sident, in app~ling to
S'.:.o:~:cc: ·o.;;~.:i:'.::s '.:iO -~;,;cor.:e "~;ar:it0rs of '~i1e systac-1 G~.nd in ref<Jrri...J.g to the
Feder<-<.1 :?..cs<trve .A:! t, ..!c.~.lls ""t~<J.•t io::J. -~o the ia.:::. t tr..at the "J'nification c:: o~..:.:: ·oan:l:<:i;."lg sys.tew and. the COLl.iJlete r,ioboliza.tion of reservol:> cl.re aeon; tl:e fund¢a.l 1::.rin::.:i;ples of the Act. 11
T.nis '-"'::"'l.i.::'ic.:..tion Cd.n h.:.~.rdly be acccr:;:f;lished by a.mendner..ts to the Feder.;:.l la·.~rs.
The :?ederal Raserve Act cd.nnOt 7 in other
·:Jord.s, 'be tjad,e ad.a.I t"-ble 'CO the 1,,.;,;.::; of i'o:-ty-eight jjj'ferent Std. tes,
and.~·.:.:~e:i.·e raust be coo:;;;;ra:cion as ·b0'v'·"'S~l tna Sta.ta and Federal authorities in ;;he L~tter o:;:· la_isla-~ion.
.
In o:::~~r to secure t~1is cooperation it is i.Llportant tbat
a iai'Llite :uolicy shc·.1J.._ ·.:~a adopted.; th::l.t consideration should be
given to .:Che c:kl.ractar oi l;;:~islc~:cion necessary on the part of the
St<-<.tes, and. or.. the pc.~.rt o: tl'le :2ederal Govartltient, and tbat the purpose C~.na. :prob<:<.ble effec'~ of any la;isl<:~.·cion acivocated, snould be made
,,
x...799
~2-
cl~r.
Tnis involve& a consid0ration of those Federal and State
laws v7hich either prohib~ t or have d. tendency to prevent nonmember
banks frcr.1 bec('r.ling mec1bers <'f the Federal reserve system.
Banks ··•hich are prohibited or prevented from
entering t:he system r;ay be divided into three classes:
1..
Those ,vJ.lich ara ineligible to t1et1bershibp
under the Federal Reserve Act.
2.
Those r111ich are prohibited from becot'lLm.g
nembers by State larvs.
3..
Those iJhich, ·;vhUe ali;:,iblet c~.re prevented
frQn joining beca.use the character of
their assets is such they are unable
to obtain adei.iuate accommodation from
the Federal Reserve funk, and are.
tnerefore, unwilling to assume the oblit;cl tions cf mer.1bership.
In d.eterr;Lming ,-;ha.t form or legislation is necessary
to increase the ne;:,.b0rship in the :Federal Reserve Systera, these three
classes, ior convenience, should be treated separ~tely.
BAIJKS IIIT:J:.IGIBLE U11D.ER FEDERAL LAW.
1.
The -:~.ua.lif:ica.tions prescribed by the Federal
Reserve Act exclude frOLl :c.1embership:
(a.)
(b)
Unincorporated banking associations havirlg no
capital stock;
Banks the capital stock of which is insufficient
to entitle thet1 to become national banks.
According to the Report of the Coz;1ptroller of the Cu:rrency for the year 1917, on June 20, 1917, the aggregate re~ources of
StC~.te banks, savings banks. private ba.nks, and loan and trust c~an:dles,
ar..1ounted to more than $20Fcoo,ooo,ooo.
Of this a.r.1ount, D1ore tba.n
$4.800,000,000 Has held b~t the 622 mut~l sa.vings bcl.:nks in the United
Sta.tes, a.nd it is e;:;tir,la.ted. than an ecJ.:ua.l or greater amo·Jnt v~a.s held by
inccrporatod. State Sd.Vings bd.nk:s w;Lthout sud!.ficient Ccl.pita.l to entitle
then to b.Jco::1e l'lationa.l b..;;.11ks.
I.l this estir,;a.te ;is correct, a.ppro.x.irna. t·Jly one-ba.lf of tr~c b..1nk:i.'1g reso":.:;.rc,Js of the United Sta. tes, other
tha.n those hel.:l. by l1il.tiorld.l banks, are ha:d ·by bd.:nks ,iihich are inelie;ible
under th.J :C.,edcra.l R,:;::>3:·ve Act to beccDa tleiDbdr [)a.nks. ·It is, therefore,
desirable -clk..·c p:..·ovisior.. ;;~J.o-..11J. be r.~d.e for t:ila adpuhssion of such banking associd.tior2s c:.s r;::ay be a.dr;y,;ttei wi.thot;.t onclP.J:Jgering the strength of
the systetl•
X-79!·
-3Unincorpor~ted associations have no capital stoCk ~·h
.,ihich t& baso thair subscription to the stock of the Federal reserve
bank,. but raost if not all, have surplus and undivided profits ··•hich
might be used as a basis for such subscriptions.
As an alternative
plan a liruted or -.~.ualified r.1et1bership tiit;ht be extended to these associations conditioned upor. the r.1ainte:nance of a fixed. deposit balance
with the Federal reserve bank without any re~uir~1ent that such banks
sbd.ll subscribe to the capital s«Jokkof the Federal Reserve bank,..
For
reasons hereinafter set forth, ~nowev.:;r, it is believed. to be the n1ore
conservative policy to offer r.1er.1bership to e;.ll banks t1ade el.I:hgible
upon substantially sirruill.at terms, rather than to have different classes
of IIlembership..
'
It is~ therefore, recot1t1ended. that the Federal Reserve
Act be ar.1ended so c~,s to permit Llutual savings associations to membership, provided their surplus ~s e':l.ual to the d.t1ount of capital stock
that ·would be re'l,uired of a national ba.nk doing business in the same
place in ••hich s~h associc~,tion is located.
admit to
provided
e':l.ual to
business
It is also reca:iLlend.ed that the Act be ar.1ended so as to
nembershi]? incorporated banks ·;-,rithinsufficient capital stock,
the comb,.ned ca]?ital stock and surplus of each such bank is
the d,r,lO"Illlt that ·;,ro-uld be re':luired. of a national bank doing
in the place in which such ba.nk is located..
The capital re':l.uirements of national banks are not
unreasonably la.r~e a.nd a. reduction v•ould not ba;ge a. tendency to strength~n the system •
.Banks with insufficient capital mtght, however, be
to become mer..1bers i f they ·,v-Ul agree to maintain a surplus
which added to their capital will e~ual the amount of capital stock
ra~.~-uired. of :Q.Q.tional banks.
A fixed surplus v.rould in such case
c~,fford the same protection to those dealing vvith the bank that is afforded by capital stock, except in those States in which the stockholders are under a double liability for contracts and debts of the
association.
The stockholders of national banks and of some State
banks ·and trust con:rpe;.n.n:s are subject to this double liability, but this
is not true of the stockholders of <:.11 banks adzaitted to r.1erabership in
the Fede1·al reserve systetl, a.nd. there is ac..:ordingly nr- inconsistency
in :Jexmitting a fixed surplus to be treated. as capital stock for' the
purpose of detenntning the eligibility of the bauk.
pe~tted
Section l of the cippendei.l bill, pu.ge_ _ _~ is drawn
L"tJ. accordance ·,;ith these recommendations.
X-799
MEMBERSHIP PJ!\OHIBITED 3Y STATE LAWS.
2.
Bank3 are prevented from becoming members by the
la.ws {Jf •nly five Stdtes:
Thirty-on<;J States have passed enabling
acts specifically authorizing State b~nks ~nd trust companies tt enter
the system.
The lci.Ws of twelve States do not expressly or impliedly
prohibit membership, and so it is necessary to obtain legislation in
only five States, in 0rder to make it possible fr,r all banks which
meet tho requirements of the Federal Reserve Act, to enter the system.
In some States, however, banks and trust companies becoming members of the system, are entitled to enjoy all of the privileges and are subject to the restrictions of other mt:Jmber banks, while
in other States, banks and trust companies are permitted to become members, but are still subject to reserve and other requirements of the
State laws.
It is, therefore, aesirable th3.t somt:i standard form of
enabling act should be adopted by the sevt:!ra.l St~tes, designed to place
all membt:ir banks on an equality.
There is appended ht:iret~a. tbn~a.tive
draft of bill int<>naed to accomplish this purpose. (See p.:~.ge
•)
BANKS PRE}'~NT§D FROM ENTERING THE SYSTEM BECAUSE
OF ADDITIO!-!}-k,I3_URDEN§_ IJiY_OJNEp_ IN MEMBERSHIP.
The largt:ist class of nonmember bc~.nks ia composed. of
those which cn5~5e in tho corr~ercial b~nkin5 business to l limited
extent only.
Few of the ~ssets of such banks ~re eligible for rediscount with, or purchase by, a Federal reserve bank.
Except to
a very J,imited. exte;nt, such Lanks are, therefore, unc~.tlle to procure
loana from tht: F~o;d'-'rc~.l reserve bci.nk and the benefits derivtld from
membership do not c~.ppe.:t.r to be of .:~. concreto or pr~ctical n~ture when
viewed from the at ..mdpoint of the earning c;;~.pacity of the bankThe attitude of those in control of institutions of
this clas·.;; may be summed up as follows;:
(~)
If the investme>nts th~t they c~.re ptlrmitted by
law to make, could be used wh~;;n n~;;ct:saary to obt~in loans from
Feder~l reserve banks, they could re~sonably ~fford to cc~.rry the re~uired reserve witn tne Federal reserve b~nk, and to invest surplus
in interest bearing sccuritiea instead of carrying this surplus with
other banks at interest.
St;;~.te
(b) On the other hand, if their Statb laws permitted investment in securities which are eli5ible for rediscount with,
or purchase by, Federc~.l reserve bank.;;, they could acquired rec~.sonable
proportion of elit,ible pc~.per and could thus obt.:~.in some adv~ntage from
membership in the Federal Reserve system.
Unless their assets comtl within the catt:!gory of
X-799
-5~ligible p~per, th~y feel that m~mb~rship imposes additional burden without compensating advantages.
FEDERAL LEGISLATION PERMITTING FEDERAL RESERVE
BANKS TO ACQUIRE NO~ LIQUID SECURITIES NOT
CONSISTENT WITH PURPOSES OF FEDERAL RESERVE ACT..
An amendm~nt to the Feder~l Reserve Act, authorizing
Federal r~serve banks to require long term securities other than
obligations of the United States, would hardly be consistent with
the purpos~s of the Act.
The succ~ss of the Federal reserve system is dependent upon, to a vt::.ry gre..it ext~nt, the ability of the
Federal reserve b~nks to respond to the dem..inds made upon them by
the member banks in abnorm..il as well as in normal times.
This
ability would, unaoubtecily• be seriously imp~irc~ if the Federal
rcservt:i banks were pt:rmi tteci to acquirt;; any large proportion of
non liquid securities.
Such securities would neCessarily be offered
to the Fedt:iral reserve banks in l~rge quantities at times when the
general ~rk~t for such securiti~s was most inactive, and when the
Feder~l reserve b~nk itself could not dispose of such securities in
ord~r to meet current de~~nds except at a loss.
Such an amendment
to th~ Federal Rt:serve Act would, therefore, inevitably have a tendency to weaken, rather than to strengthen, the system.
The true remedy for this aitu~tion would set:im to lie
with the States.
If the State laws ~re ~ended so as to authorize
noncom...l'lercial banks to invest some proportion of their asat;;;tS in
eligible commercial paper, such b~nks without any m~t~rial reductions in their earnings m~y c~rry such pap~r as ~ secondary reserve
and will thus be plact:d in a position as member banks to obtain
assistance from the Feder~l r~serve banks when neededAs these banks are not subject to th~ s~e proportion
of demand liabiliti~s as commercial b~nks, it will not bo necessary
for them to carry a large proportion of th~ir assets in eligible
paper, but they should be permitted. to carry aome proportion sor:as
not to be in times of stress, dependent upon other banks for assistance.
in thia class
Many of the banka/will, no d.oubt, become members, notwithstanding the fact that under existing laws the burdens of memb~rship are in many cases believed to outweigh ihs advantages.
X-799
-6A CHANGE IN RFS~RVE ~.9..V.I!§MENTS OF ~fEI~_Elt_ !3~
SHCULD ENC.P.!JB£GF.:...J-lniJCOm.1t:RCIAL BANKS T.9 ENTER
SYSTEM.
Assumin6 thcct St:l.t<:; leg,isLo.tion is necessJ.ry to ovt:rcor:,e this situ:ition ul tima.t"'ly, tht: queJtion :1rist:>s wh~;;tht::r or
not membc:rsnip cannot Lc;; en::c,urd.6t:d by an amendmt:nt to tht;; Fed-
er:cil Rus.;,rv6 Act d "'si 6 ned. to rt::coc;nize the principlt:l thc::lt the
a.mount to bto ccr.tr:.butod to resourct:os of tho Federal rest;rve b:cink
should be based to so::1(:; oXtc:nt upon th:;; a.dv.:~.nt.;~.ges to be derived
from tncmb"'rship.
In other v>ords, if th<:.> .:~.asets of a bank are
such th.:~.t it C-1.!'! pro:;ur~;;; only li::litt:::-:1 accomr::odc-ttion from th~;; Feder.il rt;sd·ve;; b:cink, it '.;ould St;o:;;n; to b~;; consistent to rtquire less
rcoato'rVe to bco r:u.intaincd thc:tn is r,~aint;;l.irtt;;d by commerci.il ba.nks.
It L; not unu.;;ua.l for b.:1nkers to r"'quire Ltrgt> borrowers to m:ciinta.in ~ 6r~.:~.t"'r d~rosit ba.lJ.nce thJ.n.thosc who do not
seek loJ.no from tht; b.:~.nk.
It may bo r"'.:~.son.ibly J.ssumed th.:~.t rtoncommercLl.l b.inks will l:Lt.Vt::. occJ.;;ion to co.pply for fewt:r loa.ns than
commerc:i.:~.l b.mks sinc:e such b.:mks are not subject to demand liabilitius to the s.:~.m~ extent ~s comrr"'rci.1.l b~nks.
The rt:cegnition of the principlo th~t resources contribut"'d to th.:: Fedt>r:::l.l rc:servc: b.::.nk stculd bt:J~r somo rel:.~.tion to the
bendits re;;ceiveci would not involve; .:my ch~n<bt; in the C:::l.pit:::l.l requiremc:nt-> since tht> stock of the Fedvr:.~.l reserve b~nks is now
yiddin6 a. f~ir r~;;turn tt the sub;;cribt:r d.nd · con3titutes C:i. desircJ.ble
.:~.nd. cons~;:;;rv.:~.tivt~ inveatn:e;;nt for "'ither -:~. comm_,rcLtl or a noncommercia.l bct.nk~
It \vould, ho·NeVcr 1 rt::quire some chc:tnge in the reserve
req uirc.r:icmt ch
In d.eter:winin,s the rcst:lr·.re to be m.;~.int.1inc;d, the chardcter
of li.:~.bility to wn.ich thb r:Jt;;i!Jver bcJ.nk i3 aubj ect should be taken into
c onsid"r.:lti on.
V:hilo not "'xpr"'ssed in thv statute this principle
wa.s rE::c ogniz ~;d in the Na.tion.:.a.l B.ii.nk Act in fixing thEJ reserve requirc:;rr.<;;nts of n.-:ttional banks.
Banks in rd>~;;rvc and co;;ntrJ.l res:;;;rV;::. cities WB~>e, a.nd a.r~;;,
required to ca.rry a hi.sh"'r reservt~ th.:~.r~ othor banks.
This distinction
was no .:ioubt rr,adt:> Oi:!C<AUSe the; banks i~ such cities c;;~.rry a l;;~.rger
amount of bank dtopoaita than these> loc.:~.tea. clSe\vhcrc:.
ReserVt; requirezpents should bo bas<;>d on th"' ch;;~.ractcr of :J.<_,cJit liability
rather tha.n on the.: c;eoe:;ra.phical loc.:..ticn of th" b;..~.nk.
Bank deposits owned by ot!H:Jr bank~ -.vhich J..re in turn
subject to demand li.:~.bilities of their cu.:>tomd:;; are more subject to
withdrawal thci.n other clJ..sses of d. eposi ts and :i hi~Sher rt:S\:lrVe shoul.d
be maintained a6ainst this th.in .igainst any other cld.ss.
X-79~
-7Adopting the principle that in fixing r~strVB requirem.e:;nts apecial consiJt)r::~.tion snoulJ be givvn tc the exttont to
which th.J deposit iti 3ulJjcct 't:J wi'thira:N:ll, it is recommt:nded
that Section lS cf tht F;::deral Re3t:r\·~ Act be :.l.lT:c;ndeei so d.S to
provide fer th0 iol}c·.:ing cl.:3~;ifi~::~.ticnJ:
(a.) Od.nk dc-pOJi t.;; j
(b) c omwt:rcial deposits, that is, dofO.:.d t3. of
p~rsons,
firms, or coq.on.ticn3 used in the conduct of
thtdr busir.. t:l.;;s j
(c) indivi.;u-'-.1 dtrr,:csit;;, tllct.'t i3, checkinz; accounts of
inct:.vic.ua.:3 used in t.i1c- p~;;;.~=:nt of current expenaes;
(o.) inv-"stmijnt depc;;i t.;;, tt~t is, t un:L:> hvld for inVt.:.3t~:"'i:t.
Hlls cJ.ci:;;.;; tc incl~;;<c savin,ss accour::-cs, C.crtitic.:::.t~:-_, of ·~'..oposi't ;A.nd other tine
d·~:rcsi ':.J.
The rvSv!'Vb to bt- m.... ir.':...o.incd
cla33eS 'to be ~s fellows:
i3-ink deposits
Co~er~ial
in
InJivi_;ud.).
d~positiJ
InVvdtrn~:;;nt
deposits
t!1~:-Sv
seV~;:.r-.1-l
15 pt;;r c"'nt.
10
do
7
do
5
Jo
Section 2 of th<:: a:pp .. naed bill (p~6'-'_ _ _ _) is cir ..1.wn
with this rvCOL'lni<-.tnci ..ttion.
..!.CCOrcHnCI;)
deposits
d.6..i~n3t
X-799a
FEDERAL LEGISLATION NECESSARY TO BRING ABOUt
GREATER COORDINATION ~N POWERS OF STATE
AND NATIONAL BANKS. AND TO PROMOTE UNIFORWuTY IN FEDERAL AND STATE LAWS
REGULATING THE BANKING BUSINESS.
** ****
The arr.endments to Federal and State laws hereinbefore suggested are intended to remove some of the legal obstacles to State bank rr~mbership~ and to encourage the nonrr.emb~r
banks to enter the system. In order to &3velop and strengthen
the system~ however~ it is necessary not only to increase the
rrembership, but it is e~ually important to insure as far as possible the same rights and privileges to all members and to place
all member banks in a position to meet successfully the competition of nonmember banks.
If banks are induced to become nembers in the
present emergency from patriotic motives., and at the end of the
war feel that membership places them at a disadvantage in competition vvith nonmember banks., there will naturally be a tendency
to withdraw.
From every standpoint, therefore, i t is important
that membership should add to the strength of the member bank and
should not result in unduly restricting the operations of such
bank.
State banks and trust companies which becorre
members derive their corporate powers from the States by whichth~y
t:.r;;t;.· created. It is not within the povver of Congress to broaden
or enlarge these powers, but this n:ust be accomplished by legislation on the part of the States. It is, honever, within the
po.ver of Congress to rrake it possible for all such banks to enter
the national system by conversion into national banks under circumstances which nill insure to such banks the exercise of all
powers enjoyed by competing State banks.
National bank po.vers
should be broadened to enable them to rreet corrpetition of other
banks.
In the recent case of Bank v. FellowsJ 224 U. S.
the Court has fully sustained the right of Congress to grant to
national banks any and all powers exercised by corporations created under State laws which corr.e into competition or quasi competition with such banks.
To preserve and perpetuate the Federal Reserve
it is obviously advisable to vest in national banks all
powers nhich can be safely and conzervatively exercised ar:d which
are necessary to enable them to rr.eet the corrjpetition of State
banks and trust companies.
It has, heretofore been
System~
X-799a
.... 2 -
generally conceded that the corporate powers of national
banks have been rruch more limited in scope than those of
competing State banks and trust companies .. _and that the
limitations on the exercise of their corporate poNers ha'U)e
been such as to place them at a ::!iso..dvanta.ge in meet:.i,ng the
competition of other banks.
PROBABLE EFFECT ON OTHER BANKS AND ON
STATE LEGISLATION.
I.f the poNers of national banks are broadened so
as to enable them to engage in the same classes of business
as their competitors., State banks which enter the system but
which are subject to certain disadvantages resulting from dual
control by State and Federal authorities will be encouraged to
convert into national banks. Those which have rerr.a.ined out of
the system because of the belief that their powers will be restricted will be encouraged to enter since they rO.y;;df it becorres necessary .. convert into national banks without loss ~.
of·power.
Assuming that banks entering the system are subject
to certain lirrdtations on their operations prescribed by the
laws of the United States for the purpose of safeguarding the
banking business .. this fact will in the end prove an asset in
meeting competition of nonrr~mber banks since the public will
prefer to deal with those banks which are subject to proper
safeguards in their operations. The State authorities will 1
therefore .. be encouraged to adopt sirr~lar restrictions and the
rr.uch desired uniformity in laws regulating the business of
banking will thereby be expedited.
To accomplish this purpose
it is recorrrrended:
FIRST: That the trust powers of national banks be
broadened so as to enable such banks under appropriate safeguards to conduct this class of business on the sar:ce basis as
trust company competitors. There has already been introduced
in Congress a bill reconn.ended by the Board ·Nhich is designed
to accomplish this purpose and which provides for segregation
of assets and the creation of a trust department.
SECOND: That national banks be authori~ed to conduct
a separate savings department uncler appropriate safeguards, on
the sarr~ basis as State savings bank competitors. Section 3 of
the appended bill, page
is drawn in accordance with this
1
recommendation.
It is not contemplated that there should be any-assignment of capital to each department 1 but merely that the assets of
the three departments should be segregated and the books and
X-799a
- 3 -
accounts kept independently.
The capital and surplus of the
bank •Nill, therefore, be used to cover deficiencies in the assets of any departrr~nt.
EFFECT OF THESE AMEND.!VJENTS.
If these two amendments to the Federal laws are adopt•
ed national banks will be authorized to engage in the business
of GOm:r;erciaJ. banks, savings banks and trust companies.
1'he
business of savings banks and trust companies is more or less
local in character and can properly be conducted in accordance
with the State laws subject to such restrictions as the Federal
Reserve Board rr.ay find it necessary to irr,pose.
The business
of corrrr,ercial banks, on the other hand, is both local and national in character.
Deposits received from and loans nade to customers at
the place of business of the bank rray be classed as local transactions but the services performed by the corrmercial bank for
its customers include the transfer of funds or "'C~ailits , from
one State to another, the collection of obligations maturing in
other States, and other transactions which necessitate the establishment of relations with correspondent banks located outside of
the State in which the corrmercial bank has its place of business.
Few of the customers of a corrmercial bank conduct their
business operations wholly within the State in which the bank is
located.
Such banks are, therefore, called upon to act as
agents and to perform other services in transactions involving
interstate as well as intrastate corrnerce. It is, therefore,
proper that this branch of the banking business should be conducted subject to the provisions of the National Bank Act as from
time to time amended.
~any of the provisions of this Act have
already been incorporated in the la..vs of several States and in
the course of tirre it Nill no doubt becorr,e the stanO.ard. form of
act regulating the corrEercial banking business i~ the United
States.
The restrictions on banking operations contained in
the National Bank Act, vvhich appear to be the subject of most
concern to State banks contemplating conversion into national
banks~ are those which limit loans on real estate and ..vhich limit
the amount that rray be loaned to any one person) firm or corporation.
Inasrr.uch as real estate loans under the foregoing plan
could be handled through the savings department of the bank, the
-czorrmercial department would be in a position to compete on more
or less equal terms with State corm:ercial banks in nearly a.ll
States except in some States State banks are permitted to lend
to one person~ firm or corporation an amount greater than ten
per cent of the capital and surplus of the landing bank~
In
X-799a
- 4 ·-
those State,> Section 5200 3 v•hich prohibits national banks from
lending an amount great0r than ten per cent of their capital
ancl surplus to any on0 person 1 firm or corporation) rr,ight still
deter State banks from converting into national banks.
It is not bolieved. that this limitation should be removed or that the aiLount that rray be 1 caned by a national bank
to one personJ firm or corporation should be incroased by statute. !t is, hOivever, im~ortant that the Fedaral Res;;;rve Board
shoull bo pem,ittel to suspond th5.s l.irr:itation under certain
circumstanceJ.
It is [.erterally COl'\CodeJ that cll..<r:ing p0riods when
cotton or other crops are being assernbleU. for rr.ov:.oment to the
rrarket, it has not always boen :possible to onforco strictly the
provisions of S0ction 5200 without serious consequences) and
some discretion shouLi b3 vestel in tho Board. to remedy this
situation.
In rr.any States, the laN provid.::ls that a bank may lend.
ten per cent to ona prson) firm or corporation, and rr.ay lenli
an additional arr,ount und1:r ~roper socuri ty.
.,
.If this provision shoulQ be incorporated in the Federal laNs 1 ·.vithout qu:A.lification 1 it n:.ight enable ths purchaser
of cotton 1 grain, and other corm.o:ii tios to hold such corrn;odi ties
an ind3finite perioi for speculative purposes. If, hoNeverJ the
Board is authorized to suspend these limitations during certain
periods when such ~orm,odi ties arc bc:ling asser.,bled.J the banks
would be able to assist in the rrarb;ting of such corrr;,od.i ties without resorting to the various de·v ic0s nod used. to evade the limitations of Section 5200.
It is 1 therofore 1 recorrn~nd.ed that the McKellar bill
which has heretofore been introducel in Congress 1 an.i the provisions of which are incorporated in Section 2 of the appended
bi11 1 page
ba included in the recorrrr:endations of the. Board to
Congress.
X-799a.
I
RESUME.
"'
~ion I .ofthe appended bill is intenued to rrake
it possible~ without actually reducing the capital requirements of national banks, for m:utual savings banks and certain
incorporated banks not noN eligible to membership 1 to bccorr..e
members of the Federal Reserve System.
Section II is intended to place the reserve requirements of the Federal Reserve Act on a more equitable basis and
to encourage those banks to enter the System the officers of
which now." feel that rr.embership involves the assumption of burdens without con~ensating advantages.
Section III is intended to broaden the powers of national banks enabling them, with the aid of other amendments
recomcended, to meet ~ll competition of State banks and trust
companies.
It is believed that this will encourage conversion
of State banks and trust companies and promote uniforn.ity in
State laws regulating the banking business.
If national banks
are placed in a position to extend any reasonable accommodation
to customers under appropriate safeguards, the State authorities will necessarily be induced to place banks organized under
State law in a position to meet the competition of national
banks under similar safeguards.
On the other hand, if national
banks continue to be handicapped in their operations there will
be no inducement for the State authorities to adopt laws similar.
to the Federal statutes.
Section IV is intended to give some flexibility to the
lirrdtations of Section 5200 Revised Statutes and to rrake it possible for corr.rr;ercial banks to rr~et conditions which normally
recur periodically without resorting to various methods of
evasion.
Respectfully submitted 1
CounseL
,1.)
X-7CJ9- '-"" •
PROPOSED FEDERAL LEGISLATION.
X-7<J9b
- 1 -
BE IT ENACTED BY THE SENATE AND HOUSE OF REPRESENTATIVES
OF THE UNITSD STATES OF /IYEHICA IN CONGRESS ASSEHBLED:
That, that paragr.1ph .Jf Section 9 of the Act apy.:,roved
SECTION l·
December 23, lSl3, known ar.d
her~;;in
referred to as Fhe
Federal Resc-:;;rVE:: Act, which re.id s:
"No applyine; bank sh.il.l be admit ted to mt;rnb~:;r
ship in a. Fec1er->.l reserve bank un.lesa it posdesscs a paid-up, unimpaired c;tpita.l sufficitmt to t<ntitle i t to becomt> a national
banking ci.ssocLition in the place where it is si tuatt:d under the
provisions of the nct.tional-ba.nk act 1 "
be
o.m<ind~;;d
.;;tnd rv"'enactcd to
re;;~.d
d.S
follows:
'No c:~.pplyin,s bank shall be admitted to ID<;;mbr;:;rship in a Fed;;;ral rc;:;.,rve bank unleas it possesst>s a paid up, unimp-Lir~;;a capital sufficient to "'nti tle it to become a national
banking associJ.tion in the pLwe where it is situated und0r thu
provisions of thr;:; nation;;~.l-b;;~.nk act, or unleas its combined C:i.pit.:~.l
.:;tock d.nd surplus :.<.re equal to the amount of C.3.pi tal stock it would
be r~quired to have to becomb .3. nation~l b.3.nkine; association in th~
plac~;:; ,'Jht;re it is aitu ..-tbd, and unlc;ss such bank d.gr·ves as .:1. comi.ition of m6mbership that it will not permit its comoinc.d c.:~.pH.:t.l
stock .:l.nd surplus to be rtoduced Oi:!low th.:it :illlount while .3. memb 8r
of the Ft;dt:ral rvs.-;;rve systc.mProvided, however, that mutud.l
s.3.vine;s d.Ssociations without ca.rita.l stock, but having a surplus
c:qua.l to the .3.mount of capital stock th.;~.t would b~;; rt:;quired of .
n-1tional banks doing busint:Jss in the p.L1c~ wh"'r"' such assocLt.tions
:Ud situated, may be admittt:d to nkmbvrship in the F'edt>ral fte.servt;
systt;;m upor. subscribine; to the amount equJ.l tl'l six per cent. of
such surplus and upon ent6rin5 into ..in agroem~nt not to p8rmit such
;;;urplus to be reduc8a. below the; amount of capital stock ..t n3.tion.::t.l
bank would btJ requirt;d to h3.ve in the pl3.ce whc:re the a..> 30ciation
is situ.:l.ted while a mt:on:ber of tht: Fbdorcil Rest:!rVe Syatem. r;
1
SECTION 2.
and
rc-en:act~:>d
That Section 19 of the
F~::idt:ra..l
Reserve Act be :imendod
as follows:
"3-:..nk doposi ts, wi ~hin
th~;:, n·,.;;.:~.ning
of this
Act, sh.:~.ll b~ h~la to m~~n th~ net a~ount due to oth~r b~nks ~ftcr
deducting therefrom tht;; J.mount du0 from othor t,..:~.r..ks.
Com.i1it:rcic~.1 d ~:;.posits a;:1.:ill be he 'J.d to mea.n
deposits of persons, firm.:>, or corpCL'. tiOi1S used in the condur~-L
of thdr busin<:;ss.
Ino.ividu..:tl de:r.)vsits sh.:..ll be neJ.d. to mc-;an
dt;;posits of inaividu~ls ust;;J in th~ p.:iJffiant cf curr~nt expens~s
Investmt;lnt depcsits sh ..:..ll be h~:Jld to inclU(ir;:; all depoc;:i..tz fld.Y..?. bltj
.:tft~;::r thirty aays, all s.:.~.vin;;;s ace ounts anJ c~:;rtif icc~·c,~<o> 1f d.c:t.: r-;;;l r,
,,
...
~
X-799b
-2which are subject to not Jess than thirty days 1 notice
before payment.
Every bank, ba.nking association, or
trust company which ia or ·which becomc:s a mE::mber of any
Federal reserve bank, sha.ll 0sta.blish and maint.d.in reserve bald.nces with its FE::dera.l n;;,st>rVe bank as foll'Ows~
(a) An actual net balance t;qual to not les2 than
fifteen per cent of its bank deposits;
(b) An actual net balanc:t: t:Jqual to not less than
ten per cent. of its commercial deposits;
{c) An actual net balance e~ual to not 1es3 than
seven per cent. of its individual d~posits;
(d) An actual net balance equal to not less than
fice per cvnt of its investment deposits.
No memb0r bank shall keep on deposit with any State
bank or truat company which is not a m~mber bank, a sum in
bXC ess of ten per cent. of its own paid up capital stock.
No
member bank shall act as a medium or agent of a non•member
bank in applying for or rt:;Ceiving discounts from a Federd.l
reserve bank under the provisions of this act, except by perrr;ission of the Federal Reserve Boa. rd.
The required balance
carried by a member bank with a Federal rt:S6!'Vt; ba..nk may under
tht: regulations of, and subject to, such p.:-nalties as tn..iy be
prescribed· by the Fed(;;ral RtJserve Bo.:trd, be checked -:J.ga.inst
and withdrawn by 3uch mvmber bank for the purpo3e of mt;:eting
existing liabili·cit::s. Provided, howevc;r, Th.;~.t no bank sha..ll
a.t any tirr.e, :.rHkt:o new loans or shall pay any dividtmds unle.35
and until thb total balance rt;;quited by law is fully restored,
National banks, or ba..nks organized undo:;r local laws, locat;;;;d in
Alaska, or in a dependency or insul:1r posstJssion of any part of
th<.J United States outsid;;;; tht.j continc.ntJ.l Unit-ed States, may re'main nonmember ba..nks, a.nd shall in that event, maint:1.in rese.rv,;:::;
.• nd comply with all th~:; conditinn:3 provided by la..w regulating
tht>m; or said banks may, with th<::: c onaent of the reserVE:! board,
becom,;, mc:.rr:b.:-r of any one of tht:~ reserv~;:; districts, d.. nd sh.1ll
in that t;;Vt.mt, takt;; stock, rraintain !'eservt:Js, .1ne1 bt;; subjt::ct
to all tht;; otht.jr provi 3ions of th:i.s act.
SECTION 3. "Any bank inc orporattJd by spo-jCi:il law er organizt.;;d
under the g<:meral law of any State which bt;comcs a na.tion2;.l
bankin& associd.tion by conversion und or authority of Section
5154, R"'vistd Statutes, and 'Vhich at th0 time of such convorsion is conducting a separate savings depa..rtment undt:r
authority of the laws of the Stc~.te in which such bank i.3
loca.tect, may continuet aftd' b"'coming a .!ut:i.or-,.;~.1 b2;.nking
association, to conduct or op~ra..te such savings d~partment
a.s a separate Ciepartzr"ent 0f the; bank and nu.y inv;,st dcpo.>its
rt!C ei vt:~d in such dt;pa. rt:nent in ace ordanct: ··Ni th tht; laws of
tht! Stdt6.
Pro via t;d, howevo:;r, ThJ. t the Ft;dcr.1.1. Reservt:
X799b
-3Board., by regulation. may- dett:rmin~;; t() what extent such d8posits may be inve;;:;teu in notes, drafts, bill.:; of ·.xch:l.nc,d,
acceptances, or other securities eli6ible for reaiscount
with, or purchase br, F<.;deral r6senro bdnks, and to .vt.at extent such deposits r£.ay be invt:st~:;d in a.ny particular class
of security or prop~;;rty ;v}cich .s~vin.:?;a banks ar.,;; pdrrr::i ttc;;d
by the law a of the St;~.te tc ir.vcst in; I'rovided further,
That in those Stcnea thE; l;;iivS oi which do not prescribe th.;:;
ch;;iracter or investrr.onts -r.o be ;n;;l.Cie by savings b;;inks tl';e
Federal He serve BO;;ird., by r10ogulatior., may pre.scribo the
nature and character of Lwostmenta to be maae.
Every
national bank opor:ni~g :t separate sdvings d<Jpartment und.er
ae1thori ty of this .\ct sh01.ll se;srog':l.te and. set apart a.ll
assets belongin;s to such department and, under regulations
of the F"ch.ral Rdervt; Bo.1rd,. shall ket-p a separat~;, set of
book:;;~ and record.;, ..>hO\':in;; in propwi'" det:1il all tn.na:1ctions
cn~.l6cd. in.
No 3Uvh nation...i.1 b:;~.nk sha.ll rvCviVc in it.J
savings depa.rtrro:nt .;;.ny dt;;podi ta ctht:r than timt:> doposits or
savings deposits, :~.:; d.,fineci by Section 19 of the Ft;deral
ReseEVt> Act.
In case of liquidation of a n:;~.tion:;~.l b~nk
opt:r-'lting ~ St;p:1ra.t..; savin;ss department ~;;:i t1·"~;.;r by :;l receiV<>r
duly .;ippoint;;;Cl or by 3. liquiC1ating ag.::.nt, tht; cteposi tors in
the savings dep~rtxent sn.::l-11 h.:l.Vt- a first lit:on on .'l.ssc;ts h<>ld
in such def..lrtmvnt.
The. Federal Rt:ost.rve 3oc.rcl, by rco;sul.::.tion,
may p~:>rrr:it ~ny n.:~.tional b..:t.nk to e3tiolian :;lnci n....~-int..:~.in ..:t. Scio.lr:tte savings dt~partm\:!nt to be op~;:;rated in accord:;~.nct:: with the:
provisiona of thia ..:t.ct so far a.3 a.p:rlic:.~.·ole.
SECTION 4.
That section dt:Nen or the Federdl Re.:'t::rv~
Let, a.s ctn16nd.~;:;d by Act of St;ptc;r:.~bt;r seventh, nin¢:··
tt:en hundred and sixteen, be further cl.Il':endGCt by .:::;.::..dinJ; a new paragraph as follows:
"Upon the affirmative Yotto of ..i majority of its
mt;mbcrs, tho Ft>Cit:oral Rt:o;;;~t;;rV.;; 3oaro. sh;.;tll haVt. r:o.Jcr
to auspend a limita--cion i<;;posecl by se;ction iifty-two
hunc.red. of the Re-vised S:..::.~utes of the Unitel.l Stlt~.o3,
which provides in ;;ubsta:c.ce th::..t tht: tot:il lia.bili tics
to :::tnJ n.J.tional or n:e:..ub::lr L::ink of :!..nJ person, cc:::p:~ny,
corpor:ition, cr firn:. for n·oney borroNt;;d, includint; in
tho liabilitit.3 :fuf thb c on:.p:~.ny or firG ~~,r.."" lia.tili ty
cf the St>VGr..:t.l mE:Jrrbers the;reof, ahal:L at no ti::uc t>XC~,;;o:;ri
one-te::":.h part ot t.h8 amcun'c. of ca.pi t_ll .Jt 8Ck of .;;u::.h
n.;ttion;.l or rr:ember b.ink :.:i.CtliJ.lly paid i:1 "'-.10- uninrp..;;.irt;d,
.J.n:i ont;-t~;;n-r,h p::..rt of its unim!)a.ircd 2U.rf-ltl;;:. 1cr·oyj_Jc;o,
ho\'i~jV0r, 'Ih::l.t in .:;.ny c..:..se:; in ·.vrdch such ~j_r;\)_t_;l+.i0JC:3jlr.;;
ausr.cnded, th& Ft::i;;;r.il RcSbt'V<.o Bo.:trd sh.l:;_:;_ rcquir"', J.3
a condition of such au.5pvnaion, thxt -:;):):;; n:;teJ, :lr.:if"(;,s,
a.nd bills 01 tXCh::l.n(;0, or othtor t::Vid..:;nCt;;:l :11' (j;;;(>t, rJ).:J••
cour:tc:d by a. n.J.tional or r:~t:t:u.~ber b..ink in ~xcc:.~;s of tflt; _;,.:-:~c:;
•
X-799b
•
provided by section fifty-two hundreti .;hall be s~;;;cured
by a first lien upon cotton, corn, wh.;;.~t, or some othtlr
st:l.ple a.gricul tural products, or by oblig-1tions of the
United Statt>S·
Thu Ft.;;d0r3.l R~:>avrV<:J Bo..tr·i shall, by
regul:ition, prc;scrib<:J tht:: lt::ngth of timv that such
lirnit3.tion shall bt; suspendt:>d, and the amount thcl.t any
person, firm, or corporation
~y
te permitted to become
lio.ble to a naticna.l or member bc.tnk under thE:: provisions
of this Act."
.
...
X-79S
PROPOSJ[Q STATE LEGISLATION
k:QBM OF' BILL.
mi.@1i IN ACCORDANCE WITH
RECOMNENDAT IONS
•
••
~.-799
An Act authorizing any bank or trust company incorporatud undor the laws of this Comrr,onweal th to become a mamber
of a Federal rGserve bank; to vast in such bank all pcrvvers conferred on member banks; to provide that the exercise of such
p0v1ers shall be subject to all of tha provisions of the Federal
R0serve Ac:t and to regulations of the Federal Ras0rve Board,
rr~de pursuant thereto; to alla# any such bank or trust company
to comply 'Ni th raserV3 rcquirecents of the Federal Reserve Act
in lieu of thoso established by this CommonNealth; to permit tRe
authorities of this Comrronweal th which supervise and examine
banks ani trust corr;panies organized under its laws~ to acc;apt
the examinations and audits rr~de pursuant to the Federal R~serve
Act in lhu of th osa rc;l{uired. by the laws of this Comrnonweal th
anC:.. to disclose to the Federal authorities inforrr.ation rolating
to th.:; condition and affairs of banks and trust cornpanies organi~ed under the laws of this State which have become or which
s.:;;ak to bJcom.:; mombcrs of tho Faderal Raserva System.
Be
it enacted by tho Senata and House of Reprasanta-
tiv0s of tha Cormom;c;al th of
in General
Assembly md, ani it is horaby 0nacted by the authority of the
same.
SECTION l.
Tha ",rord.s "Fadoral Raserva Act as h.Jrai.n
used shall ba hald to mean ani to includ0 tho Act of Congress of
th0 Unito.i Stat;;;s approv0d Do comber 23~ 1913~ as h.:JrGtof orq and
h: rsaf t0 r a.rr.Jnrl,;,d.
Th0 .vords
F.eioral R.:;scrvJ BoarJ. 11 shall be hJlii to
mean th2 F.:,deral R0sarve Boari create.:'. an:.. J.oscrib.:;.:l. in th.:; Faioral R3sorvc Act.
11
Th.:; vvords 11 Fa.iaral resarv,:;; bank" shall be hcli t.o
mean th;:;; F.,deral rosorvo banks croatad and orga."liZe·i unier authority of th..::: Fodaral Rosorva Act.
T'iL3 ;vords 11merr.b0r bank 11 s}u.ll b0 h,:;;li to moan any national bank, St:1.to bank or banking and trust company which has
become; or ·irhic:. . becozr.cs a m.:;mber of one of th-::; F.:;d..;ral n~sorvo
banks cr ..:;at3ci by th:J FJd0ral R:sorvJ Act.
SECTIOlJ 2. That any bank or trust ccmpany incorporated U.."ldar th-> lavvG of this Corr.mon.v,:;alth shall hava the pow..:;r
to subscriba to th0 capital stock and b;:;,com; a r:..;:rr,bar of a.
Fd.cral rcsarvc bank.
.
'
::-799
SECTiON 3. Any bank or trust company incorporated
under th~ l~ws of tnis Commonwealth which is~ or which becomes
a member of a Federal rossrve bankJ is by this Act vested with
all poNe rs confJrrod upon member banks of tha ·F0daral r.oserve
banks by tho terms of the Federal Reservo Act as fUlly and
corr~letely as if such powers were specifically enumerated and
dcscribad herein~ ani ~11 such powers shall b3 exercised sub'"'
ject to all rostrictions and lirr~tations imposed by the Federal
Reserve Act~ or by regulations of the Federal Reserve Board
rr:ad0 pursuant tharato. 'l'ho right~ howaver~ is expressly reserved to rovokJ or to arr.end the pONors horein conferred.
SECTION 4. A compliance on the part of any such bank
or trust company Nith the res0rve re~uirements of the Federal
RJserva Act shall be hclld to be a full compliance with those
provisions of the laws of this St~te which re~uire banks or
trust co~p~nids to maint~in cash balances in their vaults or
with other banks 1 and. no such bank or trust company shall ba
re~uired to carry or rr~intain raserve other than such as is
requirod under tho tarms of the F3deral Reserve Act.
SECTION 5.
Any such bank or trust company shall be
subject to the exarr,inations required under the terrrJS of the
Fe~eral R3serva Act~ and the authorities of this State having
suporvision ovor such bank, way in their discretion accept
such exan:in~tion in lisu of the examination required under the
laNs of this Comrr.onwaalth.
Such authorities 1 their agents
and Grr.ployl';les 1 rr:ay furnish to the Foderal fulserva Board~ the
Fedaral reserve banks, or to oxarr~ners duly appointad by the
Federal .Res:;rvo Board., or tho Federal raservo banks 1 copies
of all Jxarr.inations rr.ade~ and rr:ay disclose to such Foderal
R0s0rva Eo~r.:i, F0daral reserve banks~ or cxan;iner~ any infonra.tion Nith raference to the condition or affairs of State banks
or trust companies organiz;.;d under the laws of this State
which become members of a Federal reserve bank, or which apply
for mGmbership in a Federal reserve bank.
SECTION 6.
All acts and the parts of acts inconsistent herewith arc h~reby repealed ..
4-18-18
@FedFRASER