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i 445 X-7696 (INTERPRETATION OF BANKING ACT OF 1933) Copies t o be sent t o a l l Federal reserve banks. November 28, 1935. Mr. , Chairman, The Banking' Code Committee, , Dear Mr. » : The Federal Reserve Board has given consideration t o your l e t t e r of November 24, 1933, i n which you inquire whether or not the practice therein outlined would be considered contrary t o that port i o n of Section 19 of the Federal Reserve Act, as amended, which provides t h a t , "No member bank s h a l l , d i r e c t l y or i n d i r e c t l y by any device whatsoever, pay any i n t e r e s t on any deposit which i s payable on demand". I t appears that Article VIII, Paragraph ( 3 ) , of the Bankers Code of Fair Competition, as approved by the President on October 3, 1933, requires every clearing house, county a s s o c i a t i o n , county group, or State bank association to adopt rules f i x i n g uniform service charges t o be charged by banks whereby services rendered by banks s h a l l be compensated for either by adequate balances carried or by a scale of charges. I t also appears from your l e t t e r t h a t , in order t o determine whether the balance carried in an account i s s u f f i c i e n t t o compensate the bank f a i r l y for services rendered, i t i s necessary t o analyze the account? that t h i s requires the establishment of uniform rules which X-7696 2- must give c o n s i d e r a t i o n to the value of t h e account and proper s e r v i c e charges a g a i n s t t h e account; and t h a t t h e s e charges a r e of two c l a s s e s : f i r s t , g e n e r a l overhead expenses of t h e bank, and second, out of pocket expenses, such as exchange, c o l l e c t i o n and o t h e r charges a r i s i n g out of s p e c i f i c t r a n s a c t i o n s f o r s p e c i f i c customers and a c t u a l l y p a i d or c r e d i t e d by t h e bank on behalf of such customers• I t f u r t h e r appears t h a t , under t h e Code, i t i s t h e duty of t h e Banking Code Committee t o consider t h e r u l e s which a r e being submitted f o r approval by c l e a r i n g houses and o t h e r banking groups provided f o r i n the Code and t h a t , b e f o r e p a s s i n g upon t h e s e r u l e s , your Committee d e s i r e s t o know -whether i t would be c o n t r a r y t o t h a t p r o v i s i o n of t h e F e d e r a l Reserve Act r e f e r r e d t o above f o r member banks t o t a k e i n t o c o n s i d e r a t i o n "the reasonable value of t h e i r customers' d e p o s i t b a l ances i n a n a l y z i n g accounts i n accordance w i t h a uniform p l a n t o be approved by t h e Banking Code Committee f o r t h e purpose of determining whether s e r v i c e charges should be a s s e s s e d a g a i n s t t h e i r customers, and, i f so, t h e amount t o be a s s e s s e d : Provided, That ( l ) t h e value of each account t o t h e bank i s computed i n accordance w i t h a uniform p l a n approved by t h e Banking Code Committee and (2) t h e banks r e q u i r e a c t u a l reimbursement (without deduction of i n t e r e s t or of t h e e s t i m a t e d value of t h e customers 1 balance t o the banks) f o r exchange c h a r g e s , c o l l e c t i o n charges, and o t h e r charges a r i s i n g out of s p e c i f i c t r a n s a c t i o n s f o r s p e c i f i c customers and a c t u a l l y paid or c r e d i t e d by t h e bank on behalf of such customers•" X-7696 A f t e r c a r e f u l c o n s i d e r a t i o n , t h e F e d e r a l Reserve Board i s of t h e o p i n i o n t h a t a p r a c t i c e such as t h a t o u t l i n e d i n your l e t t e r would n o t be c o n t r a r y t o t h a t p r o v i s i o n of S e c t i o n 19 of t h e F e d e r a l Reserve Act which i s quoted above. I n r e a c h i n g t h i s c o n c l u s i o n t h e Board has t a k e n p a r t i c u l a r l y i n t o account t h e f a c t t h a t i t i s proposed, i n p r o v i s o No. 2, among o t h e r t h i n g s , t h a t t h e banks w i l l r e q u i r e a c t u a l reimbursement f o r exchange and c o l l e c t i o n c h a r g e s , w i t h o u t t h e d e d u c t i o n of i n t e r e s t or of t h e e s t i m a t e d value of t h e customers' b a l a n c e s t o t h e b a n k s . Such a p r a c t i c e would e l i m i n a t e any q u e s t i o n of i l l e g a l i t y which might be occasioned by the a b s o r p t i o n by a bank of exchange or c o l l e c t i o n charges i n an amount b e a r i n g a s u b s t a n t i a l l y d i r e c t r e l a t i o n s h i p t o t h e amount of t h e b a l a n c e . Very t r u l y y o u r s , (Signed) Chester M o r r i l l Chester M o r r i l l , Secretary.
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