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X-9590 INTERPRETATION BANKING ACT OF 1955 (Copies to be sent to all Federal reserve banks) May 15j 1956 Mr. R. B. Coleman, Vice President and Cashier, Federal Reserve Bank of Dallas, Dallas, Texas. Dear Mr. Coleman: This refers to your letter of April 10, 1956, in regard to a possible inconsistency that you believe may exist between the second paragraph of section 1 of Regulation U and the last clause of the third paragraph of that section. The discussion below will show, it is believed, that the provisions in question are in fact consistent. The last clause of section 1 is to be regarded as making it clear that the first two paragraphs of that section do not prevent a bank which has made a loan subject to the Regulation from making another such loan regardless of the status of the collateral securing the first loan, if the borrower provides additional collateral having a maximum loan value at least equal to the amount of the additional loan. Even if the first loan is unsecured the second loan may be made if this amount of collateral is provided. Since a competing bank with no previous loans to the borrower would be permitted to make a loan on the basis of this amount of collateral, it seemed desirable to provide clearly that the first bank could do the same regardless of the status of prior loans. X-9590 - 2 - The second paragraph of section 1, considered with the first paragraph of that section, permits a bank, if the maximum loan value of the collateral securing all the loans subject to Regulation U exceeds the total amount of such loans, to make an additional regulated loan equal to the amount of the excess. This is permissible regardless of the cause of the excess, whether an increase in the market value of the collateral, a decrease in the amount of the loan, or some other cause. The second paragraph of section 1 also means that, after loans subject to the Regulation have been made, the bank must treat the total amount of such loans and the maximum loan value of all the collateral securing them, respectively, as "the amount of the loan" and "the maximum loan value" referred to in the first sentence of the third paragraph reading as follows; "After any such loan has been made, a bank shall not at any time permit withdrawals or substitutions of collateral that would cause the maximum loan value of the collateral at such time to be less than the amount of the loan." The above discussion covers both your first and second questions. Very truly yours, (Signed) Chester Morrill Chester Morrill Secretary
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