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BOARD OF GOVERNORS 27.2 OF" THE FEDERAL RESERVE SYSTEM WASHINGTON ADDRESS OF"F"ICIAL CORRESPONDENCE TO THE BOARD X-9506 :t<> bruary 28, 1933. SliDJECT: Procedure under ConcH tion;:; of McmbE:rship .Regarding 'f:o.in tenanee of i>dequate Capital Structure. Dear Sir: In accordance viTi th Regulation H as revised effective January 1, 1936, the standard condition of membership regarding maintenance of an adequate capital structure '-1S now proscribed reads as follows: 11 2. The net capital and surplus funds of such bank shall be adequate in relation to the character and condition of its assets and to its deposit liabilities and other corporate responsibilities, and its capital shall not be reduced except vvi th the permission of the Board of Governors of the Federal Reserve b'ystem." Footnote 8 of the "8. Rr~gulrttion fur·ther provides: If at any ttmc, in the light of <.1.11 the circumstances, the aggregate am01mt of tho bank 1 s net capi t.al and surplus funds appoars to lx::! in:.:tdequate, the bank, within such period as shull be deemed by th~_; Board to be reasonable for this purpose, shall incrl.~ase the amount thereof to an amount which in the judgment of the BoE~rd shLcll be adequate in relation to the bank's aggregate~ dcposi t li.'J.biJ.i tios and other coroor~1tc rcsponsibili tios. 11 Prior to the adoption of the new standtcrd condition of mom- bership quoted above, the following stand.::~rd condition of membership 273 -2- Z-9506 rel:c:tive to capital structure h&d been prescribed: ' "15. Such bank shall maintain an :.un.Olmt of paid-up and unimpaired capit.al and ill1impaired surplus which, in the ,judgment of the Federal ltoserve Bo!;rd, will be adequate in rel[t tion to its total deposit lie bili ties, h<wing due regard to the genc3I'Dl princi:plu th<ct c. bc:.nk 1 s caol tal and surplus ordinarily should r1ot be l·JSS than one-tenth of the r:ver::ge nmo1mt of its :1.ggree.;::te deposit liabili tic~s, and, in some ci!·cumst1.nces, should be more thr.n one--tenth of such (tmount." In the Board's letter dated June 50, H333 (X-7469), it wan stated that the letter addressed to banks advising of the Board's approval of their applications for membership vmuld Gontain the following comments regarding condition of membership numbered 15: "In connection with con(li tion numbered fifteen above and in tho absence of n.ny special action by the Board, if in any period of tvmlve months ending on the thirtieth day of Novemb::.r the a\-'t~rage amount of deposit liabilities of the bank during such period as determined on tho bo.sis of reports made by the bank to thee: Fedural Reserve b<:mk for the purpose of computing its required reserve, exceeds ten tLnes the aggregate amount of the bank's paid-up and unimpaired capital stock and unimpaired sur:)lus, the Board will expoct that the bank, as soon as possible and within the next succeeding six months, will increase the aggregate amount of its paid-up and U.'1impaired capital and tmimpaired surplus to an amount at least equal to ten per cent of the average amount of its deposit lia bili ties during such tvml ve rnon ths. 11 In lett:3r X-7469 it was also stated thc.t while each bank subject to conditirln of membership numbered 15 was expected to comply with its provisions without any special action on tho part of the Board, the Board would, in special circumstances and upon the specific recommendation of the Fedc;ral R.oservG Ag•mt, consider whether, in view of all of the facts involved in the particular case, it would -3- 274 X-9506 be justified in not requiring the bank to increase its capital and surplus to an amount at least equal to one-tenth of its deposit liabilities, or whether, on the other hand, a larger proportion of capital and surplus should be required in order to afford adequate protection because of special conditions existing in the c.·1se of the particular bank under consideration. The revision of former standard condition of membership numbered 15 does not reflect in any degree whatsoever a modification of the Board's position that it is essential that member banks maintain a sound and adequate capital structure. It is anticipated, however, that the condition, as revised in the Board's existing Regulation H,, while maintaining the fundamental principle, will provide the flexibility necessary to facilitate administro.tion. The Board feels, therefore, that a compliance by each State member bank subject to former condition numbered 15 with the portion of the new standard condition of membership numbered 2 relating to the adequacy of its capital structure and with footnote 8, set forth in Regulation H, should be considered a compliance with the former condition numbered 15. In any case in which a member bank subject to condition numbered 15 complies with such portion of the new condition numbered 2 and with footnote 8 of Regulation H the detailed requirements contained in condition numbered 15 and in the Board's letter X-7469 regarding such condition may be disregarded. In tho circumstances, it will be appreciated if you will ad1ise each such State member bank in your district accordingly. . . ; X-9506 -4- It is requested thrt, annur:llly as of the close of the year, the Federal Reserve Agents review the condition of e~' ch member State bank subject to the new standard condition of membership nuGbered 2 or former standard condition of mer!lbership numbered 15 and advise the BoQrd of any situation in lNhich it appears th&t tho net cap:ttal and surplus funds of any such bank are inadequate under the provisions of the condition of membership, supplementing such advice with a brief statement as to the facts of each crtse and a recommendation as to the action which should be taken. Of course, if, during the year, any situ- a tion should develop which would r:::quire more immedia to action under the conditions of membership in question, the Fedornl Reserve Agents are requested to advise the Board fully as to tho situation and submit a recommendation as to tho action which should be ta.kcn in tho matter. It is expected that the Federal Reserve Agents will continue to keep themselves currently Qdvised as to the condition of all State member banks in their districts, whether or not subject to the new standard condition numbered 2 or former standard condition numbered 15, and in the case of any State member bank which appears to be in need of additional capital will take such action as may be appropriate in the circumstances, advising the Boo..rd fully in th(:: premises. Very truly yours, ~~ L. P. Bethea, Assistant Secretary. TO ALL FED.C:HAL RESEHVB AGiNTS
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