The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
823 W . P . G . H A R D I N G . GOVERNOR EX O F F I C I O M E M B E R S ALBERT S T R A U S S , VICE GOVERNOR ADOLPH C . MILLER CARTER G L A S S SECRETARY OF THE TREASURY CHAIRMAN J O H N SKELTON WILLIAMS COMPTROLLER OF THE CURRENCY ADDRESS REPLY TO FEDERAL RESERVE BOARD C H A R L E S S . HAMLIN FEDERAL RESERVE BOARD W . T. CHAPMAN, SECRETARY R . G . E M E R S O N , ASSISTANT SECRETARY w . M. IMLAY, FISCAL ASENT WASHINGTON October 24, 1919 X-I705 Subject: Amendment to Section 5200 and Rediscount Powers of Federal Reserve Banks. Dear Sir: There is enclosed herewith an analysis of the amendment to Section 5200 of the Bevi eed Statutes of the United States, which became a law on October 22, 1919, together with a memorandum discussing the distinction which must be . drawn in making rediscounts for national bank and state bank members. Very truly yours Governor# X-1705 (a) LOANING- POWERS OF NATIONAL BANKS UNDER THE AMENDMENT TO SECTION 5200 U.S.R.S. APPROVED OCTOBER 22, 1919 • The amendment to Section 5200 of the Revised S t a t u t e s which became a law on October 22, 1919, has made c e r t a i n m a t e r i a l changes i n the loaning powers of n a t i o n a l banks * For the convenience of n a t i o n a l banks and o t h e r s i n t e r e s t e d i n the e f f e c t of those changes, there i s submitted herewith an a n a l y s i s of the p r o v i s i o n s of Section 5200 now i n f o r c e . The' amounts which a National Bank may p r o p e r l y lend to any one p e r s o n , company, c o r p o r a t i o n or f i r m (including i n the l i a b i l i t y of a company or f i r m , the l i a b i l i t i e s of the s e v e r a l members t h e r e o f ) under the v a r i o u s c l a u s e s of Section 5^00, as amended by the Act approved October 22, 1919, are s t a t e d i n terms of the percentage of the paid-up and unimp a i r e d c a p i t a l stock and surplus of the lending bank. Character of Loans. (A) Accommodation or s t r a i g h t loans, whether or not s i n g l e name, (B) " B i l l s of exchange drawn i n good f a i t h against actually existing values". The law e x p r e s s l y provides t h a t t h i s phrase s h a l l a l s o i n c l u d e : (a) D r a f t s and b i l l s of exchange secured by shipping documents conveying or securing t i t l e t o goods shipped. (b) Demand o b l i g a t i o n s , when s e cured by documents covering commodities i n a c t u a l p r o cess of shipment. (c) Bankers ' acceptances of the kinds d e s c r i b e d i n Section 13 of the Federal Reserve Amounts Loanable. 1 1 1 ' 1 ' 1 1 1 1 1 1 1 ' 1 ' ' ' 1 — Maximum l i m i t , of b a n k ' s . paid-up and unimpaired c a p i t a l and s u r p l u s . No l i m i t imposed by law, X-1705 (a) - 2 - Character of Loons. (C) Commercial or b u s i n e s s paper (of other makers) a c t u a l l y owned by the p e r s o n , company* c o r p o r a t i o n o r f i r m n e g o t i a t i n g the same. (D) Notes secu r ed by shipping documents , warehouse r e c e i p t s or other such documents, conveying or securing t i t l e covering r e a d i l y marketable non-perishable s t a p l e s , including l i v e s t o c k . No bank may make any loan under (D), however, (a) Unless the a c t u a l market v a l ue of the p r o p e r t y securing the o b l i g a t i o n i s not at any time l e s s than 115$ of the f a c e amount of the n o t e , and (b) Unless the p r o p e r t y i s f u l l y covered by insurance, and i n no event s h a l l the p r i v i l e g e a f forded by (D) be exercised f o r any one customer f o r more than s i x months i n any consecutive twelve months. (E) Notes secured by not l e s s than a l i k e f a c e amount of bonds or notes of the United S t a t e s issued since April 24, 1917, or by c e r t i f i c a t e s of indebtedness of the United S t a t e s . (F) Notes secured by U. S. Government o b l i g a t i o n s of the kinds d e s c r i b ed u n d e r (E) the f a c e amount of which i s a t l e a s t equal t o 105$ of the amount of the c u s t o m e r ' s notes. •Amounts Loanable, No l i n i t imposed, by law. 15$ of b a n k ' s c a p i t a l and surplus, i n a d d i t i o n to the amount allowed under (A); or if the f u l l amount allowed under (A) i s not loaned then the amount which may be loaned i n the maimer described under (D) i s increased by the loanable amount not used under (A) . In other words, the amount loaned under (A) must never be more than 10$ but the aggregate of (A) and (D) may equal, but not exceed, 25$. of b a n k ' s c a p i t a l and s u r p l u s , i n a d d i t i o n to the amount allowed uuv...? (A), or if the f u l l amount allowed under (A) i s n o t loaned, then the amount which may be loaned i n the manner described under (E) i s increased by the loanable amount not used under (A). In other words, the amount loaned under (A) must never be more than 10$, but the aggregate of (A) and (E) may equal, b u t not exceed. 20#. No l i m i t , b u t t h i s p r i v i l e g e , under r e g u l a t i o n s of the Comptroller of the Currency, e x p i r e s December 31. 1920. , X-1705 (a) ' 8 SOME EXAMPLES OF WHAT A NATIONAL BANK MAY LEND AT ANY ONE TIME TO ANY ONE CUSTOMER UNDER THE AMENDMENT TO SECTION 5200 APPROVED OCTOBER 22, 1919, EXPRESSED IN TE%S OF PERCENTAGE OF THE BANK'S CAPITAL AND SURPLUS. Illustration 1 Illustration 2 Illustration 2 (.A) Accomodation or s t r a i g h t loans, 10$ 5$ 5$ (D) Notes secured by warehouse r e ceipts , etc., 15$ 20$ 15$ lofo 35$ 10$ 35$ , 15* 35$ (E) Notes secured by a l i k e f a c e amount of Government obligartions, (B) B i l l s of exchange drawn a g a i n s t actually existing values, (C) Conzuercial or b u s i n e s s (F) Notes secured by a t l e a s t 105$ of U. S. Government o b l i g a t i o n s , October 24, 1919. paper, ,, No l i m i t imposed "by law. 11 " " " " " n " " " 827 X-1705 (b) WHAT A FEDERAL RESERVE BANK MAY DISCOUNT FOR JT§ MEMBER BANKS. The l i m i t a t i o n s imposed upon the amounts of r e d i s c o u n t s which a Federal r e s e r v e bank may make f o r a member bank, whether State or nat i o n a l , are determined by the p r o v i s i o n s of the Federal Reserve Act and are n o t i n any way a f f e c t e d by the amendment to Section 5200* Under the p r o v i s i o n s of Section 13 of the Federal Reserve Act any Federal reserve bank may rediscount f o r any member bank, whether S t a t e or n a t i o n a l , the o b l i g a t i o n s of any one borrower to the e x t e n t of t e n p e r cent of the member H a n i ' s c a p i t a l and surplus but i t i s expressl y provided t h a t " b i l l s of exchange drawn a g a i n s t a c t u a l l y e x i s t i n g v a l ues™ s h a l l not be included i n determining t h a t ten p e r cent l i m i t . In the opinion of the Federal Reserve Board t h i s phrase " b i l l s of exchange drawn a g a i n s t a c t u a l l y e x i s t i n g values" includes " d r a f t s or b i l l s of exchange secured by shipping documents conveying or securing t i t l e to goods shipped" and "bankers 1 acceptances of the kinds described i n Section 13 of the Federal Reserve Act" even though Section 1) (unlike the amendment to Section 5200) does not expressly s t a t e t h a t those two c l a s s e s of ptaper are b i l l s of exchange drawn a g a i n s t a c t u a l l y e x i s t i n g values. In the opinion of the Board, hpwever, accepted demand b i l l s on which the drawer i s r e l e a s e d from l i a b i l i t y are not " b i l l s of. s^schange" w i t h i n the meaning of Section 13 and must, t h e r e f o r e , be included i n determining the l i m i t s on the mount of paper of m y one borrower which a F e d e r a l r e s e r v e bank may rediscount f o r any member bank. Under the terms of Section 11 (m), as amended by the Act of March 31 1919, any Federal reserve bank may, u n t i l December ~$lt 1920, r e d i s c o u n t f o r 31 y member bank, whether State or n a t i o n a l , the obligati o n s of any one borrower to the e x t e n t of twenty p e r cent of the member b a i k ' s c a p i t a l and s u r p l u s , provided, however, t h a t the excess over and above t e n p e r cent must be secured by bonds or n o t e s of the United S t a t e s issued since A p r i l 24, 1917, or by c e r t i f i c a t e s of indebtedness of the United S t a t e s . Special P r o v i s i o n s R e l a t i n g to Rediscounts f o r Member S t a t e Banks. The above d i s c u s s i o n r e l a t e s to the g e n e r a l powers of a Fede r a l r e s e r v e bank to make r e d i s c o u n t s f o r any member bank, whether State or n a t i o n a l . I t must be observed, however, t h a t under the terms of Sect i o n 9 of the Federal Reserve Act no Federal r e s e r v e bank can r e d i s c o u n t f o r a member S t a t e bank any of the paper of any one borrower who i s l i a b l e to such member S t a t e bank i n excess of ten p e r cent of the c a p i t a l and surplus of that S t a t e bank but i t i s provided t h a t the d i s c o u n t of b i l l s of exchange drawn a g a i n s t a c t u a l l y e x i s t i n g values and the discount of commercial or b u s i n e s s paper a c t u a l l y owned by the person n e g o t i a t i n g the same s h a l l n o t be included i n determining the amount to which a 2 ** X1J05 (b) borrower i s l i a b l e to such member S t a t e "bank. The p r o v i s i o n s of t h i s Section 9 are i n no way a f f e c t e d by the amendment to Section 5^00 of the Revised S t a t u t e s and the same t e s t as to the e l i g i b i l i t y of any p a r t of the l i n e of paper of any one borrower which i s held by a member State bank i s a p p l i c a b l e now as b e f o r e t h a t amendment t o Section 5200* Under the p r o v i s i o n s of Section 11 (m) as amended by the Act of march 3 > 1919, the Board has r u l e d t h a t a Federal reserve bank may, u n t i l December 31 f 1920, rediscount f o r a member State bank paper secured by not l e s s than a l i x e f a c e amount of bonds or notes of the United S t a t e s issued since A p r i l 24, 1917, or c e r t i f i c a t e s of indebtedness of zhe United S t a t e s , without regard to the amount the borrowing bank may a l r e a d y have loaned to i t s customer under n i s r e g u l a r l i n e of c r e d i t , provided, however, that the aggregate of a l l rediscounts of the paper of any one borrower must i n no case exceed twenty p e r cent of the capi t a l and surplus of the member State bank. In other words, if the r e g u l a r l i n e of c r e d i t of the borrower from a member State bank i s not more than the t e n p e r cent l i m i t f i x e d by Section 9 of the Federal Reserve Act, Federal reserve banks may r e discount f o r State member banks to the same extent t h a t they may f o r member n a t i o n a l banks« I f , however, the regular l i n e of c r e d i t of the borrower from the member State bank i s more than t h a t ten p e r cent l i m i t t then the Federal r e s e r v e baniL cannot rediscount any of t h a t r e g u l a r l i n e of c r e d i t but may rediscount t h a t paper which i s secured by Government o b l i g a t i o n s of the kinds s p e c i f i e d up to the l i m i t s described above * (See r u l i n g of the Federal Reserve Board p r i n t e d on pages 3bl and 3 62 of the A p r i l , 1919, Federal Reserve B u l l e t i n - ) October 24, 1919,
@FedFRASER