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; FEDERAL RESERVE BOARD washington ADDRESS OFFICIAL CORRESPONDENCE TO THE FEDERAL RESERVE BOARD X-6443 December , 1929. SUBJ3CT: L i a b i l i t y Incurred "by Member Bank in Purchasing Federal Reserve Exchange. Dear S i r : In a ruling published in the Federal Reserve Bull e t i n for September, 1928, at page 656, the Federal Reserve Board held that the l i a b i l i t y incurred by a member bank through the issuance of i t s cashier's check for Federal r e serve exchange purchased, should be treated as a l i a b i l i t y for money borrowed rather ithan as a deposit l i a b i l i t y . The f a c t s of the transaction which were under consideration by the Board a t that time were described as follows: A member bank which i s temporarily short in i t s reserves arranges with another member bank having a temporary excess in reserves for the use of a stipulated amount of Federal reserve credit, for one day or more, as may be agreed upon. The bank purchasing the credit either gives i t s c a s h i e r ' s check to the selling bank, to be held for one day or more, as the case may be, or, dispensing with the formality of issuing a cashier's check, authorizes the s e l l i n g bank to clear a ticket for the amount through the clearing house settlement on the day agreed upon, and the s e l l i n g bank either gives i t s d r a f t on the Federal reserve bank to the buying bank or arranges with the Federal reserve bank to t r a n s f e r on the Federal reserve bank's books the stipulated amount from the account of the selling bank to the account of the buying bank. I t now appears that, while Federal reserve exchange i s frequently purchased and sold in accordance with the method above described, this practice i s not universall y followed and i t often happens that a member bank purchases Federal reserve funds from another member bank through the method of book e n t r i e s , wire t r a n s f e r s or otherwise. The question has been presented to the Board as to how such transactions should be regarded in cases where the purchase and sale of Federal reserve exchange i s accomplished by some method.otHer than that described in i t s 1928 ruling. 278 X-6443 -2- After considering this question the Board, i s of the opinion that a l l such transactions should "be c l a s s i f i e d in accordance with the purpose to "be e f f e c t e d and the principles involved rather than in accordance with the mechanics of t h e i r accomplishment. Transactions of this kind are manifestly temporary loans negotiated f o r the purpose of avoiding the necessity of rediscounting with the Federal reserve "bank or showing a deficiency in reserves. The Board rules, therefore, that in every such transaction whether effected by check, took entries, wire transfers or otherwise, and regardless of the method of repayment, the purchasing member "bank should show i t s resulting l i a b i l i t y to the selling member hank as money "borrowed and the selling member "bank should t r e a t the transaction as a loan made. In using the Board's Form 105 for report of condition, the purchasing member bank should show the l i a b i l i t y incurred in any such transaction under " b i l l s payable and rediscounts" and the selling member bank should enter the amount of the transaction under "loans and discounts". Very truly yours, R. A. Young, Governor. PROPOSED CIRCULAR LETTER TO-AIL GOVERNORS A2TO FEDERAL RESERVE AC-E1TTS.
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