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FEDERAL RESERVE BOARD
WASHINGTON
ADDRESS OFFICIAL CORRESPONDENCE TO
THE FEDERAL RESERVE BOARD
X-4813
March 22, 1927
SUBJECT:
Topic for Governors' Conference.
Dear Sir:
The Federal Reserve Board has voted to
place upon the program of the next conference of
Governors for their consideration the question
whether notes held by a member bank bearing the
endorsement of officers of nonmember banks are
eligible for rediscount at Federal reserve banks.
This question was the subject of the Board's letter of February 17, 1927, X-4794. A copy of this
letter together with copies of the replies thereto are enclosed herewith for your information.
Very truly yours,
Walter L. Eddy,
Secretary.
Enclosures.
W GOVERNORS OF ALL FEDERAL RESERVE BANKS.
FEDERAL RESERVE BOARD
X-4794
WASHINGTON
ADDRESS OFFICIAL CORRESPONDENCE TO
THE FEDERAL RESERVE BOARD
February 17, 1927.
Dear Sir:
The Board has been asked by one of the Federal reserve
banks to rule upon the question whether certain notes held by a
member bank bearing the endorsement of officers of nonmember banks
.are eligible for rodiscotk!t at Federal reserve banks. It appears
that the menbor bank in question solicits loans through officers
of its correspondent nonmember banks. Tno notes are made payable
to tho local ba~~ officer and arc endorsed by him to the ~ember
ban..~ which allows him part of the interest on the loan in payment
for his services. The nmne of the nonmember bank does not ap~ear
on the notes either as payee or as endorser.
Before ruling upon the question whether notes of this
kind should be considered eligible or desirable for rediscount,
the Board wishes to be fully informed as to the extent and prevo.lenco of the practice of making loans in this way. You ate accordingly requested to advise the Board whether notes originating in
the manner described or under similar circumstances have ever been
presented to your bank for rediscount and if so, whether or not
they were rediscounted. The Board would also be glad to be advised
as to the extent to·which practices of this kind prevail in your
Federal Reserve District.
Very truly yours,
D. R. Crissinger.
Governor.
TO GOVERNORS OF ALL F. R. BANKS EXCEPT KANSAS CITY.
X-4013-·o.
c 0 p y
FEDERAL
0 F
R:ZSERVE
B ;,_ N K
B 0 S T 0 N
February 19, 1927.
Dear Sir:
Receipt is ac:mowledgod of your circular letter of
FebruarJ 17, X-4794, a:1d in repl¥ I would sa~r tbat no instance
such as that referred to has ever come to the attention of this
ba"lk and,as far as we know, there is !lo ?racticc of this kind
cxisti:1g in this district.
Should any note such as described in your letter be
offered us for rediscount, we wo,lld, before co:1s ide ring the
apJlication, ask counsel for his oi)inio:1 as to wl:ccther tho
tra:1saction involves a:1y violation'of ~aragra~h (c) of Section
22 of the Federal Reserve ~ct.
Very trulr yours,
(s)
~.
P. G. Hardi:1g,
Governor.
Hon. D, R. Crissinger, Governor,
Federal Reserve Board,
WashL1gto;1, D. C•.
•
c 0 p y
X-4813-·b,.
FEDERAL
:lESER~ B~"X
OF NE!l Y):aK
February 25, 1927.
Sirs:
In reply to your letter of February 17 (X-4794), we do
not r0call a:J.y cc:Lse in which notes bearing the endorsements of
officers of non-me1:1ber banks have been offered us for rediscount
b;r member banks.
We are quite certain that no such practice as
that described in your letter exists or
h~s
existed in this
district.
Very truly yours,
(Signed)
L. F. SAILER
Deputy Governor •
Federal Reserve Board,
Washington, D.
c.
c0
p
y
x-4313-c
FEDERAL RESERVE :BANK OF PHILADELPHIA
February
Dear Governor Criss in,c:•er:
In reuly to y-our letter
X-4794, I am
writing to inform you that .notes negotiated in
the manner described by you have never been
presented to this bank for rediscount
~•d
we
have never found a practice of this kind in
this district.
Very truly yours,
(s)
W. H. Hutt,
Deputy Governor.
Hon. D. R. Crissinger,
Governor, Federal Reserve Board,
Washington, D. C.
19, 1927.
X-4813-·d.
c 0 p y
February 23, 1927.
Mr. D. R. Crissinger, Governor,
Federal :aeserve Board,
Washington, D.
c.
Dear Governor Crissinger:
Reference is made to the Board's letter
X-4794, dated
Feb~~y
17, on the subject of the
eligibility for rediscount at a Federal Reserve
Bank of notes held by member banks bearing the
endorsement of officers of non-member banks.
We have not lmd an;r paper of that kind
offered to us for rediscount or as collateral.
I
Very truly yours,
(Signed)
JC. R. FANCHER
Governor.
ERF. ZD'D
•
'.
(COPY)
FEDERAL RZSERVE BA...lllK OF R! CHMOND
X-4813-e
February 21, 1927
Federal Reserve Board,
Washington, D. C.
•
Gentlemen:·
We have received and considered the
Board 1 s letter X-4794, under date of February
17, in which the Board expressed the wish to be
informed as to the extent and prevalence of
the practice with certain member ba"iks of soliciting loans through its corres~onaent nonmember banks and obtaining paper bearing the
endorsement of officers of such nonmember banks.
To ou:r knowledge, we have no such paper,
and if such paper had come to us with the knowledge, we should have made. most careful inquiry
into the circumstances, siuce the practice,
in our jndgment, apnears _one to be condemned
whether the payer may or may not be tecffi1ically
eligible for rediscount at Federal Reserve Batiks.
Very truly yours,
(Signed) Geo. J. Seay,
Governor.
x-4313-f
FEDERAL
OF
RESERVE
:SANK
ATLANTA
Februar:' 28, 1927.
Mr. D. R. Crissi~~er, Gover~or,
Federal Reserve Bo~rd,
Washi:1gton, D. C.
Dear Sir: Reference is made to :Soard I,Qtter
X-4794 under date of FebruarJ 17th, regardiP~ the
solicitation through officers of correspondent nonmember ban:ts of loans by member ba...'1.ks, etc.
To the best of our knowledge no notes
of this character have been offered to the parent bank
or our New Orleans Branch, and should it be ascertained
that such paper was offered to us it would be our policy
to disa~::>orovo suc..."'l items.
We do not think that tho practice referred
to in your letter is prevalent in this district, however,
this is merely an expression of o~inion as we have no
first ha1d information.
Yours vor:l truly,
(s) M. E. Wellborn,
Govcr:::tor.
(CuP~:)
OE'EDEP..AL RES:ii.RVE EMf!.: OF CHICAGO
X-4813-g
February 24, 1927
Federal Reserve Board,
Washington, D. C.
Dear Sirs:
Attention:
Honorable D. R. Crissinger,
Governor.
In further reference to your letter X-4794, dated February 17th,
and in which letter reference is made to a case wherein a certain me~
ber bank solicits loans through officers of its correspondent non-member
b~~, involving notes made payable to the local bank officer and endorsed by him to the member bank, you ask for advice on two points as follows:
1.
As to whether notes ori~inating in the manner
describea, or under similar cirdarnstances, have
ever been presented to this oank for rediscount
and if so, whether or not they rvere rediscoi.l."'lted.
In response I ampleased to advise you that we are unable to find any
cases VTherein notes of the class referred to, or of simJ.lar character,
have been offered to us for rediscount.
2.
The Board also inquires as to the extent to which
practices of this kind prevail in this district.
We are not aware of the prevalence. of such ~ractices, and since the receipt of your letter have carefully reviewed the examiners' re~orts on
approximately twenty-five member banks whose relations with their country
torrespondents might have led to such practice, but find no evidence of
its existence.
Very truly yours,
(Signed) J. B, McDougal
Governor.
X-4513-h
FtnE~At
RESERVE
BAFK
0 F
ST .
L 0 U I S
Fcbruar; 25, 1927.
Dear Governor Crissinger:
Replying to your letter of
the 17th, X-4794, you are informed that no notes
originating in the manner described or under similar
circumstances havo ever been prcscn tod to this bru1k
for re-discount.
We do not believe practices of
the kind described prevail at all i;;1 this District.
Ou.r :Memphis Branch has had
one or two notes offered to it whiCh did bear evidence
on their face tr~t they were either acquired from a
non-member bank or wore tal.cen indirectly thru a nonmember ba~k as an acco~~odation.
In each such case,
after ~1 investigation, the notes wore t~ccn up ~- tho
member bank re-discounting them.
Very truly yours,
( s)
Q.
M.
Atteber~r,
Dc:;m t~· Go vc r:1or •
Federal Reserve ~oard,
Washi~ton, D. C.
Attention; Governor Crissinger.
COPY
X-4813-i.
FEDERAL RESZRVE :S.A1UC OF MINNEAPOLIS.
February 24, 1927.
Hon. D. R. Crissinger, Governor,
Federal Reserve :Soard•
Washington, D. c.
Dear Governor Crissingert
This will
ac~~owledge
receipt of your letter (X4794).
Since 1923 we have not rediscounted nor have there been
offered to us any notes such as described in your letter.
Previous to 1923 When we were authorized by the :Soard to discount
paper originating in non member b&~ks, we had a few notes offered
to us bearing the endorsawent of individuals associated with 'non
~embP.r b&1ks, and did di~count such notes. te, however• gave but
little consideration to such endorsements. tn other wordsi we
looked to the maker rather than the endorser. Xn doing so, we
reasoned that if a note wa~ eligible and desirable. the fact that
an individual had endorsed or guaranteed the paper, could in no
way affect 1ts eligibility.
Yours respect;t'ully,
(Signed)
R. A. YOUNG .
Governor.
RAY-C
t:.JO
(COPY)
FZDERAL R:.:;E:;;IW2 J3A:TI<: OF KP..!,TS.AS C-ITY
X-4813-j
March 4, 1927
Fed6ral Reserve BoarQ,
Washington, D. C.
Gentlemen:
Attention - Governor Crissinger.
Replying to your letter of February 16th, which is part of a
file started on December 31, 1926, by Mr.
, then President
of the
National Bank of
-------------------------
In order to answer intelligently the questions you ask in your
letter of February 15th, I deferred answer until after a moeting of tho
Managi:.1g Directors of our branches, which was held here yesterday. In
the meantime I advised them to come prepared as to facts of tho amotUlt
of ~aper now under rediscount with us that bears earmarks as having come
from a non-member bank~ Since conferring with them, I cru1 say to you
that I do not believe there is any paper in this .bank that can possibly
be cons trued as comi:::1g from a. non-member banl{;.
For further discussion I will take the case of Mr.
at·
,, and this is on all fours with nearly every so-called live stoCk
bank at live stocl~ centers, meaning by that, banks that are located at
public stock yards. Naturally their business is with the larger live
stock operators, scattered over the ra...-.ges and feeding sections of our
District.
In the case of Mr.
, instead of sendi:1g a man from
his own ,bank out into Western Nebraska, to inspect loans for which ap')lications had been made to him by live stoCk handlers, he selected a man in
that section of the country to represent him. He selected a man who was
president of a state non-member bank, with the distinct understanding that
these loans were no uart of the bank's business. The man inspects the
cattle, values them,-rnakes the loan, looks after the cattle during the
1 s ba...'1k informed of the
grazing or feeding season, and keeps Mr.
progress that is being made with the cattle during the life of this loan.
For this service Mr.
allows the man he has SQlccted one percent
or ofttimes t~o percent on the amount of interest that is charged.
These loans are always too large ever to be taken into any
1 s bank, the
small country banks. The money is furnished by Mr.
notes are drawn to his representative and endorsed by the r~resentative
with recourse, bearL1g, of course, in this way the guarantee of the ma:1
who reoresents him. Predicated upon what I have stated to be the facts,
I c~ot but feel that this is eligible paper. I ltnow a great number of
X-4813-j
t-:J-J
iiho hove be; on doL1g this throughout their ·.-~hole banking careers;
indeed, I hnvo done it r.iysclf ·-rh0:1 I "'l'D.S in tho co~.1norcial be.!L.dng business. I think it is the proper ·.-ra'J for a men ':'Tho specializes in live
stock loaas to r.lcl<o his loa11s this 17ay, thc:1 have his inspectors go out
occasionally a."ld check u~ on his re-presentatives who are o:1 the ground,
and satisfy himself that his interests are being properly tcken care of.
banl~crs
Uo'l7, in the case of Mr.
, if he had selected a man in
that neighborhood who '.7as not con:1ected with a bank, had bad the paper
drarn o:1 Mr.
's forms and taken the loan in to his ba:.1k, I can:1ot help but feel that it would be eligible for rediscoU-"lt. I k:1ow fron
my ~c.1o·.-:ledge of the situation that these loans are not made T?rirnarily ·
for tho :?Uruoso of rediscounting with the Federal Reserve Ba..'12:c, a...'ld they
are seldo~ offered to us ~'ltil a considerable period of the note has run,
and then onl~r '.7hen some emergency comes into the bank's business and it
:leeds to rcdis count.
Wnat I m~ trying to get at is that because a note ecars the
endorsenent of a man ~ho is the president of a non-nember bank, this circwnsta."lce :aced not necessarily make that note ineligible. Whenever vre
find that a oenber ba~ is doing that, we refuse to take the paper. We
had a.n outsta.."lding case of this kind in a ba:uc at
, where the
man was coveri:~ un the makers of the notes, maki:1g the notes on the
ba:.lk 1 s fo'i-rns, but 11hen we discovered that the makers of these
notes, or the endorsers of tht:i:l '7'-ere the officers of a non-member bo:.1J::,
and that the proceeds had been passed to the cre~it of a no~-member bo:.~t
we at o:1co refused to take the :1otes, l:llld in this special case the practice has boon broken up.
----
Each one of our Managinb' Directors told me durL1g the co:lference yesterda.y that they arc following at the branches exactly the sane
rule that ..-...e have laid down here at the ho~ office and that no:!:l-member
bank paper is kept out of our rediscounts.
The point I want you to rule upon is that because a note bea.rs
the endorsement of a wan i1ho is the president or an officer of a non-me~
ber ba:'ll: need not :1ecessarily make that note ineligible for rediscount,
~hen upon i:lvestigation ~e find that the note was made in good faith to
the holdL1g :neober bank and has no relation to, or clai:;n U-::>on, the nonoc<::tber bank.
I hope I have made myself clear in this nutter, and while it
is :10 longer especially vi t.:tl to us because, as I said, I believe we now
have no such paper in the ·oank t?f this District; yet, your exai!liners apparently still rai~e the question of whether '"e are not taking non-neober
ba~ pa~er ~here they find a note bearing the endorseoent of a president
or officer of a non-oeobcr b~ik.
I reiterate that ~henever ~e find upon investigation that the
notes are made on practically the sa~e line as those of Mr.
's, and
there are several - possibly one or two at every live stock ce:..1ter tha.t
make their pc.per this ;:a.y ... I hope you rrill realize that you are goi:l€; to
X-4813-j
-3-
de:1y, first to the li vo s toe:: interests and also to the '·.1e:.1ber ba~1ks located at stock yc..rds, a great deal of thG service of the Federal 3.eserve
Sys ten by ::1£\ldng a ruling that such paper is ineligible. Of course, Mr.
- - - - - could have chosen another r:1a.."l out there, but often this local
banker is the best ::1an, and it is for that reaso:1 he is chosen, but if he
is acting in good faith and Hr.
is actL1g i:1 good faith, ~7hic.'1. ·:·e
ascertained, I feel the ~aper should be classed as eligible.
I have the honor to rewa.in,
Very truly yours ,
(Signed) W. J. Bailey
Governor.
(COPY)
FED:E...'lAL RES:::RVE :B.Alm OF DALLAS
X-4813-k
February 23, 1927
Federal Reserve Board,
D. c.
~ashingto~,
GeLJ.tlenen:
Attention Governor D. R. Crissillger.
Thi~ wili a~~owledg~ receipt of Board's letter X-4794, dated
February 17, 1927, relative to eligibility and desirability of notes offered for rediscount by ner:1ber banks and which are nayable to and bear the
e~dorseiJent of officers of non-:me;nber banks, though' such LJ.on-;ne:nber banks
do not themselves endorse them.
Replying to the Board's inquiry I a~ glad to say that ,-e cannot recall a sL~gle i~stance where pa~er of this character has been offered to this b~>k for rediscount and we hope that none ~ill be offered
in the future. Inasmuch as our attention has never been called to loa~s
of this sort in this district it is our opinion that it is not a co~on
practice here, but to the contrary if there are a~y they are few in n~
ber.
t
Wbere the proceeds of the loan are used for a purpose that
would render it eligible, while it is possible that the endorsement of
officers of ~on-menber ba~ might be merely incidental, under the circumstances stated in the Board's letter where the endorsing qfficers of,
non~member ba~~s have a. pe~~iary interest through a division of earnings
received from such loans, ~rima facie the oatter of eligibility is questionable, to say the least. In addition to this, it is apparent that this
practice should readily result in the extension of unsound credit which
v.ould be still further aggravated if the paper could be passed on to Federal Reserve E&~cs for rediscount.
It is al.so conceivablo that through separate agreer.lents loans
that were in fact made at the instance of non-member baru~ might in this
ma~ner be cw~ouflaged with a view of making thew technically eligible
for rediscount at Federal Reserve Batiks which would not be the case if
they bore the actual endorse~ent of such non-member ba:u~.
In substance, it is our opinion that loans of this character
should not be encouraged by a ruliYJg that would :::-!Ellce the~J. eligible for rediscount by a Federal Reserve Bnr.k.
Yours ver;i truly
(Signed)
L~~~n
p. Talley
Governor.
COPY
FEDERAL RESERVE
E~TC
OF DALLAS.
X-4813-k-1
March 18, 1927.
Federal Reserve Board,
Washington, D. C•
Gentlemen I
Attention Vice Governor Edmund Platt.
I have your letter of March 14, in reply to mine
of February 23.- a."ld it is apparent that we are discussing
two separate propositions, one being a legitimate loan for
an eligible purpose and the other a subterfuge to evade
legal loan limitations and to use the rediscount facility
in a manner not conter1lJ>lated by law.
•
I fully agree with you that in a number of instances the resources of banks are not sufficient to finance
their larger custo~ers. It is also a fact, as you state, that
frequently banks in the larger towns and cities make loans
direct to customers of smaller banks and this is particularly
true where the smaller banks have already loaned such customers
up to their legal limit. Under such circumstances where it is
a legitimate transaction and the proceeds are used for an eligible purpose, the notes betng offered for rediscount by a
member bank, apparently there can be no sound reason for discriminating against them merely because they bear the endorsement of an officer of a non-member bank. In other words, the
matter of eligibility and acc91)tabili ty should a.lways be governed by the facts in the particular case.
On the other hand, it is conceivable that a nonmember bank might enter into an arrangement with its cor:t·espondent member bank to make loans for its account with a
separate agreement to provide for them at maturity, thus
violating the spirit, if not the letter, of the law with
reference to its legal loan limit and, furthermore, enjoying
indirectly the use of the rediscount facility of the Federal
Reserve Bank. If the loans are in fact made at the instance of
the member bank, instead of the non-member bank, apparently
there is no g9od reason for making them payable to an individual who is an officer of the non-member bank and, in our
•
00PY
- 2 X-1813-k-1
judgment, the fact that they are made payable to him, instead
of to the member bank which is sup?osed to have made the loan,
should place the Federal Reser~e Bank u1on inquiry as to the
legitimacy of the transaction.
It is our further thou&~t that it is not a sound
practice for a member bank to solicit loru1s and, as I stated
in my previous letter, where the officer of a non-member bank
has a pecuniary interest throu&~ a division of discount or
otherwise there would be an incentive through the use of the
rediscount facility to~uf~~~ xnso~1d credit.
I hope that this will give you a clearer understanding of the idea that I intended. to express in my previous letter
and it is still my opinion that nothing would be gained through
a ruling of the Board on this subject as tho matter of cli6iJility
and credit acceptability would have to be determined by the actual
facta in each case.
(Signed)
LYNN P.
TAlth~.
Governor.
RES~RV:S
FEDERAL
0
:t
S A l-'!
F R _'\. ?T
c!
sc
0
February 25, 1927.
Federal Reserve Board,
Washi~gto~, D. C.
Dear Sirs:
In reoly to your letter of Februar~· 17th (X-4794), you
are i~formcd t~t it is not a g~noral practice in this district
for the officers of b~iks to mru{e commercial loans for correspon~cnt banks and to receive commission for their services.
We
camtot recall any insta.:'lco in wnich a :10tc was offered to us for
discount, drawn payable to officers of a non-member bru1k. Had
such paper been submitted, however, ~~d had we detected tho fact
that the endorsers were officers of non-mmnbcr b~~ks, we would
have inquired into tho purpose of making tho loa..• in such form,
to determine, first, whether the member b~~k was ap~lying for
funds of the Federal Reserve Ea~~ with the object of extending
its business beyond ordinary channels, and, secondly, whether the
member b~~k ap~lying for the discount was acti~ as agent of a
non-member bank •
.A.s ~roumay real~zc, it is quite a custom for city ba.~lcs
to gra:1t relief to country corros")o:::ldents b~r "9Urchasing custoi]lers 1
notes without recourse, or by making direct loa•1s, ~articularl:i in
the case of excess lines, to customers of country correspondents.
Tho for.m whic~ these loans truce v~rics quite considerably. Some
city bo.~~-:s require, wherever ...,ossiblc, that the loan s:i1all be made
on its own form of '9romissory note. In other instances, thc~r
require that the loans shall be made on the foiT.l of the corrcs;::>ondent b~•k, dr~wn to the order of the borrower or to the order of
the country b~~~. or, in rare instuncos, to the order of officers
of such count~· ba~. Whether or not sucll notes would be endorsed
without recourse would depend upon urrangements agreed upon.
Yours very truly,
(s)
Jno. U. Calkins,
Governor.
@FedFRASER