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FEDERAL RESERVE BOARD WASHINGTON ADDRESS OFFICIAL C O R R E S P O N D E N C E T O T H E FEDERAL RESERVE BOARD X-7113 March 9, 1932. SUBJECT: Applications of S t a t e Banks and Trust Companies f o r Membership. Dear S i r : There i s a t t a c h e d h e r e t o , f o r your i n f o r m a t i o n and guidance, a copy of a l e t t e r to the Federal Reserve Agent a t the Federal Reserve Bank of Richmond, w i t h r e gard to t h e treatment of d e p r e c i a t i o n i n t h e investment accounts of s t a t e hanks and t r u s t companies applying f o r membership i n t h e Federal Reserve System. Very t r u l y y c u r s , Chester M o r r i l l , Secretary. Enclosures. TO ALL F. R. AGENTS EXCEPT RICHMOND. 8 OF Y X-7113-a March 7, 1932. Mr. W. W. Hoxton, Federal Reserve Agent, Federal Reserve Bank of Richmond, Richmond, V i r g i n i a . Dear Mr. Hoxton: Receipt i s acknowledged of your l e t t e r of February 24, 1932, with regard t o the treatment of "bond d e p r e c i a t i o n of a s t a t e bank i n the F i f t h Federal Reserve D i s t r i c t which contemplates making an a p p l i c a t i o n f o r membership i n the Federal Reserve System. You r e f e r t o the Board's l e t t e r of June 19, 1931 (X-6914), a d v i s i n g of the adoption by the Board of a p o l i c y of r e q u i r i n g t h a t a t t h e time of admission of a s t a t e bank or t r u s t company to membership i n the Federal Reserve System, i t s h a l l be f r e e from a l l known l o s s e s and d e p r e c i a t i o n , so t h a t , on t h e date i t s membership becomes e f f e c t i v e , i t s statement w i l l r e f l e c t as nearly as p o s s i b l e t h e value of i t s a s s e t s ; and a l s o to the Board's l e t t e r of January 18, 1932 (X-7062), a d v i s i n g t h a t , i n connection with the examination of s t a t e member banks of the Federal Reserve System, the amounts of d e p r e c i a t i o n on stocks and on d e f a u l t e d bonds only should be shown as l o s s e s . You i n q u i r e whether the p o l i c y s e t f o r t h i n the l e t t e r of January 18, 1932, r e l a t i v e to s t a t e bank members of the Federal Reserve System i s a l s o a p p l i c a b l e to banks applying f o r membership i n the Federal Reserve System. In t h e opinion of the Federal Reserve Board, t h e r e i s j u s t i f i I 245" -•&- X—7113—a c a t i o n , under p r e s e n t c o n d i t i o n s , f o r d i f f e r e n t i a t i n g i n t h e treatment of "bond d e p r e c i a t i o n which may e x i s t i n banlts a l r e a d y members of the F e d e r a l Reserve System and t h a t which may e x i s t i n the case of banks which a r e applying f o r admission t o the System. However, i n some r e c e n t cases t h e Board has not i n s i s t e d upon s t r i c t observance of t h e p o l i c y o u t l i n e d i n i t s l e t t e r of June 19, 1931, and has approved a p p l i c a t i o n s f o r membership i n the System made by banks whose managements were competent and whose a f f a i r s otherwise were i n g e n e r a l l y s a t i s f a c t o r y shape, upon c ondition t h a t they should, p r i o r to admission t o the System, charge off a l l known l o s s e s and a l l d e p r e c i a t i o n on bonds other than those c l a s s i f i e d i n the f o u r h i g h e s t grades by a recognized investment s e r v i c e organiz a t i o n r e g u l a r l y engaged i n the business of r a t i n g or grading bonds» T h e r e f o r e , while no d e f i n i t e statement can be made i n advance, i t i s probable t h a t t h e Board would be disposed to extend s i m i l a r t r e a t ment to the bond d e p r e c i a t i o n of other banks applying f o r membership i n t h e System i f t h e i r managements and condition were g e n e r a l l y s a t i s f a c t o r y i n a l l other r e s p e c t s . I t i s suggested t h a t you consider t h e s e a s p e c t s of the matter c a r e f u l l y and advise the Board f u l l y with regard to them i n connection with any recommendation t h a t you may submit i n any case i n which you f e e l t h a t the Board would be j u s t i f i e d i n making s i m i l a r allowance f o r b o n d ' d e p r e c i a t i o n . Very t r u l y y o u r s , Chester M o r r i l l , Secretary.
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