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X-9048 December 15, 1934. SUBJECT $ Approval of Reduction of Preferred Stock or Capital Notes or Debentures by the Federal Reserve Board. Dear Sir; This r e f e r s to a question raised by one of the Federal Reserve .Agents with regard t o whether or not the approval of the Federal Reserve Board of the retirement of preferred stock of a national bank or of the retirement of capital notes or debentures or preferred stock of a State member bank i s required. In connection with the inquiry regarding the retirement of preferred stock of a national bank# you are advised that the Board has heretofore taken the p o s i t i o n that i n view of the provisions of s e c t i o n 302 of the Ibiergency Banking Act of March 9, 1933, the Board's approval i s not required with respect t o the reduction of preferred stock of a national bank. Under the terms of such section 302, preferred stock issued by national banks i s made subj e c t t o retirement i n such manner and upon auch conditions as may be provided i n the Articles of Association of the bank# with the approval of the Comptroller of the Currency, Under the provisions of the Federal Reserve Act a State 395 -2- A-9048 member bank i s not required to obtain the approval of Vne Federal Reserve Board of a reduction i n i t s capital stock, either common or preferred, unless the particular State member bank i s subject t o a condition of membership requiring the Board's approval of a reduct i o n of i t s capital stock. The Bfard f e e l s that in any case where the Board's approval of the reduction of the c a p i t a l stock of a State member bank i s required under a condition of membership such approval would be required of a reduction of preferred stock as well as commdn stock. Under the provisions of section 9 of the Federal Reserve Act, as amended, as you know, the terms "capital" and '^capital stock", for the purposes of membership of State banks i n the Federal Reserve System, s h a l l include the amount of outstanding c a p i t a l notes or debentures l e g a l l y issued by the applying bank and purchased by the Reconstruction Finance Corporation. In view of t h i s f a c t , the Board f e e l s that i n any case where, under a condition of membership, the Board's approval of the reduction of the capital stock of a State member bank i s required# approval of the reduction of c a p i t a l notes or debentures lawfully issued by such bank and purchased by the Reconstruction Finance Corporation would a l s o be required* On the other hand* i n the case of any State member bank not subject t o such a condition of membership, the Board's approval of a reduction of such cap?tel notes or debentures issued by the bank would not be required. 396 -3- X-9048 The Board understands that provision i s usually made, among other things, for the retirement from time t o time of c a p i t a l notes or debentures or preferred stock out of earnings of the bank and t h a t , accordingly, there may bo numerous reductions i n comparatively small amounts of c a p i t a l notes or debentures or preferred stock issued by State member backs. In the circumstances# the Board f e e l s that i t i s appropriate to authorize the respective Federal Reserve Agents, in cases in which the Board's approval i s required, t o approve on the Board'e behalf reductions of capital notes or debentures or preferred stock issued by State member banks where, i n the opinion of the Federal Reserve Agent, a l l of the circumstances involved warrant such a reduction and where a f t e r such reduction i s accomplished the member bank w i l l have an unimpaired capital and surplus of not l e s s than one-tenth of the amount of i t s deposit l i a b i l i t i e s * Each of the Fed- eral Reserve Agents i s accordingly hdreby authorized t o approve on behalf of the Board, i n the circumstances and within the l i m i t a t i o n s described, reductions of capital nctes or debentures or preferred stock issued by State member banks i n any case where the Board's approval of such reduction i s required. I t i s requested that in any such case the Board be advised for i t s records of the reduction which, has been e f f e c t e d with the Agent's approval. Of course, should any case a r i s e i n which f o r any rec son v-he i'eecral Reserve Agent i s i n doubt as t o the wisdom 397 -4« A-9048 of the proposed reduction or i s unwilling t o give h i s approval thereto under the authority granted herein, the bank's a p p l i c a t i o n may be submitted t o the Board f o r determination, together with current informat i o n as t o the condition of the applying bank, i t s reason f o r desiring to e f f e c t the reduction and any other information, including the •iigeiit's comments and recommendation, which may be of a s s i s t a n c e t o the Board i n passing upon the application* I t i s assumed, of course, t h a t i n passing upon any proposed reduction of c a p i t a l notes or debentures or preferred stock, the Agent w i l l g i v e consideration to the general condition of the i n s t i t u t i o n and the s u f f i c i e n c y of i t s remaining c a p i t a l structure, with due regard t o the maintenance of lawful c a p i t a l requirements and an adequate r a t i o of c a p i t a l t o deposits i n view of a l l the circumstances involved in the particular c a s e . F n i l e , as noted above, the Board's approval of reductions of c a p i t a l stock or c a p i t a l notes or debentures i s not required under the law i n some cases, the Board f e e l s , i n view of the important e f f e c t which a reduction i n the c a p i t a l stock of a bank may have on i t s f i n a n c i a l condition, that the r e s p e c t i v e Federal .Reserve Agents should endeavor to keep themselves informed as t o any proposed reductions i n ihe c a p i t a l stock or c a p i t a l notes^or debentures of State member banks* whether the Board's approval i s required i n such cases or not, and t o take such a c t i o n as may be appropriate in any case where the : 398 -5~ X-9048 proposed, reduction would not be t o the t e s t i n t e r e s t s of the bank. The Board would l i k e t o be advised for i t s records of each reduction e f f e c t e d i n the c a p i t a l stock or c a p i t a l notes or debentures of a State member bank, and the Board w i l l be glad t o give consideration t o any such proposed reduction i n any case i n which the Federal Reserve Agent f e e l s that the circumstances warrant, even though the Board's approval of the reduction i s not required under the conditions #f membership t o which the p a r t i c u l a r State member bank i s subject* Very t r u l y yours» Q&upCDo hD/rULdUi Chester Morrill, Secretary. TO ALL FEDERAL RESERV3 AGENT'S,
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