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BOARO OF''GI;IVERNORS
DF" THE
FEDERAL RESERVE SYSTEM
WASHINGTON
ADDRESS OFFICIAL CORRESPONDENCE
TO THE SOARO
October 22, 1937.
SUBJECT:
Comments of Federal Reserve ·
Banks on Regulation A.
Dear Sir:
Pursuant to the Board's letter of July .30, 1937 (R-41), all
of the Federal Re$erve banks submitted their comments and suggestions with regard to the proposed revision of Regulation A. The
suggestions and criticisms received from the Reserve banks were of
muc~ assistance to the Board and to its staff in working out the
final form of the regulation, and the Board wishes to express appreciation to the banks for the thorough consideration which was
given ~~ ti1em to the proposed regulation.
It seems appropriate to refer to the more important suggestions which were made by the banks, especially those which wore not
incorporated in the final regulation, and to state some of the considerations which influenced the Board and its staff in reviewing
these suggestions.
Qeneral PrinciRl~s. - Several banks made suggestions as to
the elimination or modification of the preface to the regulation antitled "General Principles", and .in the light of these comments certain changes have been made in the statement o£ General Principles
in the final form of the regulation.
Seption 1. pj.sgotmt of po1(@Sa QFaft; ,!Q.<i pi;j,J.§ for gper
banl&;l. - Two of the Federal Rosorve banks suggested that sections 1
and 2 be reversed so that tho provisions relating to discounts would
come first .and those relating to advances would be next in order iu
the regulation. This sugaestion hae been adopted, as well as a suggestion that the subsection entitled "Ac.ivancos on·eligiblo paper"
precede that entitled "Advances on Gov~rnment obligations" in what
is now section 2 of tho regulation.
Section l(a), Commercial, asric\lJ.turaJr gp.d indy.strial
paper. - Ono o:f the Federal Reserve banks suggested that the question
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whether paper the proceeds of which are loaned to some other borrower be made eligible for discount should be submitted to a committee of Presidents for study and recommendation before any change
was adopted. The subject is one which has had thorough consideration over a number of years past, and it was felt that addi·tional
study would develop little important information not already available on the subject. Accordingly, it was considered that no sufficient reason existed for deferring ~ decision with respect to the
matter.
Section l{c). Construction loans.- Two of the Federal
Reserve banks suggested that what is now footnote 4 under "Construction loans" be changed so a.s to exclude the offering member bank
from the "persons" who may enter into the agreement to advance the
full amount of the loan upon the completion of the construction
financed by the note offered for discount. Since member banks are
permitted to make mortgage loans it was not thought that a member
bank should be excluded from entering into such an agreement merely
because it was extending the com~truction loan. The question whether
a member bank is an acceptable "person" in any givGn case is essentially one of credit, to be considered by the Federal Reserve bank
in the light of the facts in the particular case rather than one of
eligibility.
Section l(i) Limitations. - Two of the Federal Reserve
be.nks called attention to the last sentence of this subsoction with
regard to the amount of the paper of one borrower discountable for
a Stn te member bs.nk. The law itself contains a provision in the
twelfth paragrepp of section 9 that no Federal Reserve bank shall
bo permitted to discount for any Stete bank or trust company notes,
drafts or bills of exclw..nge of any one borrower who is liable for
borrowed money to such State bank or trust company in an amount
greater than that which could be borrowed lawfully from such State
bank or trust company were it a national banking a.ssoc:l.ation, and
the regulation morely restates the provision cf the statute. The
same limitation is not applicable with respect to national banks,
because a Federal Reserve bank is forbidden by the law to discount
for a national bank only the amount of paper of onu borrower which
is in excess of the limitations of section 5200 of the Revised Statutes. The distinction is one·which occurs in the statute itself,
and it did not seem desirable to make the limitation of the regulation with respect to national banks more stringent than provided in
the law m(3rely because the law subjects ~)tate member banks to the
more restrictive provision.
Section !U_c). Advances on other security under section
lO(b) of the Federal Reserve Act. - It was suggeFt.cd that the words
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"highest rate applicable to discounts for member banks 1.mder the
provisions of sections 15 and lSa of the Federal Reserve Act" be
changed to "highest discount rate". This change was not adopted
because it was thought that the regulation should conform to the
existing practice and to the manner in which the statute has been
consistently interpreted.
One of the Federal Reserve banks suggested a rewording
of clause (2) at the end of this subsection so that it would read
"on demand at the option of the Federal Reserve bank". This particular clause of the regulation is one which has been rephrased several
times and has been made the subject of careful study in the light
of suggestions previously received from the Federal Reserve banks.
It is believed that the language as incorporated in the final form
of the regulation accurately reflects the statute and will work out
satisfactorily in practice. It did not seem clear that the substitute language suggested was in accord with the intention of the
statute.
Sectio 2 d •
ds of ollateral wbi h ma be used as
securit for advances un er ect on 10 b o the Federal Reserve Act. The views of the Federal Reserve banks with regard to the provisions
of this subsection were not uniform, one or two feeling that the provisions were undesirable, while others offered no objection to them.
Certain suggestions for specific changes in phrasing were made. The
Board felt it desirable to retain the provisions in the final regulation as an indication of a preferred list of collateral for advances
b,y Federal Reserve banks under section lO(b) of the Federal Reserve
Act, but with the general provision that such advances may be made
against any collateral satisfactory to the Federal Reserve bank when
in its judgment circumstances make it advisable to do so.
Several banks suggested that the wording of the subparagraph
relating to loans upon the security of stock made in conformity with
Regulation U be changed so that it would app~y to obligations evidencing loans upon the security or stock wnich are not made in violation or the provisions of Regulation u. It was thought that such a
change would make the provision more eomprehensive than it should be,
and inasmuch as the paragraph·conetitutes merely a preferred class
of collateral, without rendering ineligible as collateral other nonconforming loans on stock, there was no sufficient reason for broadening the subsection in the manner suggested.
'··
One of the Federal Reserve banks suggested that it would
be appropriate to include in this subsection reference to the fact
that the loan value of assets acceptable under section lO(b) is
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subject to determination of :the Reserve bank. In view of the provision which has been included in section 3(d) with reference to the
amount of assets required as collater~l "at their reasonable value
determined in a manner satisfactory to the reserve bank", it is believed .that the purpose of this suggestion has been substantially
met.
It was also suggested that all obligations of the kinds
enumerated in this subsection as security for advances under section
lO(b) should be negotiab~e 1b for~. Inasmuch as the law permits a
Federal Reserve bank to a~cept any assets satisfactory to it as collateral security for a.dvqnces under section lO(b), it was thought
that the regulation should not make any specific requirement with
respect to negotiability a£ assets securing such advances· but that
the question whether non-negotiable assets should be taken as such
security should be treatedas one affecting acceptability from a
credit standpoint for consideration by the Federal Reserve bank in
each case.
Section §(a). APP;Licatj.ons. for discounts or advances. One Federal Reserve bank called attention to the fact that this subsection does not require that the app~ying bank shall certify in
its application that the paper offered is eligible for discount under
the terms of the regulation. Under the regulation each Federal Reserve bank is free to use its own/< discretion as to wheth'er it will
include such a requirement in its discount application forms. It
appeared unnecessary rro.n the sta.ndpoin t of the Board to make the
inclusion of such a requirement mandatory.
Section B(d). M.¢rgipal Collateral. -Comments were made
by the Federal Reserve banks upon the question whether it was desirable that the Board me.ke any statement regarding the amount of marginal collateral required by the Reserve banks. Some objected and ·
others offered suggestions as to the phraseology which might be used
in this connection. This point wa.e thoroughly discussed by the Board
and its staff and consideration.was given to the desirability of making any such statement, whether such a statement should be incorporated in a letter to the Federal Reserve banks or in the regulation
itself, and what specific limitation on the amount of marginal collateral should be prescribed. As you know, the regulation ~s adopted
does not forbid a Federal Reserve bank to accept collateral in excess
of the percentages named, but provides that Federal Reserve banks
shall report to the Board in the loan schedule the facts of any case
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in which the amount of collateral exceeds 25 per cent of the amount
of a discount or 125 per cent of the amount o~ an advance.
Section 5(e). Credit on security of obligations of the
United States. - A number of the Federal Reserve banks offered
objection to the provision contained in the. draft of the regulation inclosed with R-41 relating to the amount of credit extended
on security of' obligations of the United States, and indicated a
number of administrative difficulties in connection with any such
provision. This provision has been considerably modified in tbe
final regulation and requires merely that where the amount advanced
on the security of obligations of the United States is less than par,
the bank must re,Port the facts to the Board in the loan schedule.
This is not intended to mean that such a report must be made in a
case in which a member bank obtains the full aw~unt requested by
it, but if the member bank requests an advance in the full par
amount of the Government obligations offered as security and the
advance is made at less than par the facts an~-circumstances should
be reported in accordance with the regulation.
Section 4(a). Prohibition upon acceptance of nonmember
bank paper. - Some of the Federal Reserve banks suggested the desirability of revising the exception to the prohibition upon
the acceptance of nonmember bank paper as it appe&red in the draft
of the regulation submitted with R-41. After cont>iderat.ion of
these suggestions, the prohibition has been reworded so as to except therefrom assets otherwise eligible which were purchased by
the offering bank on the open market or otherwise acquired in good
faith and not for the purpose of obtaining credit for'a nonmember
bank.
The subject of the acceptance of nonmember bank paper
for discount or as security for advances under saction lO(b) of the
Federal Reserve Act is now governed exclusively b,y the provisions
of seqtion 19 of the Federal Reserve Act and section 4 of the revised Regulation A, the prohibition in the revised regulation being
intended as a revocation of the blanket authority heretofore outstanding which was granted by the Board's telegr~s of March 11
and March 13, 195~ (Trans Nos. 1620 and 1659) and which authorized
Federal Reserve banks under certain conditions to discount or accept
as security for advances paper acquired from or bearing the signature or indorsement of nonmember banks.
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Section 6. Bankers' acceptances. - In accordance with the
suggestions of several Federal Reserve banks, there have been restored to the regulation as finally approved the words "between foreign countries" in paragraph (1) of subsection (b) and the words "or
issued by a grain elevator or warehouse company duly bonded and licensed and regularly inspected by s~~te or Federal authorities with
whom all receipts for such staples and all transfers thereof are
registered and without whose consent no staples may be withdrawn" in
paragraph (3) of subsection (b). The restoration of these provisions
brings the new regulation in to conforrni ty ln these respects with the
old regulation.
Recommendations as to minimum standards in making real
estate loans and installment loans. - Some of the Federal Reserve
banks recommended the elimination from the Appendix of the recommendations of the Board regarding'minimum standards for installment
paper and real estate loans used as collateral security for advances
to member banks, while others favored their retention. After being
modified in several respects to meet specific suggestions of the
Federal Reserve banks with regard to the provisions of these recommendations, they have been·ret.ained in the Appendix in the hope that
they may serve to encourage sound practices by member banks.
General. - Several suggestions as to wording or phraseology made by the Federal Reserve banks were not adopted because of
th~ desire to have the language of the regulation follow the language
of' the statute where this was practicable, unless the use of other
language appeared to be desirable for some special reason. It may
also be said that in a very general way the provisions of the old
regulation which are found in the new regulation have been carried
forward in substantially the same form unless some material reason
for changing the language appeared to make modifications desirable.
yery truly yours,
Chester Morrill,
Secretary.
TO PRESIDENTS OF ALL FEDERAL RESEaVE BANKS
@FedFRASER