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FEDERAL RESERVE BOARD WASHINGTON X-7469 ADDRESS OFFICIAL CORRESPONDENCE TO THE FEDERAL RESERVE BOARD June 30, 1933. SUBJECT: Condition of Membership - r e l a t i o n , of b a n k ' s c a p i t a l and s u r p l u s to deposit liabilities* Dear S i r : I n a d d i t i o n to the 14 conditions contained i n the Board's l e t t e r of March 11, 1933 (X-7356), and such s p e c i a l c o n d i t i o n s as may be d e s i r a b l e i n a p a r t i c u l a r c a s e , the Board now p r e s c r i b e s f o r each bank applying f o r membership i n the Federal Reserve System the f o l l o w i n g c o n d i t i o n numbered 15? "15, Such bank s h a l l maintain an amount of paid-up and unimpaired c a p i t a l and unimpaired s u r p l u s which, i n the judgment of the Federal Reserve Board, w i l l be adequate i n r e l a t i o n t o i t s t o t a l deposit l i a b i l i t i e s , having due regard t o t h e general p r i n c i p l e t h a t a "bank's c a p i t a l and s u r p l u s o r d i n a r i l y should not be l e s s than o n e - t e n t h of the average amount of i t s aggregate deposit l i a b i l i t i e s and, i n some circumstances, should "be more than o n e - t e n t h of such amount." H e r e a f t e r i n g i v i n g you t e l e g r a p h i c advice of approval of an a p p l i c a t i o n f o r membership "by a S t a t e "bank the word "ANCHORIVETED" following t h e name of the a p p l i c a n t w i l l be used i n s t e a d of "ANCHORIVET" and w i l l mean; "Application of such "bank f o r membership has "been approved by Board s u b j e c t t o f i r s t 14 c o n d i t i o n s s e t f o r t h i n Board's l e t t e r of March 11, 1933 (X-7356), c o n d i t i o n numbered 15 s e t f o r t h i n B o a r d ' s l e t t e r of June 30, 1933 (X-7469), and s p e c i a l c o n d i t i o n s s t a t e d 825 X-7469 " h e r e a f t e r . Please advise such bank of B o a r d ' s approval and conditions of membership p r e s c r i b e d , t o g e t h e r with explanation thereof contained i n Board's l e t t e r (X-7356). L e t t e r containing d e t a i l e d advice r e g a r d i n g such approval w i l l be forwarded bank through you as soon as p o s s i b l e . When you have r e c e i v e d c e r t i f i e d copy of r e s o l u t i o n of board of d i r e c t o r s of such bank accepting conditions of membership p r e scribed by Board, t o g e t h e r with advice of compliance with any s p e c i a l conditions to be complied with p r i o r to admission to membership, the Federal r e s e r v e bank i s authorized upon payment t h e r e f o r to i s s u e approp r i a t e amount of Federal r e s e r v e bank stock and t o accept r e q u i r e d r e s e r v e s . P l e a s e advise Board date upon which membership of bank becomes e f f e c t i v e and amount of Federal reserve bank stock issued t o i t , forwarding copy of r e s o l u t i o n accepting c o n d i t i o n s of membership and advising of compliance with any cond i t i o n s t o be complied with p r i o r t o admission." Such a telegram w i l l a l s o c o n t a i n the code word "AUCHOEOME" which w i l l mean: " I n connection with c ondition numbered f i f t e e n above and i n the absence of any s p e c i a l a c t i o n by the Board, i f i n any period of twelve months ending on the 30th day of November the average amount of deposit l i a b i l i t i e s of the bank during such p e r i o d , as d e t e r mined on the b a s i s of r e p o r t s made by the bank t o the Federal r e s e r v e bank f o r t h e purpose of computing i t s r e q u i r e d r e s e r v e , exceeds t e n times t h e aggregate amount of t h e b a n k ' s paid-up and unimpaired c a p i t a l stock and unimpaired s u r p l u s , t h e Board w i l l expect t h a t such bank, as soon as p o s s i b l e and w i t h i n t h e next succeeding s i x months, w i l l i n c r e a s e the aggregate amount of i t s paid-up and unimpaired c a p i t a l and unimpaired surplus to an amount at l e a s t equal t o 10$ of t h e average amount of i t s deposit l i a b i l i t i e s during such twelve months." I t i s contemplated t h a t when you r e c e i v e t e l e g r a p h i c advice from the Board of approval of a b a n k ' s a p p l i c a t i o n you w i l l c a l l s p e c i f i c a t t e n t i o n to t h e above comments i n connection with cond i t i o n number 15 when you submit t o the bank f o r c o n s i d e r a t i o n and w O— acceptance t h e c o n d i t i o n s p r e s c r i b e d "by the Board. X-7469 The comments above r e f e r r e d t o w i l l "be included also i n the l e t t e r addressed to the a p p l i c a n t bank containing the conditions of membership. Whenever an examination i s made of a S t a t e member bank the Federal r e s e r v e examiner should consider whether t h e r e l a t i o n of the b a n k ' s c a p i t a l and surplus t o i t s deposit l i a b i l i t i e s conforms s u b s t a n t i a l l y t o t h e p r i n c i p l e expressed i n c o n d i t i o n number 15. While, of course, member banks which have not accepted c o n d i t i o n number 15 a r e not s u b j e c t to i t s requirements, t h e Board f e e l s t h a t i t would be proper f o r the examiner or your o f f i c e t o suggest t o any member bank which does not appear t o have an adequate amount of c a p i t a l and surplus the d e s i r a b i l i t y , as a matter of good banking p r a c t i c e , of conforming to the p r i n c i p l e l a i d down i n the c o n d i t i o n . In the case of any bank subject to c o n d i t i o n number 15, where i t appears t h a t the r e l a t i o n of i t s c a p i t a l and s u r p l u s to deposit l i a b i l i t i e s does not meet t h e requirements of t h a t c o n d i t i o n , the examiner or your o f f i c e should request the bank t o give prompt cons i d e r a t i o n to compliance with such requirements. I n a d d i t i o n , the Board d e s i r e s your o f f i c e to determine annually by r e f e r e n c e to the reserve r e p o r t s of S t a t e member banks subject to c o n d i t i o n number 15 whether each such bank i n your d i s t r i c t i s complying with the requirements of t h a t c o n d i t i o n . While you w i l l note t h a t the Board expects each bank s u b j e c t to c o n d i t i o n number 15 to comply w i t h i t s p r o v i s i o n s without any X-7469 ^ -4s p e c i a l a c t i o n "by the Board, the Board w i l l i n s p e c i a l circumstances and upon your s p e c i f i c recommendation consider whether i n view of a l l the f a c t s involved i n the p a r t i c u l a r case i t w i l l be j u s t i f i e d i n not r e q u i r i n g the "bank t o i n c r e a s e i t s c a p i t a l and surplus t o an amount at l e a s t equal to one-tenth of i t s deposit l i a b i l i t i e s , or whether, on the o t h e r hand, a l a r g e r p r o p o r t i o n of c a p i t a l and surplus should "be r e q u i r e d i n order to a f f o r d adequate p r o t e c t i o n "because of s p e c i a l c o n d i t i o n s i n the p a r t i c u l a r hank under c o n s i d e r a t i o n . I n the f u t u r e , when the t h r e e c o n d i t i o n s r e l a t i n g t o the e x e r c i s e of t r u s t powers by an a p p l i c a n t bank, r e f e r r e d to i n the Board's l e t t e r of March 11, 1933 (X-»7356), are p r e s c r i b e d , such cond i t i o n s w i l l be r e f e r r e d to i n the telegram as c o n d i t i o n s numbered 16, 17 and 18, i n s t e a d of 15, 16 and 17. Very t r u l y y o u r s , Chester M o r r i l l , Secretary. LETTER TO AIL FEDERAL RESERVE MEUTS.
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