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FEDERAL RESERVE BOARD WASHINGTON ADDRESS OFFICIAL CORRESPONDENCE T O T H E FEDERAL RESERVE BOARD X-7062 January 18, 1932. SUBJECT: Depreciation on S e c u r i t i e s Held by S t a t e Member Banks. Dear S i r ; There i s enclosed herewith, f o r your information and guidance, copy of a l e t t e r addressed by the Federal Reserve Board to the Federal Reserve Agent a t Minneapolis in response to an i n q u i r y received from h i s o f f i c e , copy of which i s a l s o enclosed, with regard to d e p r e c i a t i o n on s e c u r i t i e s h e l d by S t a t e member banks. Very t r u l y yours, Chester M o r r i l l , Secretary. Enclosure a. TO ALL FEDERAL RESERVE AGENTS. (Except Minneapolis) C O P X-7062-a Y January 14, 1932. Mr. John E. M i t c h e l l , Federal Reserve Agent, Federal Reserve Bank of Minneapolis, Minneapolis, Minnesota. Dear Mr. M i t c h e l l ; This r e f e r s to Mr. B a i l e y ' s l e t t e r of December 23, 1931, i n q u i r ing as to the a t t i t u d e of the Federal Reserve Board toward d e p r e c i a t i o n on s e c u r i t i e s in S t a t e member banks of the Federal Reserve System, in the l i g h t of the i n s t r u c t i o n s issued to n a t i o n a l bank examiners by the Compt r o l l e r of t h e Currency, under date of December 18, 1931, t h a t , while bonds should be r a t e d and appraised as h e r e t o f o r e , no p a r t of the dep r e c i a t i o n , except t h a t upon d e f a u l t e d bonds, should be regarded as a l o s s and shown as such on page 11 of the form f o r r e p o r t s of examinations of n a t i o n a l banks. The Board b e l i e v e s t h a t , in making examinations of S t a t e member banks and in analyzing r e p o r t s of examinations of these i n s t i t u t i o n s made by S t a t e a u t h o r i t i e s , i t would be d e s i r a b l e f o r the Federal r e s e r v e banks to s e t f o r t h the e n t i r e amounts of d e p r e c i a t i o n on s e c u r i t i e s , grouped according to the r a t i n g s of the i s s u e s . 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 . Of course, in n e g o t i a t i o n s with S t a t e member banks and S t a t e a u t h o r i t i e s r e l a t i v e to c o r r e c t i v e a c t i o n , a l l d e p r e c i a t i o n on stocks 36 X-7062-a - 2 - and "bonds should be given c o n s i d e r a t i o n and no f a v o r a b l e o p p o r t u n i t y to o b t a i n a c t i o n c a l c u l a t e d to strengthen banks whose d e p r e c i a t i o n on stocks and bonds exceeds or n e a r l y equals the amount of t h e i r s u r p l u s and undivided p r o f i t s should be overlooked. Such banks a l s o should be impressed with the a d v i s a b i l i t y of d e f e r r i n g the payment of f u r t h e r dividends u n t i l a l l l o s s e s and a l l d e p r e c i a t i o n on stocks and bonds and o t h e r doubtful a s s e t s have been charged o f f or otherwise eliminated or u n t i l adequate r e s e r v e s have been c r e a t e d . A h e l p f u l and t o l e r a n t a t t i t u d e should be preserved a t a l l times, however, and care should be exercised to avoid doing or saying anything which might n e e d l e s s l y destroy or impair the morale of bank d i r e c t o r s and o f f i c e r s . Very t r u l y yours, Chester M o r r i l l , Secretary. t COPY X-7062-b FEDERAL RESERVE E M OF MIBTEAPOLlS December 23, IS21. Federal Reserve Board, Washington, D. C. Gentlemen: A few months ago the Comptroller of the Currency adopted a p l a n and i s s u e d i n s t r u c t i o n s to a l l Chief Examiners r e l a t i v e to s e t t i n g up bond d e p r e c i a t i o n in examination r e p o r t s . Under t h a t p l a n the d e p r e c i a t i o n on bonds r a t e d B3 or b e t t e r was d i s r e g a r d e d , d e p r e c i a t i o n on bonds r a t e d under B3 was s e t up in the r e c a p i t u l a t i o n 75 per cent doubtful and 25 per cent l o s s , and a l l d e p r e c i a t i o n on d e f a u l t e d bonds was s e t up as a loss. In the examination of s t a t e member banks, we have attempted to follow as c l o s e l y as p o s s i b l e the Comptroller's plan r e l a t i v e to bond d e p r e c i a t i o n . This, however, appears to d i f f e r widely from the p o l i c i e s of the various S t a t e Superi n t e n d e n t s , and in f a c t , we f i n d no two Superintendents in agreement on t h i s important s u b j e c t . Recently we have been advised t h a t the Comptroller has g r e a t l y l i b e r a l i z e d h i s o r i g i n a l bond d e p r e c i a t i o n p o l i c y , and from now on w i l l c l a s s i f y as a l o s s only the d e p r e c i a t i o n on the d e f a u l t e d i s s u e s . w e would l i k e very much to have the Board's idea on t h i s s u b j e c t , with advice as to how we should handle the bond d e p r e c i a t i o n in f u t u r e in t h e examination of s t a t e member banks. Tours very t r u l y , (Signed) F. M. Bailey F. M. Bailey Asst. Federal Reserve Agent FMB: EP 37
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