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X-7975 August 6, 1934. Dear S i r : There i s i n c l o s e d , f o r your i n f o r m a t i o n , a copy of a l e t t e r addressed t o the Federal Reserve Agent a t the Federal Reserve Bank of Atlanta under date of J u l y 27, 1934, concerning the scope of examinations to be made of p r i v a t e banks or bankers under the p r o v i s i o n s of Section 21 of the Banking Act of 1933. Very t r u l y yours, Chester M o r r i l l , Secretary. Inclosure. TO ALL F. E. AGENTS X-7975-a * CopyJ u l y 27, 1954. Mr. Oscar Newton, F e d e r a l Reserve Agent, F e d e r a l Reserve Bank of A t l a n t a , A t l a n t a , Ga. Dear Mr. Newton; R e f e r e n c e i s made t o your l e t t e r of J u l y 3, 1954, concerning t h e scope of examinations t o be made of p r i v a t e banks o r bankers under t h e p r o v i s i o n s of S e c t i o n 21 of t h e Banking Act of 1933. You s t a t e t h a t i n many- i n s t a n c e s p r i v a t e bankers who have e x p r e s s e d a p r e f e r e n c e t o be examined by t h e F e d e r a l Reserve Bank a r e engaged i n o t h e r a g r i c u l t u r a l , m e r c a n t i l e , o r m a n uf actur ing a c t i v i t i e s , and t h a t , while they p r o b a b l y a t t e m p t t o s e g r e g a t e t h e a s s e t s p e r t a i n i n g t o t h e i r banking o p e r a t i o n s , t h e laws of t h e S t a t e of Georgia a r e such t h a t , i n case of i n s o l v e n c y , a l l a s s e t s would be pooled f o r t h e b e n e f i t of a l l c r e d i t o r s , and t h e d e p o s i t o r s , t h e r e f o r e , would have no l i e n on the s o - c a l l e d banking a s s e t s . In t h e c i r c u m s t a n c e s , you r e q u e s t i n - s t r u c t i o n s a s t o whether t h e examinations should cover a l l a s s e t s and l i a b i l i t i e s of t h e p r i v a t e b a n k e r , or only t h o s e p e r t a i n i n g t o t h e banking o p e r a tions. The Board i s a d v i s e d t h a t t h e laws of t h e S t a t e of New York r e q u i r e every p r i v a t e banker t o i n v e s t i n t h e b u s i n e s s permanent c a p i t a l in s t i p u l a t e d amounts, and p r o v i d e f o r t h e s e g r e g a t i o n of such c a p i t a l and of d e p o s i t s r e c e i v e d and t h e a s s e t s a c q u i r e d through t h e i n v e s t m e n t of such f u n d s , and, f u r t h e r , t h a t t h e a s s e t s so a c q u i r e d w i l l be f i r s t a v a i l a b l e t o s a t i s f y t h e c l a i m s of d e p o s i t o r s . S i m i l a r laws a r e s a i d t o be i n f o r c e i n C o n n e c t i c u t , 58 Mr. Oscar Newton - 2 X-7975-a and, p e r h a p s , o t h e r S t a t e s . Where such laws e x i s t , i t would appear t h a t t h e examinations r e q u i r e d under t h e p r o v i s i o n s of S e c t i o n 21 of t h e Banking Act of 1933 should be c o n f i n e d t o t h e banking o p e r a t i o n s of t h e p r i v a t e b a n k e r , whether or n o t he has o t h e r a s s e t s and l i a b i l i t i e s . Where t h e bank- i n g a s s e t s of t h e p r i v a t e b a n k e r , however, a r e a v a i l a b l e t o s a t i s f y t h e claims of any and a l l c r e d i t o r s , and i n t h e event of i n s o l v e n c y unsecured d e p o s i t o r s would be on an equal f o o t i n g with o t h e r g e n e r a l c r e d i t o r s , i t would appear t h a t , i n a d d i t i o n t o an examination of t h e a s s e t s and l i a b i l i t i e s a r i s ing from t h e banking o p e r a t i o n s , t h e examination should i n c l u d e such i n v e s t i g a t i o n of o t h e r a s s e t s and l i a b i l i t i e s a s i s n e c e s s a r y t o determine t h e t r u e c o n d i t i o n of t h e bank. In the B o a r d ' s l e t t e r of June 26, 1934 (X-7936) i t was s t a t e d t h a t inasmuch a s , under t h e terms of S e c t i o n 21, a l l r e p o r t s of c o n d i t i o n a r e to be made and p u b l i s h e d a t t h e same times and i n t h e same manner and with l i k e e f f e c t and p e n a l t i e s a s a r e now provided by law i n r e s p e c t of n a t i o n a l banking a s s o c i a t i o n s t r a n s a c t i n g b u s i n e s s i n t h e same l o c a l i t y , such r e p o r t s of c o n d i t i o n , i n a l l c a s e s , and w i t h o u t r e g a r d t o t h e a u t h o r i t y which may make t h e examinations r e f e r r e d t o in S e c t i o n 21, should be made t o t h e C o m p t r o l l e r of the Currency and p u b l i s h e d i n t h e same manner a s r e p o r t s of c o n d i t i o n of n a t i o n a l banks. In t h e c i r c u m s t a n c e s , i t i s w i t h i n t h e power of t h e Comptroller of t h e Currency t o p r e s c r i b e t h e form of such r e p o r t s . Presumably, t h e purpose of e x a m i n a t i o n s under t h e terms of t h e s e c t i o n i s t o determine t h e t r u e c o n d i t i o n of t h e bank, X-7975-a 59 Mr. Oscar Newton - 5. v e r i f y the accuracy of such r e p o r t s of c o n d i t i o n a s may be made, and d i s c l o s e any i r r e g u l a r i t i e s t h a t may be s u b j e c t t o p e n a l t y . Therefore, the m a t t e r has been d i s c u s s e d with the o f f i c e of t h e Comptroller of t h e Currency t o a s c e r t a i n t h e C o m p t r o l l e r ' s requirements with r e s p e c t t o t h e form of the r e p o r t of c o n d i t i o n by p r i v a t e b a n k e r s , and w i t h a view t o t h e adoption of r e a s o n a b l y uniform procedure i n t h e examinations conducted by t h e Comptroller of t h e Currency and the examiners f o r t h e F e d e r a l Reserve banks under t h e terms of S e c t i o n 21. In connection with the c a l l f o r r e p o r t s of c o n d i t i o n a s of June 30, 1934, t h e Comptroller forwarded to p r i v a t e bankers t h e same form (Form 2130 - C a l l No. 340) t h a t was forwarded t o n a t i o n a l banks. This form i n c l u d e s t h e items "Other a s s e t s " and "Other l i a b i l i t i e s " and p r o v i d e s f o r the i t e m i z a t i o n of such a s s e t s and l i a b i l i t i e s under schedules "M" and "N" which a r e n o t a p a r t of t h e statement t o be p u b l i s h e d . I t i s probable t h a t a l e t t e r of i n s t r u c t i o n s w i l l be forwarded t o p r i v a t e bankers by t h e Comptroller a t t h e time of t h e n e x t c a l l f o r r e p o r t s of c o n d i t i o n , a d v i s i n g them t h a t they should l i s t under the item "Other a s s e t s " a l l a s s e t s o t h e r than t h o s e p e r t a i n i n g d i r e c t l y t o banking o p e r a t i o n s , and under t h e item "Other l i a b i l i t i e s " a l l l i a b i l i t i e s o t h e r than those p e r t a i n i n g d i r e c t l y t o banking o p e r a t i o n s . Some p r o v i s i o n may a l s o be made t o provide f o r a statement of the o u t s i d e worth of p a r t n e r s i n cases i n v o l v i n g p a r t n e r s h i p . The form f o r r e p o r t s of c o n d i t i o n i s r e v i s e d from time to t i m e , and, of c o u r s e , the Comptroller may f i n d i t n e c e s s a r y or d e s i r a b l e t o r e v i s e t h e ; 6 X-7975-a Mr. Oscar Newton - 4 . g e n e r a l form or t o p r e p a r e a s p e c i a l form f o r r e p o r t s of p r i v a t e bankers i n connection with f u t u r e c a l l s . The Comptroller of t h e Currency concurs i n t h e B o a r d ' s o p i n i o n t h a t examinations under t h e terms of S e c t i o n 21, where d e p o s i t o r s a r e on t h e same f o o t i n g a s o t h e r g e n e r a l c r e d i t o r s , should i n c l u d e an examination of t h e a s s e t s and l i a b i l i t i e s p e r t a i n i n g t o t h e banking o p e r a t i o n s of t h e p r i v a t e banker i n t h e same manner and t o t h e same e x t e n t a s i f an examinat i o n were b e i n g made of a n a t i o n a l bank or a S t a t e member bank, and t h a t t h e examiner should conduct such f u r t h e r i n v e s t i g a t i o n s or examination a s may be n e c e s s a r y t o s a t i s f y himself a s t o t h e accuracy of any s t a t e m e n t s made w i t h r e s p e c t t o o t h e r a s s e t s and t h e soundness of t h e v a l u e s r e p r e s e n t e d t h e r e b y , or t h e e x t e n t of o t h e r l i a b i l i t i e s of t h e p r i v a t e b a n k e r . As s t a t e d , t h e Comptroller of t h e Currency may f i n d i t n e c e s s a r y or d e s i r a b l e t o p r e s c r i b e s p e c i a l forms f o r r e p o r t s of c o n d i t i o n of p r i v a t e b a n k e r s , and, l i k e w i s e , f u t u r e e x p e r i e n c e may i n d i c a t e t h e n e c e s s i t y f o r more d e t a i l e d and e x h a u s t i v e e x a m i n a t i o n s . In any e v e n t , a l l examinations under S e c t i o n 21 of t h e Banking Act of 1935 should be conducted w i t h t h e f a c t i n mind t h a t t h e i n t e r e s t s of d e p o s i t o r s a r e i n e x t r i c a b l y i n t e r m i n g l e d w i t h t h o s e of a l l o t h e r c r e d i t o r s wherever such i n t e r e s t s a r e n o t s p e c i f i c a l l y s e g r e g a t e d by law. Very t r u l y y o u r s , (Signed) Chester M o r r i l l , Chester M o r r i l l , Secretary.
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