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(COPY) X-6143 Memorandum f o r Mr. Hamlin September 2 0 , 1928. From Mr, G i l b e r t . R e f e r r i n g to t h e s e v e r a l q u e s t i o n s r a i s e d by you i n c o n n e c t i o n w i t h my memorandum of September 1 0 t h , 1928, embodying p r o p o s a l s c o n t e m p l a t i n g an imp r o v e d a d m i n i s t r a t i o n of t h e p r o v i s i o n s of t h e F e d e r a l R e s e r v e Act a p p l i c a b l e to S t a t e member b a n k s and c o n d i t i o n s of membership, may I b e p e r m i t t e d to submit the following: The p r o p o s a l s of my memorandum r e l a t e e x c l u s i v e l y t o S t a t e member banks of t h e F e d e r a l R e s e r v e System and n o t to N a t i o n a l member b a n k s . S t a t e member b a n k s , a s I u n d e r s t a n d t h e l a w , a r e s u b j e c t t o a p p r o x i m a t e l y t h i r t e e n g e n e r a l r e g u l a t o r y p r o v i s i o n s of t h e F e d e r a l R e s e r v e Act ( l i s t e d i n my memorandum) a n d a d d i t i o n a l c o n d i t i o n s of membership which I b e l i e v e t a k e n t o g e t h e r may be c o n s i d e r e d a s c o n s t i t u t i n g a f a i r l y c o m p l e t e and s a t i s f a c t o r y s t a n d a r d of b a n k i n g , c a l c u l a t e d to p r o t e c t d e p o s i t o r s and p r o m o t e sound b a n k i n g operations. That Congress i n t e n d e d t h a t S t a t e member b a n k s s h o u l d comply w i t h t h e s e e x p r e s s p r o v i s i o n s of t h e F e d e r a l R e s e r v e Act and t h e c o n d i t i o n s of members h i p p u r s u a n t t h e r e t o , p r e s c r i b e d by t h e F e d e r a l R e s e r v e Board u n d e r a u t h o r i t y s p e c i f i c a l l y g r a n t e d by t h e A c t , seems c l e a r . That t h e e n f o r c e m e n t of t h e s e same p r o v i s i o n s of t h e Act and c o n d i t i o n s of membership i s a d u t y of t h e F e d e r a l R e s e r v e Board seems e q u a l l y c l e a r , since u n d e r S e c t i o n 1 1 ( i ) t h e Board i s r e q u i r e d to p e r f o r m t h e d u t i e s , f u n c t i o n s o r s e r v i c e s s p e c i f i e d i n t h e F e d e r a l R e s e r v e Act and t o make a l l r u l e s and r e g u l a tions* n e c e s s a r y to e n a b l e t h e Board e f f e c t i v e l y to p e r f o r m t h e same. X-6143 Kb o t h e r g o v e r n m e n t a l a u t h o r i t y , S t a t e o r N a t i o n a l , i s d i r e c t e d o r a u t h o r i z e d to a d m i n i s t e r or e n f o r c e these p a r t i c u l a r p r o v i s i o n s . Unquestion- a b l y , S t a t e b a n k i n g a u t h o r i t i e s have no r e s p o n s i b i l i t y or power to e n f o r c e t h e p r o v i s i o n s of F e d e r a l law. State banking a u t h o r i t i e s are l e g a l l y responsible o n l y f o r t h e a d m i n i s t r a t i o n and e n f o r c e m e n t of t h e b a n k i n g laws of t h e i r r e s p e c t i v e s t a t e s , which may o r may n o t c o n t a i n p r o v i s i o n s t h a t a r e t h e a::me o r simi l a r to t h e p r o v i s i o n s of t h e F e d e r a l H e s e r v e Act r e l a t i n g t o S t a t e member b a n k s . L i k e w i s e , no F e d e r a l R e s e r v e Bank, a s s u c h , i s c h a r g e d w i t h t h e d u t y and r e s p o n s i b i l i t y o f a d m i n i s t e r i n g o r e n f o r c i n g t h e r e g u l a t o r y p r o v i s i o n s of the Federal Reserve Act. I t i s t r u e t h a t F e d e r a l R e s e r v e Banks a r e a u t h o r i z e d to make e x a m i n a t i o n s of member b a n k s , b o t h S t a t e and N a t i o n a l , b u t such exami n a t i o n s u n d o u b t e d l y were i n t e n d e d by Congress f o r c r e d i t p u r p o s e s o n l y . When such e x a m i n a t i o n s , o r e x a m i n a t i o n s b y e x a m i n e r s of F e d e r a l R e s e r v e A g e n t s o r t h e C o m p t r o l l e r of t h e C u r r e n c y , d i s c l o s e v i o l a t i o n s of t h e r e g u l a t o r y p r o v i s - i o n s of t h e F e d e r a l R e s e r v e Act o r N a t i o n a l Bank Act o r of c o n d i t i o n s of member-? s h i p , t h e c o r r e c t i o n of v i o l a t i o n s by S t a t e member bonks i s t h e f u n c t i o n of t h e F e d e r a l R e s e r v e B o a r d , a n d v i o l a t i o n s by N a t i o n a l b a n k s t h e f u n c t i o n of t h e C o m p t r o l l e r of t h e C u r r e n c y . C o n t r o l of t h e e n f o r c e m e n t of r e g u l a t o r y p r o v i s i o n s of t h e law r e l a t i n g N a t i o n a l b a n k s i s n o t c o n t e m p l a t e d i n my p r o p o s a l s f o r t h e r e a s o n , a s above i n d i c a t e d , t h a t i t i s my u n d e r s t a n d i n g t h a t t h e F e d e r a l R e s e r v e Board now h a s no d u t y or r e s p o n s i b i l i t y f o r t h e a d m i n i s t r a t i o n of such r e g u l a t o r y p r o v i s i o n s a s r e l a t e to N a t i o n a l b a n k s w h a t e v e r may have been i t s a u t h o r i t y d u r i n g £hc o r g a n i z a t i o n p e r i o d of t h e System. That d u t y and r e s p o n s i b i l i t y h a s b e e n p l a c e d by Congress w i t h the C o m p t r o l l e r of t h e C u r r e n c y whose o f f i c i a l a c t s i n t h e main a r e n o t s u b j e c t to t h e c o n t r o l of t h e F e d e r a l R e s e r v e B o a r d . ml X-6IU3 - 3,_ The F e d e r a l R e s e r v e Board h a s , however, a s above s u g g e s t e d , a r e s p o n s i b i l i t y t o C o n g r e s s f o r t h e a d m i n i s t r a t i o n and e n f o r c e m e n t of t h e r e g u l a t o r y p r o v i s i o n s of t h e F e d e r a l R e s e r v e Act and c o n d i t i o n s of membership a f f e c t i n g S t a t e member b a n k s . My c o n c l u s i o n i n t h e m a t t e r i s b a s e d upon t h e f a c t t h a t Congress has imposed upon S t a t e member banks t h e t h i r t e e n r e g u l a t o r y p r o v i s i o n s , m a n d a t o r y i n c h a r a c t e r , e n u m e r a t e d i n my memorandum and h a s r e q u i r e d t h e F e d e r a l R e s e r v e Board t o -perform t h e d u t i e s , f u n c t i o n s o r s e r v i c e s s p e c i f i e d i n t h e F e d e r a l Reserve Act. I t i s a m a t t e r of common e x p e r i e n c e t h a t r e g u l a t o r y p r o v i s i o n s of law a r e n o t s e l f - e n f o r c i n g , a f a c t t h a t C o n g r e s s u n d o u b t e d l y t o o k i n t o account in framing t h e Federal Reserve Act. this matter exists, The B o a r d ' s r e s p o n s i b i l i t y i n I b e l i e v e , r e g a r d l e s s of w h e t h e r one of t h e main p u r p o s e s , of t h e A c t , a s s t a t e d i n t h e p r e a m b l e , " t o e s t a b l i s h a more e f f e c t i v e s u p e r v i s i o n of b a n k i n g i n t h e U n i t e d S t a t e s " s h a l l be i n t e r p r e t e d t o mean improved s u p e r v i s i o n by F e d e r a l R e s e r v e a u t h o r i t i e s o v e r member b a n k s of t h e System, S t a t e o r N a t i o n a l , o r a mandate t o t h e Board o r o t h e r F e d e r a l R e s e r v e a u t h o r i t i e s t o u n d e r t a k e by w h a t e v e r methods may b e a v a i l a b l e t o p r e v a i l upon a l l bank s u p e r v i s o r s t o r a i s e t h e i r s t a n d a r d s of e x a m i n a t i o n s and e n f o r c e m e n t of b a n k i n g laws and sound b a n k i n g p r a c t i c e s . Moreover, I b e l i e v e t h a t t h e B o a r d ' s r e s p o n s i b i l i t y t o C o n g r e s s e x i s t s i n t h i s p h a s e of a d m i n i s t r a t i o n and e n f o r c e m e n t of t h e law, r e g a r d l e s s of w h e t h e r any f a i l u r e on t h e p a r t of t h e Board t o e n f o r c e t h e s e r e g u l a t o r y s t a t u t e s s h a l l r e n d e r i n d i v i d u a l Board members l i a b l e i n p e r s o n a l damages to t h e d e p o s i t o r s o r o t h e r c r e d i t o r s of S t a t e member b a n k s who may s u s t a i n l o s s e s a s n r e s u l t of s u c h n o n - e n f o r c e m e n t . X-61U3• ' 1 - HBut, i t would seem, w h a t e v e r may be t h e r i g h t s of member "bank c r e d i - t o r s damaged "by n o n ~ e n f o r c e m e n t , t h a t Congress would have t h e u s u a l remedy a g a i n s t Board members who f a i l e d t o e n f o r c e t h e law. The p r o p o s a l s of my memorandum of September 1 0 t h do n o t c o n t e m p l a t e any h a s t y o r a b r u p t t e r m i n a t i o n of t h e membership of any S t a t e member b a n k nor any h a r s h o r o p p r e s s i v e method of e n f o r c e m e n t * I b e l i e v e t h a t a S t a t e member bank found t o b e v i o l a t i n g t h e p r o v i s i o n s of t h e F e d e r a l R e s e r v e Act o r c o n d i t i o n s of membership i s e n t i t l e d a s a m a t t e r of common f a i r n e s s t o a w r i t t e n n o t i c e from t h e F e d e r a l R e s e r v e Agent of what p r o v i s i o n s o r c o n d i t i o n s i t h a s v i o l a t e d and what w i l l c o n s t i t u t e s a t i s f a c t o r y c o r r e c t i o n and t h a t , f u r t h e r m o r e , t h e memb e r bank s h o u l d be g i v e n a r e a s o n a b l e time i n which t o e f f e c t a l l c o r r e c t i o n s . What c o n s t i t u t e s a r e a s o n a b l e t i m e w i l l v a r y g r e a t l y a c c o r d i n g t o c i r c u m s t a n c e s and i s a m a t t e r t h a t c a n n o t be g o v e r n e d by any f i x e d r u l e . I f a S t a t e member b a n k , a f t e r n o t i c e of v i o l a t i o n s and t h e p a s s a g e of a r e a s o n a b l e t i m e , s h a l l f a i l , through unwillingness or i n a b i l i t y , t o comply w i t h t h e law o r c o n d i t i o n s of mem- b e r s h i p , t h e n t h e q u e s t i o n of t e r m i n a t i o n of membership s h o u l d be c o n s i d e r e d . A l l e f f o r t s t o c o r r e c t m a t t e r s s u b j e c t t o c r i t i c i s m i n S t a t e member b a n k s s h o u l d , I b e l i e v e , be made, a s f a r a s p r a c t i c a b l e , in cooperation with the S t a t e banking a u t h o r i t i e s c o n c e r n e d , b u t when s u c h c o o p e r a t i o n c a n n o t be o b t a i n e d , R e s e r v e Agent s h o u l d a c t i n d e p e n d e n t l y . the Federal I n a l l m a t t e r s p e r t a i n i n g t o t h e admin- i s t r a t i o n of t h e r e g u l a t o r y p r o v i s i o n s u n d e r c o n s i d e r a t i o n , I s e e no need f o r any d i r e c t communication between t h e F e d e r a l R e s e r v e Board and member banks e x c e p t i n connection with expulsion proceedings, A l l c o r r e s p o n d e n c e o r o t h e r communication, w i t h t h e banks s h o u l d b e h a n d l e d by t h e A g e n t s , a s t h e r e p r e s e n t a t i v e s of t h e X-6143 - 5 I n my o p i n i o n t h e improved a d m i n i s t r a t i o n c o n t e m p l a t e d i n my p r o p o s a l s w i l l not i n v o l v e any s u b s t a n t i a l i n c r e a s e i n the e x p e n s e s of t h e Board o r Federal Reserve Agents. In s u b s t a n c e , what I am p r o p o s i n g i s t h a t a l o g i c a l a d m i n i s t r a t i v e u s e s h a l l be made of i n f o r m a t i o n a l r e a d y b e i n g a s s e m b l e d ; t h a t t r e a t m e n t of S t a t e member "banks i n t h e m a t t e r of a d m i n i s t r a t i o n of t h e law s h a l l be r e n d e r e d u n i f o r m , a t l e a s t i n p r i n c i p l e , t h r o u g h o u t t h e System and t h a t ap-^ p a r e n t l a x i t y i n e n f o r c e m e n t of F e d e r a l law r e l a t i n g t o S t a t e member "banks s h a l l be c o r r e c t e d t o t h e end t h a t S t a t e and N a t i o n a l member b a n k s s h a l l "be p l a c e d upon terms of e q u a l i t y i n t h e m a t t e r of e n f o r c e m e n t of t h e F e d e r a l laws r e l a t i n g t o b o t h and t h i s s h o u l d i n v o l v e no s u b s t a n t i a l i n c r e a s e i n e x p e n s e . I n t h i s con- n e c t i o n , i t s h o u l d be s t a t e d t h a t t h e C o m p t r o l l e r of t h e C u r r e n c y h a s l o n g had w e l l d e f i n e d methods and p r o c e s s e s f o r t h e a d m i n i s t r a t i o n and e n f o r c e m e n t of t h e law r e l a t i n g t o t h e b a n k s u n d e r h i s j u r i s d i c t i o n w h e r e a s t h e Board h a s had an i n c o m p l e t e p o l i c y w i t h r e s p e c t t o t h e e n f o r c e m e n t of F e d e r a l law r e l a t i n g t o S t a t e member b a n k s . COPY The Examining Committee X— 614o^& - Q ^ kk September 10, 1928. Mr. G i l b e r t P r i o r t o A p r i l 1 4 t h , 1927, t h e Board h a d no agehcy Ghai-ged w i t h this d u t y of k e e p i n g i t c u r r e n t l y i n f o r m e d of t h e c o n d i t i o n of S t a t e member banks of t h e F e d e r a l R e s e r v e System a n d w h e t h e r o r n o t such S t a t e member b a n k s were o b s e r v i n g t h e p r o v i s i o n s of t h e F e d e r a l R e s e r v e Act a p p l i c a b l e t o them a n d t h e c o n d i t i o n s of membership imposed by t h e B o a r d a t t h e time of t h e i r a d m i s s i o n t o t h e System. On t h e d a t e m e n t i o n e d , f o l l o w i n g c o n s i d e r a t i o n of my r e p o r t d a t e d March 7, 1927, d e a l i n g w i t h t h e e x a m i n a t i o n p r a c t i c e and p o l i c y of t h e F e d e r a l R e s e r v e Agent a t S t . L o u i s , t h e Board a d o p t e d t h e f o l l o w i n g t h r e e r e s o l u t i o n s : (1) " I n view of t h e recommendations c o n t a i n e d i n t h e r e p o r t of t h e s u r v e y made by Mr. G i l b e r t of t h e work of e x a m i n i n g s t a t e member b a n k s , t h e B o a r d c o n t i n u e t h e e x a m i n a t i o n p r a c t i c e a s a t p r e s e n t , u n d e r t h e d i r e c t s u p e r v i s i o n of t h e F e d e r a l R e s e r v e Agents." (2) " T h a t t h e S u p e r v i s o r of E x a m i n a t i o n s , s u b j e c t t o t h e a p p r o v a l of t h e F e d e r a l R e s e r v e Board, be i n s t r u c t e d t o make such a r r a n g e ments as w i l l develop the d e t a i l e d r o u t i n e o p e r a t i o n s designed t o e n a b l e t h e B o a r d t o keep i t s e l f i n f o r m e d a s t o t h e c o n d i t i o n of S t a t e member b a n k s , a n d w h e t h e r o r n o t such b a n k s a r e o b s e r v i n g t h e c o n d i t i o n s of membership imposed, a n d w h e t h e r o r n o t t h e y a r e c o n d u c t i n g t h e i r b u s i n e s s w i t h i n t h e p r o v i s i o n s of t h e F e d e r a l R e s e r v e Act r e l a t i n g t o s t a t e member b a n k s . " (3) " T h a t t h e S u p e r v i s o r of E x a m i n a t i o n s be i n s t r u c t e d t o p r e p a r e a f o r m of a n a l y s i s t o be u s e d by t h e r e s p e c t i v e F e d e r a l R e s e r v e A g e n t s c o v e r i n g e a c h r e p o r t of e x a m i n a t i o n , and t o p r e p a r e f o r s u b m i s s i o n t o t h e Board f o r i t s a p p r o v a l a s t a n d a r d r e p o r t f o r m t o be u s e d by •examiners i n t h e f i e l d u n d e r t h e d i r e c t i o n of t h e Federal Reserve Agents." A few days p r i o r t o t h e a d o p t i o n of t h e r e s o l u t i o n s q u o t e d a b o v e , t h e B o a r d ' s Counsel on A p r i l 6, 1927, r e n d e r e d a n o p i n i o n on t h e d u t i e s a n d powers of t h e F e d e r a l R e s e r v e Board, t h e F e d e r a l R e s e r v e A g e n t s a n d t h e F e d e r a l R e s e r v e Banks w i t h r e s p e c t t o t h e e x a m i n a t i o n of S t a t e member banks a n d t h e a d m i n i s t r a t i o n of t h e p r o v i s i o n s of t h e F e d e r a l R e s e r v e Act r e l a t i n g t o such banks. T h i s o p i n i o n h a s a v e r y i m p o r t a n t b e a r i n g u p o n t h e work of ~2~ X-6143-a t h e S u p e r v i s o r of E x a m i n a t i o n s a u t h o r i z e d and d i r e c t e d i n t h e above q u o t e d resolutions. Among o t h e r c o n c l u s i o n s , Counsel h e l d i n e f f e c t t h a t t h e u l t i m a t e r e s p o n s i b i l i t y f o r t h e e n f o r c e m e n t of t h e p r o v i s i o n s of t h e F e d e r a l R e s e r v e Act r e l a t i n g t o S t a t e member banks r e s t s upon t h e F e d e r a l R e s e r v e Board r e g a r d l e s s of w h e t h e r e x a m i n a t i o n s of such banks s h a l l be made by e x a m i n e r s of t h e S t a t e b a n k i n g d e p a r t m e n t s , F e d e r a l R e s e r v e Agents o r F e d e r a l R e s e r v e Banks• I n view of t h e B o a r d ' s r e s p o n s i b i l i t y a s t h u s d e f i n e d by C o u n s e l , i t h a s been n e c e s s a r y f o r t n e S u p e r v i s o r of E x a m i n a t i o n s i n a n a l y z i n g and r e v i e w i n g r e p o r t s of e x a m i n a t i o n and r e p o r t i n g to t h e Board t o t a k e i n t o a c c o u n t t h e numerous p r o v i s i o n s of t h e F e d e r a l R e s e r v e Act r e l a t i n g to S t a t e member b a n k s , t o g e t h e r w i t h t h e c o n d i t i o n s of membership imposed by t h e Board p r i o r t o a d m i s s i o n of such b a n k s to t h e System. B e s i d e s v i o l a t i o n s of t h e v a r y i n g c o n d i t i o n s of membership, v i o l a t i o n s f a l l i n g u n d e r t h e f o l l o w i n g p r o v i s i o n s of t h e F e d e r a l R e s e r v e Act have b e e n c o n s i d e r e d a n d r e p o r t e d t o t h e B o a r d when d i s c l o s e d by t h e r e p o r t s : (a) (b) R e s e r v e r e q u i r e m e n t s of t h e F e d e r a l R e s e r v e Act ( S e c t i o n s 9 a n d 1 9 ) , z C a p i t a l r e q u i r e m e n t s ( S e c t i o n 9 of t h e F e d e r a l R e s e r v e Act a n d S e c t i o n s 5204 and 5205, R e v i s e d S t a t u t e s ) , (c) P r o h i b i t i o n a g a i n s t l e n d i n g on o r p u r c h a s i n g own s t o c k ( S e c t i o n 9, F e d e r a l R e s e r v e Act a n d S e c t i o n 5201, U . S . R e v i s e d S t a t u t e s ) , (d) P r o h i b i t i o n a g a i n s t payment of u n e a r n e d d i v i d e n d s ( S e c t i o n 9, F e d e r a l R e s e r v e A c t , a n d S e c t i o n 5204, U . S . R e v i s e d S t a t u t e s ) , (e) C r i m i n a l p r o v i s i o n s ( S e c t i o n 9 , F e d e r a l R e s e r v e Act a n d S e c t i o n 5209, U . S . R e v i s e d S t a t u t e s ) , (f) C e r t i f i c a t i o n of c h e c k s by o f f i c e r s , c l e r k s , e t c . when d e p o s i t o r h a s i n s u f f i c i e n t f u n d s t o h i s c r e d i t ( S e c t i o n 9, F e d e r a l R e s e r v e A c t ) , (g) Making of l o a n s o r payment of d i v i d e n d s when l e g a l r e s e r v e i s d e f i c i e n t ( S e c t i o n 19, F e d e r a l R e s e r v e A c t ) , (h) The k e e p i n g of b a l a n c e s w i t h nonmember b a n k s i n e x c e s s of 1 0 ^ of t h e p a i d - u p c a p i t a l a n d s u r p l u s ( S e c t i o n 19, F e d e r a l R e s e r v e A c t ) , (i) The making of l o a n s o r g r a n t i n g of g r a t u i t i e s t o any bank e x a m i n e r ( S e c t i o n 22, Federal Reserve Act), X-6143-a -3(j) The a c c e p t a n c e of f e e s , commissions, e t c . by bank o f f i c e r s , e t c . f o r p r o c u r i n g o r e n d e a v o r i n g t o p r o c u r e l o a n s f r o m own bank f o r o t h e r s . ( S e c t i o n 22, F e d e r a l R e s e r v e A c t ) , (k) P u r c h a s e f r o m o r s a l e t o a bank of s e c u r i t i e s or p r o p e r t y by d i r e c t o r s on more f a v o r a b l e t e r m s t h a n would be g r a n t e d t o o t h e r s ( S e c t i o n 22, F e d e r a l Reserve Act), (l) Payment of i n t e r e s t on d e p o s i t s of d i r e c t o r s , o f f i c e r s , e t c . a t a g r e a t e r r a t e t h a n t h a t p a i d to o t h e r s ( S e c t i o n 2 2 , F e d e r a l R e s e r v e Act) and (m) R e s t r i c t i o n s upon amounts, s e c u r i t y a n d o b j e c t s of a c c e p t a n c e by member banks ( S e c t i o n 13, F e d e r a l R e s e r v e A c t ) . I n r e s p o n s e t o t h e B o a r d ' s t h i r d r e s o l u t i o n above q u o t e d , d r a f t s of a r e p o r t of e x a m i n a t i o n f o r m a n d form of a n a l y s i s h a v e b e e n p r e p a r e d . The e x a m i n a t i o n form h a s b e e n d i s c u s s e d w i t h F e d e r a l R e s e r v e Agents a n d i n t e r e s t e d o f f i c e r s of t h e F e d e r a l R e s e r v e Banks of A t l a n t a , C l e v e l a n d , Kansas C i t y , M i n n e a p o l i s , Richmond a n d S t . L o u i s a n d w i t h t h e Examining Committee of t h e F e d e r a l R e s e r v e Agents and m o d i f i c a t i o n s i n a c c o r d a n c e w i t h t h e i r s u g g e s t i o n s h a v e b e e n made. It is respect- f u l l y s u g g e s t e d t h a t t h e m o d i f i e d f o r m be s u b m i t t e d t o a l l F e d e r a l R e s e r v e Agents and t h e i r c h i e f e x a m i n e r s p r i o r t o s u b m i s s i o n t o t h e B o a r d f o r f i n a l a d o p t i o n . From s u c h i n v e s t i g a t i o n s a s h a v e b e e n made b y t h e S u p e r v i s o r of E x a m i n a t i o n s d u r i n g t h e p a s t two y e a r s a n d f r o m r e a d i n g and a n a l y z i n g r e p o r t s of e x a m i n a t i o n of S t a t e member b a n k s , i t a p p e a r s t h a t e n f o r c e m e n t of t h e a p p l i c a b l e p r o v i s i o n s of t h e F e d e r a l ' R e s e r v e A c t , c o n d i t i o n s of membership a n d g e n e r a l s t a n d a r d s of the System h a s l a c k e d u n i f o r m i t y i n a marked d e g r e e a n d i n some d i s t r i c t s r e a s o n a b l e effectiveness* T h i s h a s r a n g e d from what a p p e a r s t o be f a i r l y c o m p l e t e e n f o r c e - ment i n some d i s t r i c t s t o what seems t o be v e r y n e a r l y no e n f o r c e m e n t i n o t h e r s , or, a t l e a s t , unreasonably delayed enforcement. A d m i t t e d l y , i t i s i m p o s s i b l e t o d e t e r m i n e w i t h e x a c t n e s s what t h e d e g r e e of e n f o r c e m e n t may b e f r o m r e a d i n g and s t u d y i n g r e p o r t s of e x a m i n a t i o n a n d r e l a t e d c o r r e s p o n d e n c e r e c e i v e d by t h e Board f r o m t h e F e d e r a l R e s e r v e A g e n t s , a s - —4r* X*^6143*"»a i t h a s n o t "been a n d i s n o t now t h e p r a c t i c e of a l l Agents t o r e p o r t t o t h e Board t h e s t e p s t a k e n "by thbm e i t h e r d i r e c t l y o r t h r o u g h t h e S t a t e b a n k i n g d e p a r t m e n t s t o o b t a i n c o r r e c t i o n oi* c r i t i c i s e d m a t t e r s . F u r t h e r m o r e , e x a m i n a t i o n r e p o r t forms i n u s e i n t h e v a r i o u s d i s t r i c t s and s t a t e s e i t h e r do not p r o v i d e f o r r e p o r t i n g on a l l v i o l a t i o n s of t h e F e d e r a l R e s e r v e Act or e n t i r e l y omit r e f e r e n c e t o them. However, f r o m such e v i d e n c e a s i s f u r n i s h e d by s u c c e s s i v e r e p o r t s of e x a m i n a t i o n showing c o n t i n u a t i o n of t h e same o r s i m i l a r v i o l a t i o n s i n a v e r y s u b s t a n t i a l number of b a n k s , i t may be assumed t h a t e n f o r c e m e n t i n g e n e r a l h a s b e e n below a f a i r l y sound s t a n d a r d i n c e r t a i n d i s t r i c t s . The g e n e r a l s i t u a t i o n , i t i s b e l i e v e d , c a l l s f o r remedial a c t i o n and i t i s r e s p e c t f u l l y s u g g e s t e d f o r t h e B o a r d ' s p r o t e c t i o n a g a i n s t c r i t i c i s m t h a t may be expected to develop l a t e r , s h o u l d p r e s e n t c o n d i t i o n s c o n t i n u e , t h a t t h e m a t t e r of e n f o r c e m e n t be r e g u l a r l y a n d s y s t e m a t i c a l l y f o l l o w e d up w i t h a view t o a s c e r t a i n i n g a l l p e r t i n e n t f a c t s , a l l of which, e x c e p t a s t o a few d i s t r i c t s , a s above n o t e d , a r e n o t s e t f o r t h i n r e p o r t s of e x a m i n a t i o n and r e l a t e d c o r r e s p o n d e n c e , and i s s u i n g w h e r e v e r n e c e s s a r y a p p r o p r i a t e i n s t r u c t i o n s t o such F e d e r a l R e s e r v e Agents a s may n o t be o b t a i n i n g s a t i s f a c t o r y r e s u l t s . P r o c e d u r e i n s u b s t a n t i a l a c c o r d w i t h t h e f o r e g o i n g was s u g g e s t e d by t h e examining committee of t h e F e d e r a l R e s e r v e A g e n t s i n a r e p o r t d a t e d August 24, 1926, which was a d o p t e d i n s u b s t a n c e by a l a t e r c o n f e r e n c e of F e d e r a l R e s e r v e A g e n t s , i n which was t h e f o l l o w i n g recommendation: " I n view of t h e Board 1 s power t o examine member banks a n d t h e r e s p o n s i b i l i t y t h i s i n v o l v e s , t h e Board s h o u l d s a t i s f y i t s e l f t h a t t h e e x a m i n a t i o n s o b t a i n e d o r made by t h e F e d e r a l r e s e r v e a g e n t s a r e a d e q u a t e , and t h a t a d e q u a t e s t e p s a r e t a k e n t o c o r r e c t u n s a t i s f a c t o r y c o n d i t i o n s , d i e Board now r e c e i v e s c o p i e s of a l l e x a m i n a t i o n s of member b a n k s by t h e l e g a l s u p e r v i s o r s a n d of a l l e x a m i n a t i o n s and c r e d i t i n v e s t i g a t i o n s made by t h e F e d e r a l r e s e r v e a g e n t s . The B o a r d ' s a n a l y s i s and s t u d y of t h e s e r e p o r t s s h o u l d e n a b l e i t t o d e t e r m i n e w h e t h e r t h e e x a m i n a t i o n s a r e a d e q u a t e or n o t , and where t h e Board f i n d s them i n a d e q u a t e t h e Board s h o u l d d i r e c t t h e F e d e r a l r e s e r v e a g e n t s to t a k e such s t e p s a s may be a p p r o p r i a t e u n d e r t h e c i r c u m s t a n c e s t o f I -5- •* X-6143-ta o b t a i n a d e q u a t e e x a m i n a t i o n s . I n our o p i n i o n t h e Board, s h o u l d r e " quire t h e F e d e r a l r e s e r v e a g e n t s to m a i n t a i n an org&hiaation adequate f o r t h e p u r p o s e , w h e t h e r i t i n v o l v e s l a r g e r p a r t i c i p a t i o n i n examinat i o n s made "by n a t i o n a l o r s t a t e s u p e r v i s o r s , o r e n t i r e l y i n d e p e n d e n t e x a m i n a t i o n s . The committee, however, f o r t h e r e a s o n s a l r e a d y s t a t e d , "believes t h a t t h e soundest procedure i s f o r the F e d e r a l r e s e r v e a g e n t s t o he r e s p o n s i b l e f o r t h e s e c u r i n g of a d e q u a t e examinat i o n s a n d i n f o r m a t i o n r a t h e r t h a n t o have t h e work done d i r e c t l y "by t h e Board. 1 1 One of t h e p r i n c i p a l c a u s e s f o r t h e l a c k of u n i f o r m i t y a n d e f f e c t i v e n e s s i n t h e a d m i n i s t r a t i o n of t h e p r o v i s i o n s of t h e F e d e r a l R e s e r v e Act u n d e r c o n s i d e r a t i o n i s due t o what a p p e a r s t o "be a s u b s t a n t i a l d i v e r s i t y of o p i n i o n among F e d e r a l R e s e r v e A g e n t s a s t o t h e i r powers a n d d u t i e s r e l a t i n g t o t h e e n f o r c e m e n t of t h e Act and t h e meaning of i t s v a r i o u s p r o v i s i o n s and t h e s e v e r a l and v a r y i n g c o n d i t i o n s of membership. To a l l appearances, t h i s has been p r i m a r i l y t h e c a u s e of no e n f o r c e m e n t of some p r o v i s i o n s i n some d i s t r i c t s o r of p a r t i a l enforcement. The m a t t e r i s one t h a t can be e a s i l y c o r r e c t e d by t h e i s s u a n c e of g e n e r a l o r s p e c i a l i n s t r u c t i o n s t o t h e Agents s e t t i n g f o r t h a u t h o r i t a t i v e i n t e r p r e t a t i o n s of t h e p o i n t s i n v o l v e d . I n d e v i s i n g t h e s t e p s of a n a d m i n i s t r a t i v e check upon t h e o p e r a t i o n s of F e d e r a l R e s e r v e Agents i n c o n n e c t i o n w i t h t h e e n f o r c e m e n t of t h e F e d e r a l R e s e r v e Act a s i t a p p l i e s t o S t a t e member b a n k s , some m a t t e r s of p r a c t i c e and p o l i c y must of n e c e s s i t y be c o n s i d e r e d a n d a d o p t e d . These a r e m a t t e r s t h a t r e q u i r e t h o u g h t and s t u d y beyond t h a t which can c u r r e n t l y be g i v e n by t h e e x e c u t i v e o f f i c e r s of t h e B o a r d i n view of t h e m u l t i p l i c i t y of t h e i r r o u t i n e d u t i e s , a n d i t i s r e s p e c t f u l l y s u g g e s t e d , t h e r e f o r e , t h a t i n t h e e a r l y s t a g e s of the work, a t least, t h e S u p e r v i s o r of E x a m i n a t i o n s be a u t h o r i z e d and d i r e c t e d t o r e p o r t d i - r e c t l y t o a s p e c i a l c o m m i t t e e of one Board member a n d t h a t t h e Board member s e l e c t e d be a u t h o r i z e d t o p e r f o r m t h e f o l l o w i n g g e n e r a l f u n c t i o n s : (l) To d i r e c t a n d s i g n s p e c i a l c o r r e s p o n d e n c e w i t h F e d e r a l R e s e r v e Agents d e s i g n e d t o d e v e l o p p e r t i n e n t f a c t s i n p a r t i c u l a r c a s e s n o t c o v c r e d o r f u l l y c o v e r e d i n r e p o r t s of e x a m i n a t i o n and accompanying correspondence. http://fraser.stlouisfed.org/ (3) To Federal Reserve Bank of St. Louis d i r e c t t h e f o r m u l a t i o n f o r the B o a r d ' s a p p r o v a l of g e n e r a l —6™ X-6143-a i n s t r u c t i o n s t o F e d e r a l B e s e r v e Agents o u t l i n i n g t h e d e t a i l s of i n f o r m a t i o n , a s i d e f r o m t h o s e s u p p l i e d i n t h e r e p o r t s of e x a m i n a t i o n , w h i c h a r e r e g u l a r l y n e c e s s a r y f o r a complete u n d e r s t a n d i n g of t h e Agents' a c t i v i t i e s . The p r e p a r a t i o n of g e n e r a l o r s p e c i a l i n s t r u c t i o n s to A g e n t s , c o v e r i n g a u t h o r i t a t i v e i n t e r p r e t a t i o n s of t h e a p p l i c a b l e p r o v i s i o n s of t h e F e d e r a l R e s e r v e Act and c o n d i t i o n s of membership and d e a l i n g w i t h m a t t e r s of p o l i c y . The p r e p a r a t i o n and p r e s e n t a t i o n t o t h e Board, w i t h r e c o m m e n d a t i o n s , of a l l c a s e s t h a t i n v o l v e t h e e x e r c i s e of tho B o a r d ' s s t a t u t o r y power t o e x p e l b a n k s f r o m membership. G e n e r a l s u p e r v i s i o n over t h e a c t i v i t i e s of t h e S u p e r v i s o r of Examinations.
@FedFRASER