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X-6325 MEMORANDUM RECOMMENDING A REGULATION PROVIDING THAT NATIONAL BANKS MUST HAVE A MINIMUM CAPITAL OF $50,000 AS A CONDITION PRECEDENT TO THE GRANTING OF TRUST POSTERS 409 By Mr. P i a t t . Subsection k of Section 11 of the Federal Reserve Act - the subsection r e l a t i n g t o the g r a n t i n g of t r u s t powers to National "banks - was as o r i g i n a l l y enacted very s h o r t - only four l i n e s . I t a u t h o r i z e d the Federal Reserve Board "to grant by s p e c i a l permit to National banks applying t h e r e f o r when not i n c o n t r a v e n t i o n of S t a t e or l o c a l law, the r i g h t to a c t as t r u s t e e , executor, a d m i n i s t r a t o r , or r e g i s t r a r of stocks and bonds under such r u l e s and r e g u l a t i o n s a s t h e s a i d board may p r e s c r i b e . " I need not go i n t o the d i f f i c u l t i e s of the a d m i n i s t r a t i o n of t h i s broad power, or i n t o the l i t i g a t i o n which followed. I t i s s u f f i c i e n t to say t h a t there was controversy over the meaning of the words "when not i n contravent i o n of S t a t e or l o c a l law." The Board a t f i r s t i s s u e d p e r m i t s f o r the ex- e r c i s e of t r u s t powers to banks with a c a p i t a l smaller than t h a t r e q u i r e d by S t a t e laws i n some S t a t e s , and, as our records show, a few such n a t i o n a l banks a r e s t i l l e x e r c i s i n g , or a r e a u t h o r i z e d to e x e r c i s e , the powers then granted. As a r e s u l t of the o p p o s i t i o n of the S t a t e a u t h o r i t i e s and as a r e s u l t of the l i t i g a t i o n and the Board's own d i f f i c u l t i e s with r e g u l a t i o n s and a d m i n i s t r a t i o n , the Act of September 26, 1918 g r e a t l y enlarged subsection k of S e c t i o n 11 and both c l a r i f i e d and l i m i t e d the B o a r d ' s powers. The amend- ment provided among other t h i n g s " t h a t no permit s h a l l be i s s u e d to any n a t i o n a l banking a s s o c i a t i o n having a c a p i t a l and s u r p l u s l e s s than the c a p i t a l and s u r p l u s r e q u i r e d by S t a t e law of S t a t e banks, t r u s t companies and c o r p o r a t i o n s exercising each powers," and i n a d d i t i o n provided t h a t " i n p a s s i n g upon. a p p l i c a t i o n s f o r permission to e x e r c i s e the powers enumerated n X-6325 "2" 410 i n t h i s s u b s e c t i o n the Federal Reserve Board may take i n t o c o n s i d e r a t i o n the amount of c a p i t a l and surplus of the -applying bank, whether or not such c a p i t a l and. s u r p l u s i s s u f f i c i e n t under the circumstances of the case, the needs of the community to be served, and any other f a c t s and circumstances t h a t seem to i t p r o p e r . " The Board was p r o h i b i t e d from g r a n t i n g t r u s t powers to banks with a smaller c a p i t a l than the S t a t e laws p r e s c r i b e d f o r S t a t e banks or t r u s t companies competing, and the paragraph d i s t i n c t l y a u t h o r i z e d the Board to r e q u i r e a l a r g e r c a p i t a l i z a t i o n than S t a t e laws r e q u i r e d i f thought a d v i s able . This a t once r a i s e s the question whether the l i m i t a t i o n s of S t a t e laws a r e i n a l l cases adequate, and a l s o r a i s e s the question whether t h e r e i s good r e a s o n f o r the high c a p i t a l i z a t i o n r e q u i r e d f o r t r u s t powers i n some s t a t e s , by comparison with o t h e r s . Twelve s t a t e s r e q u i r e a minimum c a p i t a l i z a t i o n of a t l e a s t $100,000, t h r e e of them r e q u i r i n g $125,000. $50,000, one of them $60,000. Fourteen o t h e r s t a t e s r e q u i r e a t l e a s t I t should be added t h a t i n a few s t a t e s where the minimum requirement i s much lower i t i s g e n e r a l l y impossible f o r banks with the minimum requirement of c a p i t a l to e x e r c i s e t r u s t powers because of a h i g h requirement of d e p o s i t of s e c u r i t i e s with the S t a t e Treasurer. For i n s t a n c e , I l l i n o i s allows banks with a c a p i t a l of $25,000 to e x e r c i s e t r u s t powers i n c i t i e s of l e s s than 5,000 but i t s minimum r e quirement f o r d e p o s i t of s e c u r i t i e s i s $50,000. We have given t r u s t , powers to one $25,000 bank i n I l l i n o i s , but i t i s n a t u r a l l y not e x e r c i s i n g them* The f o l l o w i n g s t a t e s r e q u i r e $100,000 or more as a minimum: California ...,$125,000 Kansas 100,000 Maryland. 100,000 M i c h i g a n . ( « U . P 9 Y 9 T ? ) . .150,000 Montana. 100,000 Hew J e r s e y 100,000 Hew York,. $100,000 North D a k o t a . . . . 100,000 Ohio. 125,000 P e n n s y l v a n i a . . . . 125,000 West V i r g i n i a . . . 100,000 X-6325 -3- 411 The f o l l o w i n g r e q u i r e $50,000, or "between $50,000 and $100,000: $60,000 Arkansas Colorado 50,000 Connecticut 50,000 Florida.... 50,000 Georgia ( t r u s t C o s . ) . . 50,000 50,000 Idaho.... Louisiana 50,000 $50,000 50,000 50,000 50,000 50,000 50,000 50,000 Massachusetts Mi s s o u r i . Minnesota Texas.... Washington Wisconsin. Virginia.. I t w i l l "be noted t h a t the s t a t e s with comparitively h i g h requirements a r e by no means a l l e a s t e r n s t a t e s : C a l i f o r n i a , Montana, North Dakota and Kansas a r e amon& the s t a t e s r e q u i r i n g $100,000 or more. Furthermore some e a s t e r n s t a t e s have low requirements, and one of them, Ehode I s l a n d , none at all. I n s p i t e of the absence of any c a p i t a l requirement f o r t r u s t companies Ehode I s l a n d has no National "bank with a c a p i t a l l e s s than $200,#00 e x e r c i s i n g t r u s t powers and according t o t h e Bankers' Directory has only f o u r s t a t e t r u s t companies with a c a p i t a l smaller than $200,000, the smalleet of which h a s a c a p i t a l of $75,000. We have g r a n t e d one permit to a n a t i o n a l hank w i t h a c a p i t a l "between $50,000 and $100,000 "but i t i s not yet a d m i n i s t e r i n g t r u s t s . There i s obviously no reason, so f a r as the p u b l i c convenience i s concerned f o r small t r u s t companies i n Ehode I s l a n d . New Hampshire and Vermont each aillow $25,000 i n s t i t u t i o n s to administer t r u s t s "but i n New Hampshire the National hanks a t p r e s e n t a c t i v e l y i n f r u s t "business have a c a p i t a l l a r g e r t h a n $50,000, with one exception. I n Vermont two n a t i o n a l "banks of $50,000 c a p i t a l and one of $25,000 a r e . e x e r c i s i n g t r u s t powers. The 16 o t h e r s a r e a l l c a p i t a l i z e d above $50,000. There i s obviously l i t t l e demand f o r small t r u s t companies i n e i t h e r of these s t a t e s and the same i s t r u e of Maine, which has no National banks of $25,000 with t r u s t powers and only 3 with a c a p i t a l i z a t i o n of $50,000. view of the high requirements of such western s t a t e s a s Montana, and North Dakota - $100,000 - s t a t e s which a r e s p a r s e l y s e t t l e d by comparison X-6325 -4- with the Hew England. S t a t e s , i t can h a r d l y he maintained, t h a t the s t a; t e s 4: g e n e r a l l y "believe t h a t p u b l i c convenience r e q u i r e s t h a t every community should have an i n s t i t u t i o n a u t h o r i z e d to administer t r u s t s , and the f a c t that" a m a j o r i t y of the s t a t e s r e q u i r e a c a p i t a l of $50,000 or g r e a t e r i n d i c a t e s t h a t they b e l i e v e small hanks a r e not a s a r u l e so managed o r o f f i c e r e d a s t o he a b l e to administer t r u s t s s a f e l y and s u c c e s s f u l l y . I have d e a l t with minimum requirements only and have not included the s u r p l u s requirements of S t a t e laws, "because they seem as a r u l e unimportant - not adding g r e a t l y to the minimum c a p i t a l requirements» In a few s t a t e s they n e v e r t h e l e s s do much towards keeping the small "banks from t r u s t "business. Seventeen s t a t e s r e q u i r e hanks e x e r c i s i n g t r u s t powers to deposit s e c u r i t y with S t a t e a u t h o r i t i e s . The e f f e c t of the se requirements might "be given f u r t h e r c o n s i d e r a t i o n , "but i t seems unnecess a r y to devote more space to them i n the p r e s e n t memorandum. S t a t e hanking s u p e r i n t e n d e n t s , a s i n C a l i f o r n i a , have f r e q u e n t l y expressed the opinion t h a t small hanks cannot "maintain p r o p e r t r u s t standards." There i s of course d i f f e r e n c e of opinion a s t o what c o n s t i - t u t e "proper t r u s t s t a n d a r d s " and a d i s p o s i t i o n i n some s t a t e s to i n s i s t t h a t the bank should be l a r g e enough, or t h a t t h e r e should be s u f f i c i e n t t r u s t "business i n the community to j u s t i f y experts i n t r u s t b u s i n e s s . " 11 the employment of a s t a f f of Without s u b s c r i b i n g f u l l y to t h i s view i t i s evident t h a t the c l e r i c a l f o r c e i n the average small bank r a r e l y cont a i n s men who could q u a l i f y by any s t r e t c h of imagination a s "experts* e i t h e r i n t r u s t b u s i n e s s or i n banking. I t i s the view of the d i r e c t o r s of the F e d e r a l Reserve Bank of Hew'York t h a t a group of men may be well enough q u a l i f i e d to conduct a l o c a l bank, but ma/ not be q u a l i f i e d to conduct t r u s t "business. The t e s t they apply i s the question whether they X-6325 i 413 would, "bo w i l l i n g t o e n t r u s t tho management of an e s t a t e or a t r u s t fund i n which thoy v/ere i n t e r e s t e d to the group. C e r t a i n l y something more i n a b i l - i t y , i n c h a r a c t e r and i n f i n a n c i a l standing should he r e q u i r e d f o r Conducting f i d u c i a r y "business than f o r l o c a l "banking. That the small "banks a r e ranch more l i a b l e to f a i l u r e than l a r g e hanks has "been amply demonstrated. Of the 5,004 hank f a i l u r e s from 1921 - 1928 i n c l u s i v e , 4434, or 90.7 p e r cent were harks with a c a p i t a l of l e s s than $100,000. A hank may f a i l without l o s s to the t r u s t s administered by i t , and so f a r i t does not appear t h a t t h e r e have been any l o s s e s of t r u s t funds due to National bank f a i l u r e s , but t h i s may be a t t r i b u t e d i n p a r t to good, luck and. p a r t to the f a c t t h a t the banks having t r u s t powers which have so f a r f a i l e d . (61 i n a l l ) have been comparatively few i n number, and had not y e t accumulated much t r u s t b u s i n e s s . More than 75 p e r cent of them were i n f a c t not a d m i n i s t e r i n g any t r u s t s a t t h e time of f a i l u r e . Back of a c t u a l l o s s i s furthermore a negative argument and. gives l i t t l e i n d i c a t i o n a s t o whether the t r u s t s have bo an p r o p e r l y managed. I have been informed t h a t not much i s y e t known a s to the s e c u r i t i e s i n which t h e t r u s t f u n d s of f a i l e d banks were i n v e s t e d , beyond the f a c t t h a t t h e r e have been no complaints to the r e c e i v e r s . funds were not l o s t . About a l l t h a t i s known i s t h a t u n i n v e s t e d Such uninvested funds might e a s i l y be l e s t i f they were not p r o p e r l y s e g r e g a t e d from the general funds of the bank, and small banks, where t r u s t b u s i n e s s and commercial busine ss must be handled by the same p e r s o n s a r e l e s s l i k e l y t o be c a r e f u l about s e g r e g a t i o n than banks l a r g e enough to a f f o r d a s t a f f engaged s o l e l y i n the t r u s t b u s i n e s s . This i s one of the chief concerns of our Reserve Board t r u s t department, and banks a r c c o n s t a n t l y admonished and r e q u i r e d to maintain proper s e g r e g a t i o n , « An Iowa n a t i o n a l bank t h a t f a i l e d i n February was found to havo an uninvested X-6325 414 unsocurod fund i n i t s t a n k i n g dopartmont only two wetiks b e f o r e i t c l o s e d . To sum up: a m a j o r i t y of the s t a t e s e v i d e n t l y r e g a r d a c a p i t a l i z a t i o n h i g h e r than the minimum c a p i t a l i z a t i o n r e q u i r e d f o r commerical "banking necessary f o r t r u s t corporations "as a guarantee t h a t t r u s t s w i l l be f a i t h f u l l y a d m i n i s t e r e d , " and the s t a t e s which m a i n t a i n t h i s p o s i t i o n a r e a s a r u l e the s t a t e s with t h e b e s t tanking s t a n d a r d s . Should n o t the Federal Reserve Board seek to r a i s e the s t a n d a r d f o r t r u s t powers i n s t a t e s where i t i s now low, i n s t e a d of g r a n t i n g t r u s t powers s o l e l y with r e f e r e n c e to the question whether s i m i l a r powers would he g r a n t e d by t h e s t a t e banking authorities? By following the l a t t e r course the Board undoubtedly runs the r i s k of f u r n i s h i n g an argument towards the lowering of s t a t e standards• The advocates of a lowering of the s t a n d a r d i n a s t a t e where i t i s now high Can p o i n t to the f a c t t h a t i n an a d j o i n i n g S t a t e the Federal Reserve Board endorses a lower s t a n d a r d by g r a n t i n g t r u s t powers t o banks with a small capitalization. I t would appear t h a t bankers g e n e r a l l y , as well a s many of the S t a t e s u p e r i n t e n d e n t s of banking, a r e of the opinion t h a t small banks ought not to ^e p e r m i t t e d , o r ought not t o attempt, to a d m i n i s t e r t r u s t s . By comparison With the l a r g e number of small banks i n e x i s t e n c e , only a few have a p p l i e d f o r t r u s t powers and although n e a r l y a l l t h a t have a p p l i e d ha»ve b e f n given p e r mission t o a c t , a l a r g e m a j o r i t y of them remain i n a c t i v e . Of 76 $25,000 banks w i t h t r u s t power 56 were i n a c t i v e a t l a s t r e p o r t s . S e c t i o n 3.1-k, a s amended i n 1918 a u t h o r i z e d the Board to consider " t h e needs of the community to be s e r v e d . " Without going so f a r &s to say, a s the Superintendent of Banking i n C a l i f o r n i a says, t h a t p u b l i c o f f i c i a l s charged with the duty of p a s s i n g upon a p p l i c a t i o n s f o r t r u s t powers "should s a t i s f y themselves t h a t t h e r e i s s u f f i c i e n t b u s i n e s s i n t h e community to X-6325 ; 415 j u s t i f y t h e employment of a s t a f f of e x p e r t s i n t r u s t "business," the memorandum submitted, "by Governor Young on November 8, 1928 goes much too f a r i% the other d i r e c t i o n "by saying t h a t " o u t s i d e of a few i s o l a t e d and c r o s s road casaEunities i n the United S t a t e s , the need e x i s t s i n every community." Evidently a m a j o r i t y of the s t a t e s disagree with t h i s view, as I have i n d i c a t e d above, and i t seems c l e a r t h a t the p u h l i c w i l l be b e t t e r served i f t r u s t b u s i n e s s can continue to be administered by the l a r g e r , well equipped i n s t i t u t i o n s i n s t e a d of being s c a t t e r e d among many small i n s t i t u t i o n s . There i s probably some saving of expense i n the a d m i n i s t r a t i o n of an e s t a t q i f the a d m i n i s t r a t o r o r executor i s a r e s i d e n t of the county of the decedent, but t h e r e i s nothing to b e gained by having the a d m i n i s t r a t o r o r executor a small town bank when t h e r e i s a l a r g e r , b e t t e r equipped bank only a few miles away. I n the a d m i n i s t r a t i o n of t r u s t funds g e n e r a l l y , a p a r t from c o u r t t r u s t s , and e s t a t e s i n p r o c e s s of s e t t l e m e n t , the l o c a t i o n of the t r u s t e e bank i s genera l l y unimportant t o the b e n e f i c i a r i e s . C e r t a i n l y the d i f f i c u l t i e s of super- v i s i o n w i l l be g r e a t l y i n c r e a s e d i f the small banks g e n e r a l l y a r e p e r m i t t e d to a d m i n i s t e r t r u s t s . In the C a l i f o r n i a case submitted, and i n every case where the Board f i n d s a s u p e r i n t e n d e n t of banks a d m i n i s t e r i n g the law so a s to enforce a s t a n d a r d h i g h e r than the minimum l e g a l requirements, I b e l i e v e the Board should adopt t h e same h i g h e r s t a n d a r d s . To do otherwise i s obviously to f o r c e the s t a t e banking a u t h o r i t i e s to lower t h e i r standards i n order to meet the competition of the lower National bank or Federal Eeserve s t a n d a r d s . F i n a l l y 1 b e l i e v e we should adopt the p o l i c y of the m a j o r i t y of the s t a t e s and should provide by r e g u l a t i o n t h a t no n a t i o n a l bank with a c a p i t a l l e s s than $50,000 be granted permission to a d m i n i s t e r t r u s t s , and f u r t h e r t h a t no n a t i o n a l bank with a c a p i t a l l e s s than $100,000 be g r a n t e d f u l l t r u s t powers u n l e s s an e x c e p t i o n a l showing i s made a s t o the bank;*8 c o n d i t i o n and management, a nd as to ttensed of an institution exercising trust pesos infibscommunity.
@FedFRASER