View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Circular No. 23
Series of 1919
(Reprint)

FEDERAL RESERVE BANK OF D A L L A S

November 10, 1919.

To

the

M ember B a n k A ddressed:

Your attention is called to the following analysis of the Amendment to Section 5200
of the Revised Statutes of the United States, which became a law on October 22, 1919,
together with a memorandum prepared and issued by the Federal Reserve Board dis­
cussing the distinction which, under the law, must be drawn by Federal Reserve Banks
in making rediscounts for National banks and State bank members.
Respectfully,

Loaning Powers of National Banks Under the Amendment to Section 5200 U. S. R. S.,
Approved October 22, 1919.
The amendment to Section 5200 of the Revised Statutes which became a law on
October 22, 1919, has made certain material changes in the loaning powers of national
banks. For the convenience of national banks and others interested in the effect of
those changes, there is submitted herewith an analysis of the provisions of Section
5200 now in force.
The amounts which a national bank may properly lend to any one person, com­
pany, corporation or firm (including in the liability of a company or firm, the liabili­
ties of the several members thereof) under the various clauses of Section 5200, as
amended by the Act approved October 22, 1919, are stated in terms of the percentage
of the paid-up and unimpaired capital stock and surplus of the leading bank.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

CHARACTER OF LOANS

AMOUNTS LOANABLE

(A) Accommodation or straight loans,
whether or not single name.

Maximum limit, 10% of bank’s paid-up and
unimpaired capital and surplus.

(B) “ Bills of exchange drawn in good
faith against actually existing
values.”
The law expressly provides that this
phrase shall also include:
(a) Drafts and bills of exchange
secured by shipping docu­
ments conveying or securing
title to -goods shipped.
(b) Demand obligations, when
secured by documents cov­
ering commodities in actual
process of shipment.
(c) Bankers’ acceptances of the
kinds described in Section 13
of the Federal Reserve Act.

No limit imposed by law.

(C) Commercial or business paper (of
other makers) actually owned by
the person, company, corporation
or firm negotiating the same.

No limit imposed by law.

(D) Notes secured by shipping documents,
warehouse receipts or other such
documents conveying or securing
title covering readily marketable
non-perishable staples, including
live stock.
No bank may make any loan under
(D), however,
(a) Unless the actual market
value of the property secur­
ing the obligation is not at
any time less than 115% of
the face amount of the note,
and
(b) Unless the property is fully
covered by insurance, and in
no event shall the privilege
afforded by (D) be exer­
cised for any one customer
for more than six months
in any consecutive twelve
months.

15% of bank’s capital and surplus, in addi­
tion to the amount allowed under (A) ;
or if the full amount allowed under
(A) is not loaned, then the amount
which may be loaned in the manner
described under (D) is increased by
the loanable amount not used under
(A). In other words, the amount
loaned under (A) must never be more
than 10% but the aggregate of (A)
and (D) may equal, but not exceed,
25%.

(E) Notes secured by not less than a like
face amount of bonds or notes of
the United States issued since
April 24, 1917, or by certificates
of indebtedness of the United
States.

10% of bank’s capital and surplus, in ad­
dition to the amount allowed under
(A), or if the full amount allowed
under (A) is not loaned, then the
amount which may be loaned in the
manner described under (E) is in­
creased by the loanable amount not
used under (A). In other words, the
amount loaned under (A) must never
be more than 10% but the aggregate
of (A) and (E) may equal, but not
exceed, 20%.

(F) Notes secured by U. S. Government
obligations of the kinds described
under (E), the face amount of
which is at least equal to 105%
of the amount of the customer’s
notes.

No limit, but this privilege, under regula­
tions of the Comptroller of the Cur­
rency, expires December 31, 1920.

Some Examples of what a National Bank may lend at any one time to any one Customer
under the Amendment to Section 5200, approved October 22, 1919, Expressed
in terms of Percentage of the Bank’s Capital and Surplus.
Illustra­
tion 1

Illustra­
tion 2

Illustra­
tion 3

5%
5%
.. 10%
(A) Accommodation or straight loans....
15%
20%
(D) Notes secured by warehouse receipts, etc....... ....... ..... .......... .. 15%
(E) Notes secured by a like face amount of Government obli10%
15%
.. 10%
gations .........
35%
.. 35%
35%
TOTAL ___ ______
(B) Bills of exchange drawn against actually existing values.....No limit imposed by law
(C) Commercial or business paper...... ........ ...... ..... ....... ............ ....No limit imposed by law
(F) Notes secured by at least 105% of U. S. Government obli­
gations ...... ..... ......... ....... ....................—...... - .......... - ...... -No limit imposed by law
What a Federal Reserve Bank May discount for its member banks.
The limitations imposed upon the amounts of rediscounts which a Federal Reserve
Bank may make for a member bank, whether state or national, are determined by the
provisions of the Federal Reserve Act and are not in any way affected by the amendment
to Section 5200.
Under the provisions of Section 13 of the Federal Reserve Act any Federal Reserve
Bank may rediscount for any member bank, whether state or national, the obligations
of any one borrower to the extent of ten per cent, of the member bank’s capital and sur­
plus, but it is expressly provided that “ bills of exchange drawn against actually exist­
ing values” shall not be included in determinining that ten per cent, limit.
In the opinion of the Federal Reserve Board this phrase “ bills of exchange drawn
against actually existing values” includes “ drafts or bills of exchange secured by ship­
ping documents conveying or securing title to goods shipped” and “ bankers’ accept­
ances of the kinds described in Section 13 of the Federal Reserve Act” even though
Section 13 (unlike the amendment to Section 5200) does not expressly state that those
two classes of paper are bills of exchange drawn against actually existing values. In
the opinion of the Board, however, accepted demand bills on which the drawer is re­
leased from liability are not “ bills of exchange” within the meaning of Section 13 and
must, therefore, be included in determining the limits on the amount of paper of any
one borrower which a Federal Reserve Bank may rediscount for any member bank.
Under the terms of Section 11 (m), as amended by the Act of March 3, 1919, any
Federal Reserve Bank may, until December 31, 1920, rediscount for any member bank,
whether state or national, the obligations of any one borrower to the extent of twenty
per cent, of the member bank’s capital and surplus, provided, however, that the excess
over and above ten per cent, must be secured by bonds or notes of the United States
issued since April 24, 1917, or by certificates of indebtedness of the United States.

Special Provisions Relating to Rediscounts for Member State Banks.
The above discussion relates to the general powers of a Federal Reserve Bank to
make rediscounts for any member bank, whether state or national. It must be observed,
however, that under the terms of Section 9 of the Federal Reserve Act no Federal Re­
serve Bank can rediscount for a member state bank any of the paper of any one bor­
rower who is liable to such member State bank in excess of ten per cent, of the capital
and surplus of that State bank but it is provided that the discount of bills of ex­
change drawn against actually existing values and the discount of commercial or busi­
ness paper actually owned by the person negotiating the same shall not be included in
determining the amount to which a borrower is liable to such member State bank.
The provisions of this Section 9 are in no way affected by the amendment to Sec­
tion 5200 of the Revised Statutes and the same test as to eligibility of any part of the
line of paper of any one borrower which is held by a member State bank is applicable
now as before that amendment to Section 5200.
Under the provisions of Section 11 (m), as amended by the Act of March 3, 1919,
the Board has ruled that a Federal Reserve Bank may, until December 31, 1920, re­
discount for a member State bank paper secured by not less than a like face amount of
bonds or notes of the United States issued since April 24, 1917, or certificates of in­
debtedness of the United States, without regard to the amount the borrowing bank
may already have loaned to its customer under his regular line of credit, provided,
however, that the aggregate of all rediscounts of the paper of any borrower must in
no case exceed twenty per cent, of the capital and surplus of the member State bank.
In other words, if the regular line of credit of the borrower from a member State
bank is not more than the ten per cent, limit fixed by Section 9 of the Federal Reserve
Act, Federal Reserve Banks may rediscount for State member banks to the same ex­
tent that they may for member national banks. If, however, the regular line of credit
of the borrower from the member State bank is more than that ten per cent, limit, then
the Federal Reserve Bank cannot rediscount any of that regular line of credit but may
rediscount that paper which is secured by Government obligations of the kinds speci­
fied up to the limits described above. (See rulings of the Federal Reserve Board
printed on pages 361 and 362 of the April, 1919, Federal Reserve Bulletin).


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102