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Issued by the

Industrial Advisory Committee
of the

Federal Reserve Bank of Dallas
February 28,1935

W hy Do Federal Reserve Banks Make
Advances fo r W orking Capital Purposes?
It is a matter of proper concern to bankers in general
that many industrial and commercial enterprises have
depleted their working capital during recent years, and
in order to maintain pay rolls and procure materials for
their operations are in need of such working capital for
longer periods than commercial banks have felt war­
ranted in granting, although the banks do have ample
funds with which to meet the current short-term require­
ments of trade and industry. The situation imposes the
duty of considering measures of accommodation, which
at the same time would present opportunities for legiti­
mate profit by banks willing to cooperate with new credit
facilities provided for that purpose.
It was to meet this unusual need of commerce and in­
dustry for working capital that Congress, last June,
amended the Federal Reserve Act so as to permit Federal
Reserve banks to make a substantial volume of credit
available through member banks and other financing
institutions, or direct to borrowers.

W hy Should Bankers Be Interested?
Commercial banks at the present time hold a large
volume of deposits for which they cannot easily find
profitable use. Obviously it is of the utmost importance
to banks in general that employment be found for idle
funds at rates which will yield a profitable return.
Under the terms of the amendment to the Federal
Reserve Act banks may find employment for some of
these funds by supplying the working capital which in­
dustry and commerce require without endangering either
their solvency or their liquidity. The problem of finding
funds for working capital for industry and commerce
has thus been facilitated on a basis that is safe and
profitable for the banks providing them.

W hat Are the Specific Advantages
to Bankers?
A member bank may now make a loan for working
capital purposes and, by paying a reasonable commit-

ment charge, procure from the Federal Reserve bank an
agreement to take over the loan at any time within a
specified period (which may be extended by mutual
agreement) without recourse on the member bank for
that portion not guaranteed by it, which may be as much
as 80 per cent o f the loan. The member bank is, there­
fore, put in the position of holding an earning asset
with a reasonable return which has been made liquid to
the extent stated by the obligation of the Federal Reserve
bank to repurchase or rediscount it when requested to do
so under the terms of the commitment, and which there­
fore is virtually underwritten by the Federal Reserve
bank for the full amount less the member bank’s par­
ticipation, which shall be not less than 20 per cent.

The Term s o f the Law
The pertinent parts of the law (Section 13b of the
Federal Reserve Act) provide that:
Each Federal Reserve bank shall “ have power to discount
for, or purchase from, any bank, trust company, mortgage
company, credit corporation for industry, or other financing
institution operating in its district, obligations having ma­
turities not exceeding five years, entered into for the pur­
pose of obtaining working capital for any such established
industrial or commercial business; to make loans or ad­
vances direct to any such financing institution on the secu­
rity o f such obligations; and to make commitments with
regard to such discount or purchase of obligations or with
respect to such loans or advances on the security thereof,
including commitments made in advance of the actual un­
dertaking of such obligations. Each such financing institu­
tion shall obligate itself to the satisfaction of the Federal
Reserve bank for at least 20 per centum of any loss which
may be sustained by such bank upon any of the obligations
acquired from such financing institution, . . . .”

The law also permits Federal Reserve banks to make
industrial advances in participation with financing insti­
tutions, provided such institutions obligate themselves
for at least 20 per cent o f any loss which may be sus­

What Does the Banker Have to D o?
In concrete terms, what the foregoing provisions mean
to member banks may be stated as follow s:
First: A member bank may make a loan on a reason­

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able and sound basis with a maturity not exceeding five
years to an established industrial or commercial business
for the purpose o f supplying working capital.
Second: If the loan is acceptable to the Federal Reserve
bank (which should be determined before the loan is
made) the member bank may obtain from the Federal
Reserve bank a commitment to take over the loan on
stated terms at any time within the period of the com­
Third: The member bank pays the Federal Reserve
bank for this commitment, the amount paid depending
principally upon the length of time covered by the
Fourth'. Under the terms of the commitment the Fed­
eral Reserve bank will take over the entire loan and
relieve the member bank of obligation in connection
therewith to the extent agreed to under the commitment.
In other words, the member bank may sell or rediscount
the loan without recourse to the extent of the Federal
Reserve bank’s participation, but it must continue under
obligation for the remainder; or the member bank may
retain in its portfolio its agreed portion of the participa­
tion and, discount the remainder without liability.

What Conditions Does the Law Im pose?
The loans are to have maturities not exceeding five
years, and are to be made for the purpose of furnishing
working capital to established industrial or commercial
In the regulations prepared by the Federal Reserve
Board to implement the provisions of the amendment, no
additional restrictions have been imposed. Attempts to
supply technical definitions of such terms as “ working
capital” and “ established commercial or industrial busi­
ness” have been avoided. The law was passed as part of
an effort to meet an emergency, and not to alter the
basic principles upon which commercial banks and Fed­
eral Reserve banks are to operate. Accordingly the desire
has been to interpret and administer it in the liberal
spirit in which it was drawn and adopted, and not to
rule out certain classes of loans in advance because they
were essentially different from those that commercial
banks have been accustomed to make.

Are Loans Large or Sm all?
There is no discrimination by the Federal Reserve
banks against loans of small amount. On the contrary,
the amendment was intended particularly for the benefit
o f small industries, and in line with that intention the
Federal Reserve System has encouraged loans to small

How Are the Loans Classed by the
Supervisory Authorities?
As the loans may have long maturities many banks
have been reluctant to take them because of possible
criticisms by bank examiners and supervisory authori­
ties. In that connection it may be stated that the Comp­
troller of the Currency and the Federal Reserve Board

have issued instructions to their examiners that indus­
trial loans which have long maturities, but which are
covered by commitments from the Federal Reserve banks,
are not to be classified as “ slow.” Instructions have also
been given to examiners not to include advances covered
by commitments in the class of loans subject to criticism,
and not to classify as subject to criticism the portion of
such advances not covered by commitments, except with
respect to apparent losses.
Under a recent ruling by the Comptroller of the Cur­
rency national banks are authorized to make industrial
advances exceeding the 10 per cent limitation imposed
by Section 5200 of the Revised Statutes on loans to one
person, provided the Federal Reserve bank has granted
a commitment to take over from it at least as much of
such loan as is in excess o f the 10 per cent limitation.
This enables national banks in many instances to take
care o f their customers’ needs for working capital more
effectively than would otherwise be possible.

W ho Passes on These Loans?
The special nature of the industrial advances is indi­
cated by the fact that the law established an Industrial
Advisory Committee in each Federal Reserve district for
the purpose of aiding the Federal Reserve banks in carry­
ing out the industrial loans provisions. Each member of
these committees is a person actively engaged in some
industrial pursuit. Each application for an industrial loan
or commitment is passed on first by the Industrial A d­
visory Committee and is then transmitted with the Com­
mittee’s recommendation to the Federal Reserve bank
for final action.

W hat Security Is Dem anded?
Obviously there must be a sound basis for the loans.
There must be grounds for a reasonable expectation
that the enterprise will succeed if it gets the credit for
which it applies.
Loans made thus far differ widely as to security ac­
cepted. Any security with intrinsic value will be con­
sidered— mortgages against land, buildings and machin­
ery, or lawful pledge of raw material and other personal

Direct Loans to Industry
Besides authorizing the Federal Reserve banks to make
commitments to take over industrial loans and advances
and to participate in loans with financing institutions,
the law also authorizes the Federal Reserve banks to
make loans direct to industry. On this point the law
reads as follow s:
“ In exceptional circumstances, when it appears to the
satisfaction of a Federal Reserve bank that an established
industrial or commercial business located in its district is
unable to obtain requisite financial assistance on a reason­
able basis from the usual sources, the Federal Reserve bank,
pursuant to authority granted by the Federal Reserve Board,
may make loans to, or purchase obligations of, such busi­
ness, or may make commitments with respect thereto, on a
reasonable and sound basis, for the purpose of providing it
with working capital, but no obligation shall be acquired
or commitment made hereunder with a maturity exceeding
five years.”

Most of the working capital loans thus far made by
the Federal Reserve banks have been direct to borrowers.
Any established industrial or commercial business in need
of additional working capital which it cannot obtain from
the usual sources and to which a loan can be made on
a sound and reasonable basis, is eligible for a direct loan
from the Federal Reserve bank. The terms governing
direct loans to industry are similar to those governing
advances through financing institutions.

Are the Federal Reserve Banks in
Competition with Member Banks?
The provision that loans may be made direct to indus­
try does not put the Federal Reserve banks in competi­
tion with member banks, as it authorizes such loans to
be made “ in exceptional circumstances” only, and when
the borrower “ is unable to obtain requisite financial
assistance on a reasonable basis from the usual sources.”
It was apparently the intent of Congress that no business
in need of working capital and warranted in getting it
should be left without other recourse if unable to obtain
the needed funds from the usual sources.

W hat About Noil-Member Banks and Other
Financing Institutions?
Although the procedure for procuring commitments on

industrial loans is described herein from the point of
view of member banks primarily, under the terms of
the law the same facilities and procedure are available
to non-member banks and other financing institutions.

How Much Money Is Available?
The total amount o f industrial loans and commitments
of the twelve Federal Reserve banks outstanding at any
one time is limited by law to approximately $280,000,000.
The maximum available for that purpose in this district
is approximately $8,000,000.

W hat Is the First Step?
The first step for the member bank or other financing
institution which desires to make industrial loans and to
procure commitments thereon, is to make inquiry of the
Federal Reserve bank. Inquiry may be made either as to
the procedure in general or with respect to a specific loan.
The purpose of the industrial loan amendment is to
assist enterprise and encourage employment and the
Federal Reserve banks are anxious to carry out the spirit
and purpose of Section 13b. Therefore, there should be
no reluctance on the part of any member bank or other
financing institution to make inquiry with respect to the
policy and procedure of making these loans, or to discuss
any suggested or contemplated loan.



Clarence Ousley, Chairman................President, Globe Laboratories,
Fort Worth, Texas.
T. M. Cullum..... ................................... President, Cullum and Boren Company,
Dallas, Texas.
Lewis R. Ferguson...............................Vice-President and General Manager,
Lone Star Cement Co., Dallas, Texas.
W ill B. Marsh....................................... President, Chronister Lumber Co.,
Dallas and Forest, Texas.
Charles R. Moore.................................President, Austin Bridge Company,
Dallas, Texas.

All inquiries relative to loans to industry should be addressed to the Federal Reserve Bank of
Dallas, under whose authority this circular is issued.

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