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FEDERAL RESERVE SYSTEM
COMMITTEE ON THE DISCOUNT AND
DISCOUNT RATE MECHANISM
Report, March 12, 1954.
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JH t 11 . J r ' .
FR-CONFIDENTIAL
Copy No. ______
March 12, 195^
SYSTEM COMMITTEE ON THE DISCOUNT
AND DISCOUNT RATE MECHANISM
Report on the Discount Mechanism
John S. Coleman
Alfred H. Williams
A. L. Mills, Jr., Chairman
CONTENTS
Page
Preface
................................................
Committee Frame of Reference and Procedures
1
............
General Considerations Bearing on Use of the
Discount Facility ................................
7
. .
9
Major Findings and Suggestions:
Regulation A ........................................
Background of the Present Regulation ..............
Essential Content of a Revised Regulation
Guiding Principles for Reserve Bank Lending
and Member Bank B o r r o w i n g ..............
Suggested Revision of Regulation A ................
A . . .
.
Administration of Discount Policy ....................
Some Objections to the Suggested Revision of
Regulation A .........................................
Substitution of Regulation for Tradition
Against Discounting ..............................
System's Discount Mechanism Problem Mainly
One of Insistent B o r r o w e r s ....................
Adjustment Problem of Money Market Banks ............
Adverse Bank Relations Aspects of a Revised
Regulation A .......................................
Possible Reactions on Correspondent Banking ..........
The Avoidance Problem that Might Result from a
Revised Regulation A ...............................
Relation Between Regulation of Discounting and
Discount Rate P o l i c y .................................
Appendix A:
Synopsis of Reports by Federal Reserve Banks
on the Operations of the Discount Function.
Appendix E:
Use of the Discount Facility to Meet Seasonal
Needs for Reserve Funds.
Appendix C:
The Problem of Defining and Identifying Cases
of Continuous Use of the Discount Facility.
Appendix D:
Suggested Revision of Regulation A.
Appendix D-l:
Appendix D-2:
Text of Suggested Revision.
Textual Changes Which Would be Made in
Regulation A by Proposed Revision.
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FR-CONFIDENTIAL
PREFACE
When the Federal Reserve System was founded, the view was
generally held that discounting would be the chief means by which
Federal Reserve credit would be made available to member banks. The
thought was that, when member banks had exhausted their own lending
power and there continued to be legitimate productive demands for
credit, they would be able to obtain additional reserve funds from
the Reserve Banks at the discount rate against the pledge of eligible
paper.
Since eligible paper by legal definition was to have a self-
liquidating quality, it was also thought that member banks in stressing
the acquisition of such paper as a means of access to Federal Reserve
credit would keep their asset positions liquid and sound.
Four decades of Federal Reserve experience changed substan
tially the role of discounts in System monetary functions.
Experience
taught the dangers to sustained banking stability of excessive member
bank reliance on borrowed funds and implanted deeply a member bank
reluctance to incur and sustain discount debt.
It also pointed up
that member bank reserves put out through the discount window at once
comingle with reserves from every other source, with their use beyond
regulation by discount rules,and further that reserves obtained through
discounts have the same multiplying power with respect to member bank
assets and deposits as reserves obtained from any other source.
Experience, in addition, altered fundamentally the concept
of eligibility.
This concept changed both in banking theory and in
law from a narrow one of the legal eligibility of the paper offered
for discount to a broader one including appropriateness of borrowing
FR-CONFIDENTIAL
- 2 as well as the character of the paper discounted.
The broader
concept placed primary emphasis on the circumstances giving rise to
the member bank borrowing from the standpoint of sound credit con
ditions and the general economic situation.
In four decades of System operation, the discount instru
ment was reduced from the main reliance of reserve banking control to
one of three major tools for influencing member bank lending power.
The coordinated use of these instruments thus emerged as the central
task of Federal Reserve operations.
In applying its policy tools,
moreover, the responsibility of the System itself broadened from a
technical one of furnishing an elastic currency and providing a
discount facility into a national responsibility for regulating the
over-all flow of credit and money with a view to orderly economic
growth at high levels of activity and employment.
These developments
made it more essential that the several policy-making bodies in the
System's structure--the Board of Governors, the Federal Open Market
Committee, and the directors of the twelve Federal Reserve Banks-work closely together in carrying out their respective responsibilities
in effectuating System policy.
The assignment made to the Committee on the Discount and
Discount Rate Mechanism has been to reassess the System's discount
function in the existing credit and monetary environment.
The
immediate background of the Committee's activities has been a period
of transition from virtually unlimited provision of Federal Reserve
\
credit through the open market channel at the call of the market to
a flexible provision of bank reserve funds through alternative
FR-CONFIDENTIAL
- 3 channels in accordance with System appraisal of the economy's needs
from the standpoint of stability and Growth.
The longer background
of the Committee's study includes two decades during which,for a
succession of differing reasons, only slight use was made by member
banks of the discount facility.
Reinstitution of flexible credit and monetary policy following
the Treasury-Federal Reserve accord in 1951 required a System policy of
restraint under the prevailing inflationary conditions, and such a
policy called for a reduced availability of bank reserves.
Under this
restrictive policy, member banks gradually increased their use of the
discount facility and, accompanying this increase, the climate or tone
of the credit market tightened significantly.
growth occurred toward the close of
through the winter months.
1952
The peak of the discount
and discounts remained high
In the spring of 1953^ reflecting the force
of the member bank tradition against continuing discount debt, some
System admonitions in individual bank cases, and the effect of an in
crease in the discount rate, member banks endeavored to reduce or pay
off entirely their borrowings from the Reserve Banks.
credit markets tightened sharply further.
As a result,
This was at a time of over
all abatement of inflationary tendencies.
To assure the economy that credit and monetary pressures
would not in themselves upset a topping business situation and bring
about deflation, the System found it desirable in late spring to
supply reserve funds to member banks.
This was done by providing
through open market operations and a reduction in reserve requirements
enough funds to obviate heavy member bank reliance on the discount
FR-CONFIDEHTIAL
-
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facility in meeting seasonal and growth needs for reserves over the
remainder of the year.
These actions were promptly reflected in
further reduction in member bank discounts and in a shift in the
climate of the market from one of credit tightness to one of relative
ease.
Subsequently, as levels of business activity and credit demand
showed signs of recession, System policy was actively directed toward
credit ease by supplying additional reserves through open market
operations and thus keeping member bank borrowing at a low level.
The pattern of use of the discount facility in this episode,
with expansion and contraction of credit demands, conformed broadly
with that experienced under flexible reserve banking operations in the
Twenties.
There were important differences, however.
Far less use
was made of the discount facility in relation to total member bank
reserve funds than in the Twenties.
The banking system and indeed
the whole credit market showed itself more sensitive to the rise in
discount debt, considering its relative magnitude as well as the
conditions which brought it about, than had been the case in earlier
experience.
In the light of this experience the Committee has been con
cerned with the problem of what norm the System should have in mind
with respect to future discount use by member banks.
Some conception
of a norm, consistent with the maintenance of sound banking conditions,
has seemed essential to the framing of the Committee's report.
As a reasonable standard, it seems likely that banks will
normally seek to be out of debt to the Federal Reserve and that,
consequently, the reserve funds necessary for economic and banking
FR-CONFIDENTIAL
- 5 growth will need to become available through other channels.
This
means as a norm a relatively small volume of discounts by a shifting
number of member banks, with changes in that volume reflecting the
temporary response of individual banks to losses or accessions of
reserve funds and to the strength of the demands for credit made
upon them.
Such a norm further implies that, when demands for bank
credit are especially vigorous and System policy is directed at credit
restraint, the volume of discounts and the number of banks resorting to
discounts will increase--sharply when the strength of credit demands
requires that restrictive policy be aggressive.
On the other hand,
when bank credit demands slacken and System policy is directed at
credit ease, the suggested norm assumes that the volume of discounts
will decrease--sharply when contraction of credit demands requires
that easing policy be active.
Thus, by the Committee's standard, aggregate use by member
banks of the discount facility over the future will reflect to a large
extent the degree of pressure on the credit market resulting from the
interplay of credit demands and general credit and monetary policy.
The discount mechanism in these conditions will complement open market
operations and changes in reserve requirements in effectuating Federal
Reserve policy directed at economic stability and growth.
The Committee has interpreted its responsibility to be one
of raising for System consideration and discussion the pertinent issues
with regard to the present-day functioning of the discount mechanism.
Its studies point to the desirability of revising Regulation A to make
FR -CONFIDEIITIAL
- 6 the Regulation express more adequately and effectively the System's
contemporary discount philosophy.
At what precise time and under
what circumstances a revised Regulation A should be promulgated is
a problem
in itself, the solution of which deserves careful con
sideration.
In that connection, it should be borne in mind that
Regulation A has not been revised since 1937> although the inter
vening years have seen further evolution of System philosophy.
The reasoning presented in the Committee's report
is
based on certain premises with respect to the member bank tradition
against borrowing, System experience over the years with the discount
mechanism, and the implications of successive legislative amendments
of the System's discount authority.
The Committee recognizes fully
the many complexities of the subject matter with which its present
report deals and is aware that some objections may be advanced against
its reasoning on the basis of different premises, from a different
weighting of premises, or on the basis of different judgments as to
what is practical operationally.
Because of this, the Committee has
found it desirable to point out in a later section of the report the
principal objections to its suggestions.
This treatment stresses
further the Committee's role of setting forth clearly the issues
which its studies have shown to be important.
The Committee's present report is concerned almost exclu
sively with the discount process by itself.
The Committee has not
yet completed its studies of the discount rate mechanism and expects
to report on this subject at a subsequent time.
In view of the
FR-CONFIDENTIAL
- 7 interconnection between the discount process and the discount rate
mechanism, however, the Committee has concluded this report with
some tentative general observations concerning the relation of
discount regulation to discount rate policy.
Committee Frame of Reference
_______and Procedures_______
The Board of Governors at its meeting on April 2, 1953*
directed the staff in collaboration with the staffs of the Reserve
Banks to make a comprehensive study of the System's discount and
discount rate mechanism looking toward a fresh appraisal of this
important reserve banking function.
Upon completion of this study
and preliminary discussion of its several parts, the Board on
June 9, 1953, authorized the formation of a System Committee to
extend the inquiry and make such recommendations for adaptation in
the discount mechanism as would seem to be called for in the light
of progress over the past two years in reestablishing flexible
credit and monetary policy.
The Committee was organized in July
1953, composed of one member designated by the Board of Governors
as chairman, one member designated by the Chairmen's Conference,
and one member designated by the Presidents' Conference.
Thus
constituted, the membership of the Committee included:
Abbot L. Mills, Jr. (Board of Governors), Chairman
John S. Coleman (Conference of Chairmen)
Alfred H. Williams (Conference of Presidents)
As the background material for its work, the Committee had
available the following analytical and educational memoranda prepared
in connection with the earlier authorized research activity:*
*These memoranda were circulated to System officials in June 1953
for their information.
FR-CONFIDENTIAL
- 8 DEVELOPMENT OF FEDERAL RESERVE DISCOUNT POLICY, 1919-23
Mona E. Dingle, Board of Governors.
CRITERIA FOR CHANGES IN THE DISCOUNT RATE
Karl R. Bopp, Federal Reserve Bank of Philadelphia
Charls E. Walker, Federal Reserve Bank of Philadelphia.
COMPARISON OF HISTORICAL CHANGES IN THE DISCOUNT RATE
WITH CHANGES IN MARKET INTEREST RATES
Caroline H. Cagle, Board of Governors.
DIFFERENTIALS IN DISCOUNT RATES AMONG FEDERAL RESERVE
DISTRICTS
Robert V. Roosa, Federal Reserve Bank of New York.
APPROPRIATE AND INAPPROPRIATE USES OF RESERVE BANK CREDIT
Watrous H. Irons, Federal Reserve Bank of Dallas.
A PREFERENTIAL RATE ON NONCONTINUOUS MEMBER BANK BORROWING
William J. Abbott, Jr., Federal Reserve Bank of St. Louis.
TECHNIQUES FOR APPRAISING INDIVIDUAL BANK USE OF FEDERAL
RESERVE CREDIT
Robert C. Holland, Federal Reserve Bank of Chicago.
SUMMARY AND HISTORY ON BOARD'S REGULATION A REGARDING
DISCOUNTS AND ADVANCES BY FEDERAL RESERVE BANKS
Howard H. Hackley, Board of Governors.
In addition, the Committee had access to the replies of the
twelve Reserve Banks to an inquiry into their discount procedures and
practices conducted by the Board's Division of Bank Operations in
April and May 1953*
The information provided by this survey covered
Reserve Bank organization for handling discounts, director participa
tion in Reserve Bank discount policy and its application, procedures
in processing discount applications, considerations weighed in
approving or disapproving discounts, procedures followed in keeping
Reserve Banks informed as to the character of loans and investments
of member banks and whether undue use of bank credit is being made for
FR-CONFIDENTIAL
- 9 speculative purposes, and procedures in discount cases calling for
special administrative action.
The results of this survey were
circulated only to the Board of Governors and the members of this
Committee.
A synopsis of the replies is included with this report
as Appendix A.
On September
9> 1953 > the
Committee held a full day's
discussion of the System's discount and discount rate mechanism
with the System's staff participating in preparatory research.
On
September 10, 1953/ the Committee met for a full day's discussion
of System discount practices with senior discount officers from
each of the Reserve Banks.
Against this background of documentation
and discussion, the Committee then began its deliberations and the
preparation of its own report.
General Considerations Bearing on
Use of the Discount Facility
Through the discount window at the Reserve Banks access to
Federal Reserve credit is available at the initiative of nearly seven
thousand member banks.
When the System exerts restraint on credit and
monetary expansion and therefore keeps the aggregate volume of bank
reserves under tighter control, this provision for direct access to
reserves by individual member banks raises difficult problems of
discount management.
It is desirable, on the one hand, to keep open
the privilege of individual member banks to borrow at the Reserve
Banks to meet essential temporary or emergency needs.
On the other
hand, the borrowing facility should not provide a channel through
which member banks generally or an important segment of them may be
able to avert the over-all credit and monetary objectives of the System.
FR-CONFIDENTIAL
- 10 Restraint on the use, or overuse, of the discount facilitymay be accomplished by making it expensive to borrow or by limiting
access to borrowing through rules and customs.
The Federal Reserve
has always functioned with a combination of these methods, but with
experience there has been an evolution in the emphasis placed on them.
Early in System history, member bank discounts were the main
channel for the extension of Federal Reserve credit.
In regulating
use of the discount facility emphasis was first placed on moral suasion
as a supplement to the discount rate in deterring excessive individual
bank borrowing.
In the inflationary boom following World War I when
member bank discounts expanded rapidly to a volume substantially greater
than member bank reserve balances, it became necessary to rely more
particularly on the discount rate.
In 1920, in an effort to make
effective a policy of credit restraint discount rates were raised
sharply at the New York and several other Reserve Banks to as high as
7 per cent.
This discount rate action, on top of continuing moral
suasion efforts to limit discounts on the part of individual banks,
produced intense efforts on the part of the banking system to reduce
discount indebtedness.
A major lesson brought out by the bank credit
liquidation which ensued was that it was unsound for any member bank
to use continuous indebtedness to its Reserve Bank as a resource for
conducting regular banking operations.
Through the Twenties, Reserve Bank lending continued as an
important source of bank reserves, although, because of the availability
of funds from other sources, not as important a source as in the
preceding war and postwar period.
Nevertheless, a number of member
FR-CONFIDENTIAL
- 11 banks that were expanding aggressively supplemented their resources
more or less continuously with discount credit.
In the late Twenties,
when demands for stock market and other credit were heavy, Reserve
Bank discounts rose to nearly two-fifths of member bank reserves and
an increased number of bank3 became a continuous borrowing problem.
Both discount rate and moral suasion action were used by the System
in this period in attempting to deal with excessive reliance on the
discount facility by many member banks.
In the severe banking crisis and liquidation in the early
Thirties, adjustment problems of the aggressive, continuous borrowing
banks made evident the hazards to safety of depositor funds and the
dangers to ban); solvency resulting from the injection between bank
capital and deposits of borrowed funds having a creditor status ahead
of deposit liabilities.
The experience of these banks focused busi
ness and financial attention on the fundamental unsoundness of undue
dependence of individual member banks on indebtedness to the Reserve
Banks.
The experience proved to that generation of bankers and
depositors that, for more or less permanent adjustments in its operating
position, a member bank should rely on shifts in the composition
and
size of its assets, and that its recourse to the Federal Reserve Bank
discount window should be only for temporary adjustments in its reserve
position.
Because of this costly lesson, it was possible by the mid-
Thirties to speak of an established tradition against member bank
reliance on the discount facility as a supplement to its resources.
FR-CONFIDENTIAL
- 12 In a "banking organization made up of thousands of member
banks engaged in widely differing kinds of banking business, a well
entrenched tradition against commercial bank reliance on borrowed
funds is an important aid to reserve banking.
It helps both to make
reserve banking operations effective and to preserve a strong and
responsive system of individual banks.
From the standpoint of effective reserve banking operations,
such a tradition permits the discount facility to serve as a safety
valve, easing temporarily the special reserve pressures on individual
banks.
At the same time, it prevents that facility from becoming a
gaping hole through which are released all of the pressures on tank
reserves built up within the banking system as a whole.
Reluctance
to borrow, moreover, can serve to relieve strain on the discount rate
and quicken banking response to credit and monetary policy directed
at restraint.
Providing that excessive reliance on the discount
window has been avoided during prosperity, the tradition need be
little, if any, handicap to reserve banking operations directed to
credit and monetary ease, when other instruments of policy are being
actively used to take member banks generally out of debt and to raise
the liquidity of the banking system as a whole.
From the standpoint of strong and responsive banking condi
tions, the tradition against borrowing in long periods of economic
prosperity helps to prevent the more aggressive member banks from
building up undue dependence on discount credit.
Chronically indebted
banks risk depositor pressure in the event that economic conditions
turn adverse and the fact of their difficulties in a closely
FR-CONFIDENTIAL
- 13 interdependent banking community can make other banks, even those
in a strong position, highly sensitive about their own liquidity
needs.
This kind of banking climate can set the stage for a period
of irrational bank credit liquidation.
As Federal Reserve experience
in at least one important period illustrates, constructive credit and
monetary policy to cushion economic recession and foster revival can
be rendered substantially ineffectual by persistent dependence on the
discount facility developed by some banks in a prior phase of economic
boom.
The Committee believes that the tradition against continuous
member bank dependence on the discount facility is sound in principle
and proven by four decades of Federal Reserve experience.
Future dis
count policy, in its opinion, should build on the tradition as a
keystone.
Major Findings and Suggestions
Regulation A
The Committee's major conclusion is that a gearing of the
System's discount mechanism to present-day banking and monetary
conditions needs as a basic step reconsideration of the philosophy
underlying the Board's Regulation A.
The present regulation, while
it conforms to the requirements of Federal Reserve law as amended
over the years, carries forward an accent relating back to the
banking-school theory of commercial banking and reserve banking,
namely, that commercial bank assets and Reserve Bank discount assets
should be comprised primarily of self-liquidating paper. The bankingschool philosophy has been rendered obsolete by banking events, changes
FR-CONFIDENTIAL
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Ik -
in banking practice, and developments in banking theory, which in
turn influenced successive amendments to the Federal Reserve Act.
If the System is to support adequately through its discount rules
the member bank tradition against large and continuous borrowing
and if it is to carry out its credit and monetary responsibilities as
they are now recognized, its discount regulation needs to be adapted
more closely to contemporary economic
thought and to embody more
definitely the principles applicable to Reserve Bank lending that
are expressed or implicit in existing statutes.
Background of the Present Regulation.--The present Regulation A
was last revised in 1937-
This revision took account of amendments
made to the law by the Banking Acts of 1933 and 1935 in the light of
the then existing climate of opinion.
Developments in discount
operations since that time have brought out that the Regulation places
disproportionate emphasis on eligibility in the narrower sense of that
term and does not bring out adequately that successive amendments of
the Federal Reserve Act have built into banking law a major change
in discount philosophy.
The philosophy of the discount function in the original Federal
Reserve Act was based on the concept that reserve banking operations
would be soundly conducted if discounts and advances were confined
to paper meeting certain specific tests as to eligibility and if
Federal Reserve note issues were secured partly by such paper and
partly by gold.
Eligible paper under the commonly accepted banking
principle of that time was considered to be short-term paper arising
FR-CONFIDENTIAL
- 15 out of specific commercial, industrial, and agricultural transac
tions which in and of themselves would provide the resources for the
liquidation of the loan.
Linking the supply of bank reserves and issues of Federal
Reserve notes to eligible commercial paper was supposed to make the
total money supply automatically responsive to fluctuations, seasonal
and otherwise, in the pace of economic activity.
Member banks were
expected to be discouraged from extending credit in forms not directly
related to the current output of goods and services in the economy by
the fact that loans on securities, real estate loans, and long-term
credits of any kind were not eligible paper.
In view of this dominant banking-school philosophy in the
original Federal Reserve law, it was natural and proper that
Regulation A, when first issued, should be mainly concerned with the
self-liquidating quality and maturity features of paper eligible for
discount at the Reserve Banks or as collateral for Reserve Bank
advances, and should rely primarily on a restatement of basic legal
authority stated in the Act.
Early in the System's history, the strict banking theory of
discount operations was compromised.
As a result of exigencies of
World War I finance, the discount of customers' paper collateraled
by Government securities was permitted as were also 15-day advances
to member banks on Government securities.
About this time, acceptances
drawn to create dollar exchange (finance paper) were made eligible.
Again, as a result of postwar agricultural crisis, agricultural paper
FR-CONFIDENTIAL
-
16
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of a maturity outside a strict banking principle range was more
freely admitted to eligibility.*
During the Twenties, member banks appeared to feel that
their holdings of eligible paper and of Government securities were
adequate.
They were not discouraged from allowing an unusual growth
of credit types at variance with self-liquidating banking doctrine by
the fact that these assets were not eligible for discount.
It was
also demonstrated in this period that banks would borrow in the most
convenient manner, with the result that a large proportion of the
borrowing was in the form of 15-day advances against Government
securities and in the form of advances against eligible paper.
Discount of eligible paper, when used, reflected mainly borrowing
for periods longer than customary for advances.
Altogether, the experience of the Twenties showed that
there is little relation between the character of paper discounted
and the use to which banks put the proceeds, and further that little
regulative influence could be exerted over member bank lending
policies by limiting to eligible paper their access to Reserve Bank
credit.
Although eligibility imparted some preferential status to
the kinds of paper covered, it did not restrict member bank acquisi
tion of other kinds as long as banks considered their liquidity and
secondary reserve positions to be adequate for operating needs.
*The maximum discount period of 90 days permitted by the original
Act for eligible commercial paper was thought to conform roughly
with the average production cycle of commerce and industry.
Agricultural paper maturing in not more than six months was initially
eligible for discount in limited amount, and presumably the adoption
of a nine month maximum period on agricultural paper in 1923 was to
extend the principle of conformity of eligibility to the production
cycle to such paper.
FR-CONFIDENTIAL
- 17 With banking crisis and severe economic recession in the
early Thirties, needs of individual banks for access to Reserve Bank
lending facilities became large relative to their holdings of
eligible paper and a lack of such paper became a handicap--even a
solvency threat--to individual banks faced with emergency reserve
drains.
Also, the inadequate amount of eligible paper actually
offered for discount by member banks having a supply hampered the
Federal Reserve in meeting the currency as well as the reserve needs
of the country.
This experience proved that the formalistic eligibility
standards established up to that time could be seriously detrimental
to the performance of necessary banking and reserve banking functions
in a period of severe economic contraction.
An increasing number of
banking students contended that the ultimate quality or soundness of
paper held by member banks should be the test of discountability at
Reserve Banks rather than eligibility under mechanical rules.
Thus the eligibility basis for operation of the discount
mechanism proved unsatisfactory in two decades of experience under
varying conditions and this experience set the stage for what amounted
to an abandonment of the banking principle in discount operations and
in the collateral requirements for Federal Reserve notes.
Congress
in 1932 amended the Federal Reserve law to reflect a change in its
intention as to the character of assets that may be used as a basis
for credit extension by the Reserve Banks.
Congress gave to the
Federal Reserve System temporary authority in exceptional and exigent
circumstances to make advances to member banks "secured to the
FR -C ONF IDENTICAL
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satisfaction" of the Reserve Banks and also authority for the
Reserve Banks to collateral their note issues by Government securi
ties as veil as by eligible paper or gold for the amount of cover
in excess of the minimum gold reserve requirement.
These temporary
authorities were subsequently extended and later were made permanent
amendments to the Federal Acts without limitation as to use.
Concerning the Reserve Bank authority to extend advances
secured to their satisfaction, the House Banking and Currency Committee
in recommending in
1935
its permanent enactment reported:
"This amendment, by removing many of the technical
restrictions of the present law, will enable the Federal
Reserve Banks to render better service to their member
banks in times of need. This will not only make member
ship in the Federal Reserve System much more attractive
but will encourage the member banks to invest their
savings deposits, which are essentially capital funds,
in longer-term loans, a course that would greatly facili
tate business recovery.
"This amendment will also make it possible for banks,
without relaxing prudence or care, to meet local needs
both for short-tire and for long-time funds, and to be
assured that in case of need they can obtain advances
from the Reserve banks on the basis of all their sound
assets, regardless of their form or of the nature of the
collateral. Soundness of assets (a term which is here
for the first time introduced into the Federal Reserve Act)
is a greater safeguard to the banks than short maturity of
loons or the particular form of the underlying transaction."
(House Report 742, 74th Cong.)
Congress in 1933 widened the breach with the banking principle
of reserve banking by amending paragraph 8, Section 4, of the Federal
Reserve Act to make each Reserve Bank responsible for taking into account
in lending whether borrowing banks were making undue speculative use of
bank credit or employing bank credit for any other purpose inconsistent
with the maintenance of sound credit conditions.
This action recognized
FR-CONFIDENTIAL
- 19 that eligibility rules could not assure that member bank loan and
investment activities would be confined to channels consistent with
stable economic development, that Federal Reserve responsibility for
the soundness of credit conditions does not end with control of its
own portfolio, and that the tendering of acceptable security by a
member bank is not a sufficient basis for the extension of Federal
Reserve credit.
By this amendment, together with amendments
authorizing loans secured to the satisfaction of any Reserve Bank
and freeing the note circulation of its tie with eligible paper, the
Federal Reserve was given more comprehensive discretionary power to
regulate the flow of credit and money and a responsibility for formu
lating and stating principles to govern access to its discount windows.
The revision of Regulation A in 1937 had the objective of
giving administrative recognition to the supersession of puristic
banking-school doctrine as the underlying principle of discount
operations in Federal Reserve law.
It accomplished this end by: (a)
incorporating a preface of general principles which paraphrased
paragraph 8, Section U of the Act, referred to above, and stated that
the guiding aim of discount policy was advancement of the public
interest; and (b) aligning the various eligibility and advances pro
visions to the statutory amendments of the
1930's
as then interpreted.
The new version of the Regulation, in addition, included three
provisions further underscoring departure from earlier discount theory.
It made eligible domestic finance paper, thus removing an ineligibility
that hod ruled for nearly two decades.
Second, it provided limitations
on the extent to which Reserve Banks, in view of their public
FR-CONFIDENTIAL
- 20 responsibilities, might require additional collateral for their own
protection in extending credit accommodations.
Third, it set forth
in an appendix recommended minimum standards to be observed by member
banks in extending real estate loans or acquiring instalment loan
paper, with a view to making such assets acceptable as the basis for
Reserve Bank advances under Section 10(b) of the Federal Reserve Act.
But, as noted earlier, the revised Regulation A gave the
impression of continuing to accent the legal eligibility of the paper
offered for discount rather than the appropriateness of the borrowing
as the mainstay of Reserve Bank lending.
by several features of the revision.
This impression was conveyed
The space devoted to legal
eligibility features continued relatively large.
A hangover influence
of the eligibility principle was reflected in an enumeration of pre
ferred classes of bank assets as collateral for borrowing secured to
the satisfaction of the Reserve Banks under Section 10(b) of the
Federal Reserve Act.
Ambiguity of the amended Federal Reserve Act with
respect to the permissible maximum maturity on advances secured by
Government obligations was carried over into the regulation, with the
result that character of the paper rather than nature and appropriate
ness of the borrowing seemed to be highlighted as the maturity guide
for Reserve Bank advances against Government securities.*
*The 1937 revision retained in the text the requirement for a maximum
15 -day maturity on such advances but added a footnote stating that
under paragraph 13, Section 13 of the Federal Reserve Act advances
might have a maturity of 90 days. In 19^2, the regulation was amended
to substitute in the main text a permissible maximum maturity of 90
days, with a footnote explanation of the technical reasons therefor,
apparently to put the maximum maturity in line with that on other
eligible paper.
FR-CONFIDENTIAL
- 21 From the mid-Thirties on until 1951> only nominal use was
made "by member banks of the Federal Reserve discount facility so that
there was little occasion for special System interest in the substance
of its discount regulation.
Such discounting as was done was primarily
by short-maturity advances collateraled by Government securities.
This absence of member bank borrowing need for almost two
decades reflected in the first instance the impact of System open
market purchases to relieve banking crisis in the early Thirties,
secondly, the large mid-depression influx of gold, and later during
the war and postwar periods Federal Reserve operations in support of
Government security prices.
In consequence of Government financing
of economic recovery and then of war, banks over much of this period
experienced an appreciable rise in the proportion of their assets in
the form of Government security holdings.
Even though this proportion
declined somewhat after the war, it still remained at approximately
^5 per cent at the point of post-Korea inflationary crisis when the
System discontinued support operations in the Government securities
market.
In the inflationary conditions then obtaining, when Federal
Reserve policy became directed at reducing spending pressures in the
economy by limiting the availability of Federal Reserve credit, member
bank borrowing rose, first gradually and then in 1952 abruptly.
This
borrowing was again primarily on member bank notes collateraled by
Government securities, clearly the most convenient form of borrowing
under the circumstances.
FR-CONFIDEHTIAL
- 22 In part the rapid rise in borrowing during 1952 was a direct
effect of restrictive credit influence exerted by the System.
But it
also represented borrowing by some member banks to avoid excess profits
taxes, by others to profit from differentials between prevailing dis
count rates and market yields that developed under the tightening credit
market conditions, and by still others to supplement operating resources
in order to accommodate the active credit demands being generated by
inflationary trends.
These developments in particular brought under
discussion within the System the whole question of the philosophy and
effectiveness of its existing discount mechanism.
Essential Content of a Revised Regulation A .--One result of
this recent discussion was to put in sharp focus the need for the
System to develop a set of principles and standards to govern lending
to member banks now that borrowing so largely takes the form of advances
on Government securities.
It is important to meet this challenge, the
Committee feels, if the System is to function under a discount philosophy
suited to the operating needs of individual member banks as well as to
the requirements of law and to over-all monetary policy directed at
economic stability and growth.
Absence today of such a philosophy has undesirable results.
It leaves the System exposed to possible criticism for not giving more
definite and precise regulative expression to the standards which it
believes should govern use of the discount facility.
Member banks are
left uncertain as to their privileges and obligations in resort to the
discount facility.
The tradition against large and continuous borrowing,
FR-CONFIDENTIAL
- 23 being without adequate regulative support, is subject to the risk of
weakening in periods of credit tightness, thereby adding to the burdens
which other instruments of Federal Reserve action must bear and retarding
the attainment of general policy objectives.
Lack of a modernized
System discount philosophy, finally, is a factor fostering undesirable
regional differences in discount practice.
In the light of the System's entire experience with the dis
count mechanism, the Committee has given extensive thought to the
substance of a revised Regulation A appropriate to present and future
circumstances, in so far as future needs may be foreseen.
It appears
to the Committee that a revised Regulation A, designed to meet presentday banking and monetary requirements should:
(a)
Recognize that advances on Government securities
rather than discounts of other paper are the
customary basis for discount credit;
(b)
Explain briefly the broad purpose of the Federal
Reserve System and make plain the relationship of
the Reserve Bank lending facility to other System
means of providing or absorbing reserve funds;
(c)
Emphasize that borrowing is a privilege and not an
unqualified right of membership;
(d)
Contain a statement of general principles to guide
Reserve Banks in lending and member banks in Reserve
Bank borrowing;
(e)
Make clear that, in extending credit to member banks,
the Reserve Banks are obligated to take into account
all of the circumstances surrounding the loan, that
is to say, the appropriateness of the loan itself and
not primarily the nature of the paper securing it;
(f)
Differentiate sharply between principles applicable
to ordinary discounting and those applicable to
emergency situations;
(g)
Give assurance to banks of the generous availability
of discount credit in cases of emergency;
FR-CONFIDENTIAL
-
2b
-
(h)
Express strongly the limitation of ordinary use of
Reserve Bank discount facilities to short maturities,
thus facilitating, when desirable, a discount rate
differential by maturity of borrowing (e.g., between
15-<3ay and 90-day advances with a higher discount
rate applicable to advances in excess of 15 days);
(i)
Distinguish clearly between the availability of the
discount facility to member banks and the circum
stances under which it will be available to nonmember
banks, who have chosen not to accept the responsibili
ties and privileges of membership; and
(j)
Be streamlined as to technical features, with restate
ment of only essential statutory substance and with
elimination of items clearly obsolete.
Guiding Principles for Reserve Bank Lending and Member Bank
Borrowing.--The Committee believes that a foundation for needed
principles of guidance for Reserve Bank lending and member bank borrow
ing may be found in the present Federal Reserve Act, interpretations of
the Act with respect to discounting made by the Board of Governors over
the years, and the experience of the System with the discount mechanism
over four decades of operation.
On the basis of its studies, the Com
mittee offers eight guiding principles for System consideration and
possible incorporation in a revised regulation.
These principles, which
are closely interrelated, are designed to give clear and full expression
to the discount obligations of the Reserve Banks as they are stated in,
or implied by, present law.
In advancing these principles, the Committee wants to emphasize
that it is aware that exceptional situations, particularly smaller bank
situations, will require application of the principles in accordance
with a rule of reason and on the basis of the best administrative judg
ment of the Reserve Bank officers concerned.
The principles are
FR-CONFIDENTIAL
- 25 intended to be general guides and standards and not precise adminis
trative instructions inflexibly applicable to all cases.
The eight principles, with accompanying Committee comment on
each of them, are stated below:
"(l)
Due regard must be given to the effect of any extension
of credit upon the maintenance of sound credit condi
tions, both as to individual institutions and as to the
economy generally. Accordingly, consideration should
be given to the effect that the granting or withholding
of credit accommodations may have upon the applicant
member bank, its depositors, and the community and its
credit needs, and whether the member bank is conducting
its operations in a manner consistent with sound credit
conditions."
Comment:
"(2)
This general principle has the object of making
explicit the meaning of the statutory phrase
"maintenance of sound credit conditions."
Federal Reserve credit should normally be extended for
short periods to meet temporary credit needs of member
banks. (For example, extension of Federal Reserve credit
is appropriate in order to enable a member bank to adjust
its asset position because of such developments as a
temporary loss of deposits or to assist a member bank in
meeting requirements for seasonal credit which cannot
reasonably be anticipated and met by use of the member
bank's own resources.)"
Comment:
This principle underscores the short-term nature
of ordinary member bank use of the discount
facility. The limitation of central bank credit
to short maturities is a recognized principle of
central banking. The original Federal Reserve
Act emphasized short-term maturities but in rela
tion to the self-liquidating character of the
paper offered for discount. Now that the selfliquidating idea is no longer the central precept
in Federal Reserve law and discount philosophy,
it seems desirable to make plain that the System
accepts the short-term maturity principle as sound
by expressing it directly and prominently in
regulation.
FR-CONFIDENTIAL
- 26 System experience shows that a 15-day maturity is usually
adequate for meeting temporary adjustments in member bank
positions. It is the maximum provided in the law for
advances to member banks on Government securities, except
for the special authority applying to any individual,
partnership, or corporation which would seem to contemplate
unusual and exigent circumstances for borrowing.
Accordingly, in addition to a definite statement of adherence
to the short-term maturity principle, the Committee suggests
emphasis on 15 days as the usual maximum maturity for tem
porary borrowing at various points in a revised regulation.
The Committee feels that a standard adherence by the Reserve
Banks to a 15-day maximum maturity for temporary borrowing
would support the tradition against continuous member bank
indebtedness by placing squarely on individual banks two
essential responsibilities: to keep liquid; and to keep
assets so distributed as to enable them to meet out of their
own resources such drains of funds as are normal to their
banking business.
If the member banks generally meet their normal operating
responsibilities, use of the System discount facility would
ordinarily be limited and would increase appreciably at
times only in response to System operations directed at
credit restraint. With member banks generally confining
their borrowing to temporary needs, tightening monetary
pressures, which expand member bank indebtedness to Re
serve Banks, would be reflected promptly in restrictive
lending and investing policies on the part of individual
banks in order to repay debt. Such tightening monetary
pressures would also be reflected in indebtedness of an
increasing number of member banks, a development which
would be salutary under the circumstances as a means of
spreading the restrictive influence and of communicating
the fact of credit tightness throughout the market for
bank credit.
Special attention is called to the reference to borrowing
for seasonal purposes because the Committee has found
widely differing views within the System as to the nature
of the seasonal circumstances that would justify any ex
tended member bank borrowing.
It appears to the Committee
that a limitation of Reserve Bank credit extensions for
seasonal requirements to those "which cannot reasonably be
anticipated and met by the use of the member bank's own
resources" is a desirable safeguard for preventing undue
reliance on use of Federal Reserve credit for seasonal
purposes. Also, it is an essential step in keeping Federal
Reserve credit extension through the discount window
FR-CONFIDENTIAL
- 2? effectively dovetailed with provision of seasonal credit
through open market operations.
An extended discussion of the use of the discount facility
for meeting the seasonal needs of member banks for reserve
funds is contained in Appendix B of this report. The dis
cussion recognizes that there will be extraordinary
seasonal cases, most likely smaller bank situations, which
will require discount acceptance on the basis of a reason
able evaluation by Reserve Bank officials of the special
considerations giving rise to the borrowing need.
"(3)
In order to enable a member bank to meet unusual and exigent
situations, Federal Reserve credit should be extended for as
long a period as may be deemed necessary whether such situa
tions may result from a national economic emergency, or from
exigent regional or local conditions, or, in certain situa
tions, from an emergency involving only the particular member
bank."
Comment; This principle has the aim of assuring member banks
that, to meet situations arising from emergencies,
Reserve Bank credit is to be freely and liberally
available for as long periods as circumstances may
require. While it is not the function of the Reserve
Banks to underwrite the solvency of their member banks,
it is their function, in the Committee's judgment, to
help member banks in emergencies to avoid insolvency
from lack of liquidity. This is the long-accredited
"lender of last resort" principle of central banking.
"(U)
While unusual and exigent circumstances or special local
economic needs may justify continuous borrowing by a member
bank over a considerable period of time, under ordinary con
ditions continuous use of Federal Reserve credit by a member
bank so as in effect to increase its resources, whether by
long-term borrowing or by frequent short-term borrowing, would
not be an appropriate use of Federal Reserve credit."
Comment;
if there is any clear lesson out of the bank failure
experience of the first two decades of Federal Reserve
operation, it is that it is unsound for any member
bank to so use Reserve Bank credit as to increase in
effect its own resources. Banking as a financial
business operates with a thin margin of capital, and
any bank which substantially and continuously relies
on funds in a creditor position ahead of those deposited
with it, both endangers its depositors' position and
incurs additional risks of insolvency. Since the
Twenties, the capital margin of commercial banks gen
erally has fallen appreciably further. In view of the
FR-CONFIDENTIAL
- 28 statutory responsibility of the Federal Reserve for
maintaining sound credit conditions, the Committee
believes that the System must take every precaution to
avoid contributing through its discount operations to
unsound individual banking situations.
The Committee is aware that, since the early Twenties,
the System's continuous borrowing problem has been
chiefly one of a relatively small number of aggressive
banks taking advantage of every opportunity, including
that of Reserve Bank borrowing, for adding to their re
sources and profits. Definition of continuous borrowing
in a way that will exclude in advance discounts to
supplement a bank's operating resources is admittedly
difficult. But it would seem to the Committee that the
number of discount cases raising a continuous borrowing
question would be minimized if the System expresses
clear-cut regulative disapproval of such borrowing from
the Reserve Banks except in emergency circumstances.
Identification of discounts presenting a continuous
borrowing aspect will be facilitated by the development
of objective standards for defining and identifying such
instances. Appendix C considers the problem of developing
appropriate standards for determining continuous borrowing
cases, and emphasizes that the standards arrived at must
have a quality of reasonableness derived from actual discount
experience.
A practical issue in this connection is whether continuous
borrowing is to be defined in terms of the number of
successive reserve periods in which an individual member
bank borrows as well as in terms of the number of consecu
tive days a member bank remains in debt. The Committee
feels that both types of discount use are to be classified
as continuous borrowing. Borrowing for one or a few days
in successive reserve periods as an offset to recurring
reserve deficiencies serves to supplement the member bank's
own resources as if it had borrowed a smaller amount continu
ously over the entire period. Further discussion of this
issue is provided in Appendix C.
"(5)
In determining whether to grant or refuse credit to any member
bank, the Federal Reserve Banks are required by the law to con
sider the general character and amount of the loans and invest
ments of the member bank and whether the bank is extending an
undue amount of credit for speculative purposes in securities,
real estate, or commodities."
FR-CONFIDENTTAL
-
29
-
Comment: While this principle simply paraphrases the law
with respect to consideration of the general
financial position of the borrowing bank and to
undue extension of its credit for speculative
purposes, its separate statement has a further
purpose. It serves to emphasize that it is
primarily the acceptability of the loan in terms
of the general banking use made of proceeds by
the discounting bank and only secondarily the
eligibility of the paper offered for discount
which is the statutory and regulative basis of
Reserve Bank credit extension.
"(6)
Federal Reserve credit should not be extended where it
appears that the member bank's principal purpose is to
profit from rate differentials or to obtain a tax advantage."
Comment: The Committee is cognizant of the fact that it may
be administratively difficult to determine in all
cases whether Federal Reserve credit is being used
primarily for the purpose of profiting from rate
differentials. At several of the Reserve Banks,
however, procedures have been worked out for appraising
a member bank's motives, especially where that bank is
more than a very temporary borrower, which have re
assured the Committee that the problem can be handled
satisfactorily. The Committee feels that it is impor
tant to express directly the view that Federal Reserve
credit is not to be used to avoid taxation, such as
excess profits taxes.
"(7 )
The law permits only such extensions of Federal Reserve credit
as may be 'reasonably and safely made'; and the acceptability
of paper offered for rediscount or as collateral for advances
must be determined in the best judgment of the Federal Reserve
Bank in accordance with the provisions and objectives of the
Federal Reserve Act and this Regulation."
Comment: V.'hile "reasonableness" and "safety" in terms of accep
tability of the paper offered as collateral or for
rediscount is a consideration in discount operations, the
range of judgment encompassed by these words is to be
set by the full substance and purpose of law and regula
tion.
FR-CONFIDENTIAL
- 30 "(8)
The board of directors of each Federal Reserve Bank is
required by lav; to administer the affairs of such Bank
fairly and impartially and without discrimination in
favor of or against any member bank or banks. Accord
ingly, in passing upon a member bank's request for
credit, due regard must be given to the claims and
demands of other member banks."
Comment:
This principle calls attention to the duty of
the Reserve Banks to apply uniform credit
standards in extending credit to all of its
member banks and generally to maintain credit
standards which are in line with those being
applied by other Reserve Banks. It seems
reasonable that a member bank should not be
able to obtain credit from its Reserve Bank
on terms and conditions that are not generally
available to member banks and that could not
be made available to any of them without working
against the System's general credit policy.
Suggested Revision of Regulation A .--In the light of its
findings and its consideration of the appropriate scope of a discount
regulation, the Committee suggests a revision of Regulation A that
would accomplish the following four objectives:
(1)
Set forth general guides and standards as to the
proper use of the discount facility that would
reflect a positive discount philosophy based on
System experience and the banking theory on which
existing law now rests;
(2)
Reenforce the tradition against large and continuous
reliance by member banks on the discount facility
without unduly limiting temporary access to discount
ing and assuring emergency access to it;
(3)
Be consistent with the present and prospective monetary
setting; and
(b)
Allow adequate leeway for necessary Reserve Bank dis
cretion in dealing with individual borrowing situations.
The Committee has requested the Board's staff to prepare a suggested
draft of a revised regulation that would incorporate the eight guiding
principles discussed above and otherwise conform to the Committee's
FR-CONFIDENTIAL
- 31 general ideas.
Such a draft, preceded by a brief review of major
substantive and technical changes included, is presented in Appendix D
of this report.
The Committee refers this draft to System officials
for their study and consideration.
A dministration of Discount Policy
Review of System administration of its discount function in
connection with the Committee's work has shown to its satisfaction
that at each Reserve Bank this function is competently and responsibly
handlpd.
Such problems or deficiencies as are encountered in discount
administration do not seem to be the result of inappropriate implemen
tation of the present Regulation A.
They would appear rather to
reflect a System lag in adopting an informative and definite statement
of principles regarding the appropriate availability of discount credit
under the Federal Reserve Act as amended and in the light of present-day
banking needs.
It seems to the Committee that revision of Regulation A along
lines outlined in this report would strengthen the System framework for
administering discount policy and would facilitate as much standardiza
tion of discount practice among the twelve Federal Reserve districts as
may be desirable.
In taking into account the eight guiding principles
which the Committee recommends for a revised regulation, each Reserve
Bank would be evaluating the acceptability of the individual member
bank borrowing in terms of common standards.
This responsibility on the part of the Reserve Banks to apply
common standards as to the eligibility of individual member bank loans,
the Committee recognizes, would entail more burdens in discount review
FR-CONFIDENTIAL
- 32 than does consideration primarily of acceptability of offered paper.
The directors of each Reserve Bank might wish to assign the problem
of adapting existing procedures and practices to the requirements of
a revised Regulation A to the Bank's discount committee, usually com
posed of its senior officers.
The directors might also wish to
delegate to the discount committee the task of continuing systematic
review and oversight of the Banks' discount operations in the light
of a new Regulation A.
For reasons set forth in the preface to this report, the
Committee contemplates that the discount instrument under foreseeable
circumstances will function in general credit policy coordinately with
open market operations and changes in reserve requirements.
To insure
that discount operations under a revised Regulation A would be adminis
tered with a full understanding of the current credit situation, every
care sho\ild be taken to keep the chief discount officer of each Reserve
Bank briefed currently on System credit policy.
For this purpose, the
Committee would urge that this officer should regularly participate in
major staff and director discussions of general policy objectives and
methods.
While the Committee contemplates a System discount activity
varying in accordance with general credit policy, it wishes, to stress
particularly that it is not recommending a set of discount principles
that would in themselves flex with such policy by administrative dis
cretion.
The principles for discounting which it advances for
consideration would be applicable under all conditions of general
credit policy.
To the extent that exceptions (other than for very
special situations)are required to a general practice of discounts
FR-CONFIBEHTIAL
- 33 only for temporary purposes, such exceptions would be made on the
grounds of unusual and exigent circumstances arising out of national,
regional, and local emergencies, or emergencies involving an individual
member bank.
Primarily, this emergency discount principle asserts that
each Reserve Bank is under obligation to prevent member bank insolvency
arising purely from the lack of liquidity in an emergency; it is not
contemplated by the Committee that the principle would provide a special
category into which, and out of which, discount cases would be moved as
general credit policy is tight or easy.
One aspect of discount administration under a revised
Regulation A would be more attention to the purposes of member bank bor
rowing.
It would seem appropriate for the Reserve Banks on discount
application to look into the chief reason for borrowing need (i.e., "loan
increase," "deposit decline," or "securities purchases") so that member
banks would be aware that the use of borrowed reserve funds is a con
sideration in making advances.
Each Reserve Bank would need, of course, to engage in analyses
of changes in the balance sheet items of its member banks and of the
seasonal changes in their loans and deposits so that it would be in a
position to make an independent, objective judgment of the factors
giving rise to borrowing.
The accounting and statistical methods
applicable to such appraisal are now well known and their adaptation
by Reserve Bank discount and research departments, working in collabora
tion, would not present too difficult
technical problems.
FR-CONFIDENTIAL
- 3^+ The Committee recognizes that promptness of discount action
would require reliance in the first instance on a member bank's own
statement of purpose, but believes that the objective procedures
proposed above, even though applied in many instances subsequent to
actual borrowing, would facilitate administration where findings
indicated that developments other than those stated were responsible
in significant degree for the borrowing.
The Committee also recognizes that the information needed
for such objective analyses would not be uniformly available at all
Reserve Banks unless special reports were designed to obtain it.
The
suggested draft revision of Regulation A, appended to this report,
includes a more specific authority for each Reserve Bank to require
from any of its member banks such information as may be needed to
determine whether any requested discount accommodation would be in
consistent with the Committee's guiding principles.
While some incompatible interdistrict differences in discount
methods may now exist, the Committee is persuaded that differences not
supported by variations in regional conditions and needs would be largely
eliminated by a Regulation A reoriented along the lines suggested.
As
a means of furthering this development, it would seem desirable that
there be occasional meetings of System discount officers, with perhaps
the Directors of the Board's Divisions of Bank Operations and Examina
tions also included.
of common problems.
Such meetings would serve as a forum for discussion
FR-CONFIDENTIAL
•• 35 The Committee is aware that the theor;/- is still held by
some member banks that a Reserve Bank has no right to refuse accommo
dation to an applying bank if it offers acceptable security.
Although
the ghost of this theory was laid legislatively by the enactment in
1933 of an amended paragraph 8, Section
k,
of the Federal Reserve Act,
it would appear desirable for the Reserve Banks to continue in their
bank relations programs to refute the theory.
Accordingly, each Reserve
Bank might take occasion at appropriate times to inform their members
as to proper and improper uses of Federal Reserve credit.
A revised
Regulation A, making clear the standards of proper use of the discount
facility would be an aid to these programs.
Some Objections to the Suggested
Revision of Regulation A
The Committee is aware that various objections may be raised
to a revised discount regulation which would place primary emphasis on
the appropriateness of the borrowing and only secondary emphasis on the
character of the paper offered for discount.
Some objections would
question the discount philosophy which underlies the suggested revision
of the regulation; others might be based on practical obstacles to
applying a revised regulation based on this philosophy.
Since it is
important that the principal suggestions made in this report be
assessed in the light of possible objections to them, the Committee in
this section undertakes to review the objections which have come to its
attention in its own discussions.
FR-CONFIDENTIAL
- 36 Substitution of Regulation for Tradition Against
Discounting.--A key premise underlying the Committee's suggested
revision of Regulation A is that explicit standards for use of the
discount facility would reenforce the member bank tradition against
borrowing by providing a frame of reference for evaluating undue
reliance on discounting by aggressive member banks.
It may be
objected, of course, that an effect of the revision might be to
substitute regulation for tradition.
If the regulation were to be
revised along lines indicated, and especially if the discount
standards advanced should come to be applied too inflexibly by Reserve
Banks, singly or jointly, then regulation could tend increasingly to
Bupplant tradition.
A possible undesirable result might be that
member banks would become more and more concerned with narrow com
pliance to regulation and less and less concerned with adherence to
sound banking principles as such.
If there is in fact a well established tradition against
borrowing, moreover, it may be said that the tradition itself can be
enough of a reliance for the System against undue member bank use of
the discount facility.
Assuming that, in the case of some banks, the
tradition could be strengthened, such strengthening may also be
effected under the present regulation by timely and appropriate
educational activities on the part of the Reserve Banks.
System's Discount Mechanism Problem Mainly One of
Insistent Borrowers.--The System's discount mechanism problem over
the years, it can be claimed, has been chiefly one of dealing with
aggressive banks.
Since the post-World War I experience, the problem
FR-CONFIDENTIAL
- 27 has teen mitigated by a strengthening of the tradition against
borrowing and by System experience in dealing with problem cases.
This objection would point out that, during the 1952-53 experience,
when there were both excess profits tax and interest rate incentives
to member bank discounting, only a relatively small number of banks
presented problems, and comparatively few banks a serious continuous
indebtedness problem.
After some intra-System discussion of applicable
standards the exceptional cases were identified.
When the inappropri
ateness of their borrowing practices was called to their attention,
the banks in question for the most part were prepared to take correc
tive action without further pressure.
Only a very few banks turned
out to be insistent borrowers, and, in each District,they were dealt
with on a case-by-case basis.
While the handling of these cases may have been less uniform
as between Reserve Bank Districts than might be desirable ideally, it
may be argued that such unevenness of discount practice not justified
by economic differences between the Districts may be readily corrected
by a more active and systematic exchange of information on discount
procedures among the Reserve Banks.
This less formalized approach toward making the System's
discount mechanism more effective might give rise, admittedly, to
some leakage of reserve funds as a result of unavoidable delays in
recognizing problem borrowers and in taking action to deal with them.
Tt might be said, however, that if the System were alert to such
leakage of reserve funds, it could offset the leakage by other actions,
including open market operations as well as use of the discount rate.
FR-CONFIDERTIAL
- 38 Those attracted by this objection to a revised discount
regulation as a means of dealing with aggressive borrowers might
further say that adoption of explicit discount standards, by tight
ening the discount mechanism, would be an undesirable substitute for
reliance on the discount rate in curbing excessive discount volume.
The point advanced here is that raising the discount rate to an
effective level when appropriate to System credit policy is the
established reserve banking means of restraining undue member bank
use of the discount facility and, hence, the means with which the
credit markets have a familiarity.
Lessened reliance on the discount
rate, consequently, might remove some of its significance as an
objective index of credit conditions.
Adjustment Problem of Money Market Banks.--The adjustment
problems of money market banks in periods of reserve pressure, it may
be objected, would be made unduly difficult by changes in Regulation A
and in administrative procedures to emphasize temporary borrowing and
include repetitive borrowing in successive reserve periods as con
tinuous borrowing.
Reserve pressures of the banking system typically
focus on money market banks, this objection goes, because other banks
in times of pressure tend to meet their reserve needs in part by
drawing on deposits with correspondent banks in financial centers and
in part by selling securities which tend to be purchased by customers
of money market banks.
Moreover, sales of securities in such conditions
by money market banks may result in a less than equivalent reserve gain,
since some securities sold may be purchased by their own customers.
FR-CONFIDENTIAL
- 39 In periods of credit tightness, it is consequently claimed, financial
center "banks unavoidably react to market pressure by repetitive bor
rowing from the Federal Reserve.
In assessing this objection, special recognition needs to be
given to the fact that one of the characteristics of money market banks,
and one to which adjustment in their lending and investing activities
is necessarily required, is that they are subject to extra heavy re
serve pressures at times of credit tightness and contrastingly
ease at times of general credit ease.
great
For this reason, they may be
expected to hold a large proportion of short-term readily marketable
assets with which to cushion the impact of changing market pressures.
If, as a result of a revised discount regulation, banks
generally come to consider both uninterrupted and repetitive borrowing
as inappropriate, then restrictive policy by the System would be more
promptly reflected in bank lending activity.
The restrictive effect
would occur before the build-up of discounting reached as large a volume
as it would need to if banks were more complacent borrowers.
Under
these conditions the System would normally have to make available through
other channels a lerger proportion of the reserves required by the banking
system.
Adverse Eank Relations Aspects of a Revised Regulation A .--The
suggested revision of Regulation A might accentuate the System's bank
relations problem.
Placing primary emphasis on the acceptability of
the borrowing, the argument would run, might give rise to undesirable
criticism of the System by member banks.
Banks might feel that every
time they applied for an advance, no matter how temporary the need,
FR-CONFIDENTIAL
- UO they would he subjected to special review and that they would be
subject to continuing administrative review until the advance was
repaid.
They might further feel that regulatory emphasis on short-
run borrowing might imply that any continued indebtedness occasioned
by deposit movements beyond their control would reflect on the sound
ness of their operations.
On the other hand, the suggested revision of the discount
regulation does little more than give interpretative expression to
provisions already in the law.
The majority of member banks are now
administering their affairs in line with the philosophy of the sug
gested revision.
These banks, therefore, might feel kindly rather
than antagonistic to a revision of the regulation that would help
bring less conservative banks into conformity.
Possible Reactions on Correspondent Banking.--A possible
effect of the revision of Regulation A herein outlined, it could be
claimed, would be to force increased dependence on correspondent
banking relations.
The argument would assert that such dependence
would result from greater willingness to borrow from correspondents
on the part both of banks that expected correspondent lending standards
to be easier than System standards and of those that were resentful of
System review of the appropriateness of their borrowing.
Thus member
banks would be encouraged to build up correspondent balances in times
of credit ease so as to be in line for such loans, and those banks that
succeeded in establishing strong correspondent banking relationships
would put themselves in an advantageous position.
FR-CONFIDENTIAL
- Ui Concerning this objection, two observations may be made.
First, there is nothing inherently wrong with greater dependence on
correspondent bonking relationships, even if such dependence results
from regulative changes.
The second point is that lending by corres
pondent banks cannot result in any net release to the banking system
of reserve funds and consequently in no general increase in resources
available for expansion of the money supply.
To the extent that com
mercial banks make loans to correspondent banks, they must curtail
loans to their nonbank customers.*
Lending by the Reserve Banks, on
the other hand, does involve a release of reserve funds.
The Avoidance Problem that Might Result from a Revised
Regulation A .--A problem which might become important if Regulation A
were revised as suggested, it may be alleged, would be the possible
resulting rewards to any member bank able to avoid its limiting pro
visions, especially if the discount standards adopted had the effect
in practice of subordinating discount rate flexibility.
While the
revised discount regulation would be in general language, that language
would express a positive discount philosophy and presumably the Reserve
Bonks, acting individually or jointly, would give the stated discount
standards an even more specific content in actual administration.
The
hazard for System operations, the objection would contend, would be that
the administrative rules of the Reserve Banks might become too mechanical.
*Such loans might transfer reserves from banks with higher reserve
requirements to banks with lower reserve requirements. Since deposits
resulting from bank lending activities rarely remain in the lending
bank, however, there is no reason a priori to expect interbank loans
to result in greater expansionary possibilities on the basis of a given
amount of reserves.
FR-COHFIDENTIAL
- 1*2 If this should happen, then some member banks might manage their
discounting needs so as to circumvent the rules, and the benefits
for the System believed to result from a more positive discount
philosophy would fail to be realized.
Relation Between Regulation of Discounting
________and Discount Rate Policy__________
The Committee has yet to complete its study of considera
tions relevant to the appropriate level of the discount rate and of
criteria for guiding Reserve Bank changes in the rate.
It is clear,
however, that administration of discounting and of discount rate
policy are closely interrelated and that any change made in general
policy concerning one will also affect the other.
Accordingly, the
Committee feels that it is proper to include in its initial report
some tentative observations on the relation between the regulation
of discounting and discount rate policy.
A firm tradition against continuous borrowing, clear and
informative regulative standards as uo the appropriate conditions for
member bank borrowing, and a proper discount rate are each means of
keeping down member bank discounting and of helping to limit the supply
of reserves when credit demands are strong.
The greater the role
played by any one of them, the less need be the part played by the
others.
If member banks are reluctant by tradition and regulation to
borrow or, having borrowed, to remain long in debt, then increases in
market interest rates and restrictive availability of credit to bank
customers will result from the mere fact of indebtedness.
Therefore,
the level of the rate will assume less importance than if banks felt
free to borrow and to remain in debt in order to take advantage of
profit opportunities.
FR-CONFIDFNTIAL
- k3 If member banks generally felt free to borrow and remain in
debt when borrowing was profitable, the discount rate would need to be
adjusted frequently to keep it at a level equal to or not far below
short-term market rates in order to function as a primary deterrent to
discounting when the demand for credit is high.
If member banks
limited their ordinary discounting to meeting temporary needs pending
other adjustments, however, the sensitiveness of their borrowing to
the spread between the discount rate and market rates would be less
marked.
The need for frequent changes in the discount rate to keep
borrowing from appearing profitable, therefore, would be diminished.
This Is not to imply that, with a revised discount regulation,
changes in the discount rate would not continue to play a significant
role in general credit policy.
function.
They definitely would have an important
For one thing, changes in discount rates would continue to
serve as an objective indication to the business and financial community
of System credit policy.
For another, in periods of high demand for
credit and rising market and customer rates, increases in discount rates
would continue to be an essential protection to an effective mechanism.
Since there will always be banks aggressively alert to profit opportu
nities, the number of problem discount cases would naturally increase
if the discount rate were kept too low in relation to market and
customer rates.
Moreover, a rate increase could be helpful in checking
the willingness of banks to resort to temporary discounting.
It would
do this by raising the discount rate relative to market yields on
short-term securities, thus inducing some banks to liquidate assets
rather than to incur the cost of temporary borrowing.
FR-CONFIDEHTIAL
_ kl+ _
The discussion thus far has "been concerned primarily with
the effects of the suggested revision of Regulation A on the role
of the discount rate in periods of inflationary pressures when it
is necessary to restrict the supply of reserve funds.
The effect
in periods of declining credit demand, when System policy would
he directed toward cushioning credit contraction and encouraging
resumed expansion, need be touched on only briefly.
The role of
the discount rate as such in this kind of situation is more limited.
A low discount rate can serve as one indication of the System's
attitude toward credit conditions and of the type of general credit
and monetary policy that the System is following.
The role of the
rate as a cost of borrowed funds in such periods is minor, however.
On the basis of the System's varied experience in adapting to changing
credit conditions, it is generally agreed that banks should be largely
freed from indebtedness when the objective of System policy is to
cushion credit contraction and encourage resumed expansion.
Thus, the
suggested revision of Regulation A would have comparatively little
effect on the role of the discount rate in periods of declining credit
demands.
-CONFIDENTIAL
/
APPENDIX A
SYNOPSIS OF REFORTS BY FEDERAL RESERVE BANKS
ON THE OPERATIONS OF THE DISCOUNT FUNCTION*
This synopsis deals with the more important factors relating to
dig
count procedures reported by the Federal Reserve Banks in April and May
1953 when thi3 survey was conducted.
Reserve Bank Administration of the Discount Facility
Approval of Discounts.--Considerable variation exists among the
Re
seive Banks in the organization for approving discounts.
Most of the Banks
a distinction in the handling of applications considered "routine" and
tho
Se in which the circumstances surrounding the applications are "unusual".
Ro
thiform or clear-cut definition as to what constitutes "unusual" circumstances
vas .
Siven. It appears, however, that the bulk of the applications are considered
Routine".
Where an application is classified as routine, seven of the Reserve
B*hks stated that the officer or officers in charge of the discount function
he
cided to grant or refuse individual loan applications, subject to review of
action by the Discount Committee.
The officers in charge of the discount
ction at these banks are the First Vice President at Philadelphia; a vice
^sident at Boston, New York and Atlanta; a vice president and assistant vice
^ esident at St. Louis; and a vice president and assistant cashier at Minneapolis.
At Chi
c&go the loan officers (Vice President and Assistant Vice President) or
any
Member of the Discount Committee may pass on-applications.
ased on responses to the "Request for Information on Discount Procedures,"
tachments to letter Z-3715, dated April 29, 1953, to the Presidents of
Federal Reserve Banks.
pr-confidential
/
-
2
-
Most of the foregoing Banks stated that where the circumstances
Grounding the applications were "unusual" the decision concerning approval
Of
an application was referred to the Discount Committee.
At New York, where
President of the Bank is not a member of the Discount Committee, the
t8count Committee may in matters involving important policy discuss the subject
the President and the Officers' Council.
At Minneapolis applications
Pre8enting unusual features are reviewed by the Credit Committee, the President,
^ the Discount Committee.
At four other Reserve Banks the Discount Committee approves or dis
aPprovcs all individual applications for credit after the officer in charge of
tha dis
count function has submitted such applications with his recommendations.
e officers in charge of the discount function at these Banks are the Vice
e8ident in Cleveland, the Manager of the Discount and Credit Department at
JJ.
chttond, the First Vice President at Kansas City, and the Assistant Cashier
at Dallas.
The San Francisco Bank has no Discount Committee.
aPpl
lcation is approved or refused by three officers:
At this Bank each
the Assistant Cashier in
char
ge of the discount function and two other officers, one of whom is the First
Vi
President or the President.
The composition of the Discount Committee at the 11 Reserve Banks
vhich
sl s t 8
v
e
have such committees varies.
At seven of the Banks this Committee con-
°f the senior officers of the Bank with the addition, in the case of
Ranks, of the junior officer in charge of the discount department.
At
two
other Banks (Richmond and Kansas City) the Discount Committee includes, in
t°h to the senior officers, the Chairman of the Board of Directors.
At
the
Kew York Bank the Discount Committee consists of four vice presidents, the
/
^-CONFIDENTIAL
- 3 a&ager of the Discount and Credit Department and the First Vice President
cting as an ex-officio member.
At Minneapolis there are both a Credit Com-
^tee and a Discount Committee; the former, which acts in a similar capacity
the Discount Committee at other Reserve Banks, is made up of the First Vice
esident and tvo vice presidents, and the latter, which includes the Chairman
Vice Chairman of the Board of Directors and the President of the Bank, acts
individual applications only in extraordinary cases.
Participation by Boards of Directors in Discount Policy.--The Boards
directors of the Reserve Banks participate in the determination of general
c°Unt policy principally by reviewing and approving the detailed reports of
Moving by member banks submitted to them at their regular meetings. Some
Of +i
e Reserve Banks indicated that it was the practice of the Presidents to
CUss ^is.count policy from time to time with the Board of Directors and to
^aih their views on the subject.
Cleveland mentioned that the Board of
A c t o r s also participates in discount policy by prescribing loan values as
SUidi
es in considering applications for advances under Section 10b.
St Louis
ltd
lcated that the Board of Directors sets the amount which may be loaned on
Government and other Federal agency securities eligible as collateral
Regulation A.
The directors do not participate in the application of discount
Poi^p
y
a few
+
t0 individual situations at most Reserve Banks.
exceptions.
There are, however,
At three Reserve Banks the Chairman or Vice Chairman of
th.
Roard of Directors, or both, are members of the Discount Committee and
thi
8 connection pass on individual applications for credit.
At Philadel-
a]l reductions of indebtedness and refusals to extend credit are referred
to
Executive Committee of the Board of Directors and at Dallas all
8Pec
situations" are referred to this Committee.
PR-CONFIDENTIAL
-
k -
Current Discounting Practices
^Lfor Criteria Considered
All of the Reserve Banks indicated that they do not use any formal
°r mechanical standard in determining whether an application for credit should
granted or refused.
Current
practices are flexible and depend upon
analysis of the individual bank's situation in the light of its requirements,
needs of the community, and general economic conditions.
factors are considered in analyzing an application for credit:
Four basic
purpose, size,
Purity of the loan, and continuity of the applying bank's borrowing record,
differences in the weight attached to these factors would seem to be indicated
dy the various Reserve Banks.
1.
Purpose of borrowing.--All of the Reserve Banks indicated that
e purpose of the loan is the most important factor to be considered.
How-
6Veri in the situation that has prevailed for many years, when nearly all
applications for credit have been based on Government securities, there is
''•iPtle disposition to ask for information concerning the purpose of the loan
^dess one or more of the other three factors-~size, maturity, and continuity
°f borrowing--is considered "unusual."
There is substantial agreement that the following are inappropriate
Uses of Reserve Bank credit:
a.
Borrowing for speculative or other purposes inconsistent
with sound credit conditions.
b.
Borrowing primarily to reduce excess profits tax
liability.
c.
Unwarranted expansion of loan and investment portfolio.
d.
Borrowing solely to profit on the interest rate differ
ential.
PR-CONFIDENTIAL
- 5 Wide variations appear to exist among Reserve Banks in the impor
tance placed on these factors.
was very difficult to determine.
Nearly all Banks said that purpose of borrowing
In most cases the purpose of borrowing is
n°t clear-cut and frequently a combination of circumstances give rise to the
need for credit accommodation.
Differences among Reserve Banks were particularly marked with respect
to borrowing for excess profits tax purposes.
Most Banks apparently feel that
Unless the borrowing is primarily or solely for excess profits tax purposes, it
t0 not inappropriate, whereas other Banks appear to hold that any borrowing for
t ^ purposes is inappropriate.
Cleveland stated that four banks in its district
Were reported to be borrowing for excess profits tax purposes, but upon inves
tigation valid reasons for the borrowing were found.
Richmond indicated that
®anks suspected of borrowing for excess profits tax purposes were told that the
eserve Bank was not concerned about the legitimate use of the provisions of
Internal Revenue Act, but banks should not borrow to increase their capital
base.
On the other hand, Philadelphia cited the case of a bank which was
asbed to reduce its indebtedness because it appeared the bank had increased
its borrowing beyond seasonal requirements for tax purposes.
Minneapolis and
W s a s City also cited cases of banks which had been requested to reduce their
indebtedness because the credit was for excess profits tax purposes, and Dallas
indicated that some prospective borrowers had withdrawn their applications upon
^ing informed that borrowing for tax purposes was an inappropriate use of
^e<ieral Reserve credit.
^-CONFIDENTIAL
- 6 Only five of the Reserve Banks, Richmond, Chicago, St. Louis, Kansas
City> an^ San Francisco, expressed their views on the appropriate use of Reserve
^ank credit, and they agreed generally that the following would be considered
aPpropriate:
a.
Borrowing to supply the seasonal requirements of business
and agriculture.
b.
Borrowing to meet an individual bank's short-term need for
credit, such as an unexpected withdrawal of funds.
Chicago and New York implied that loans to money-market banks which
assist in creating a market for Government securities would be considered
aPpropriate.
2.
Size of loan.--Although the size of the loan is a basic factor
0nsi<iered by the Reserve Banks, there is no general agreement on the method
f determining how large a loan must be before it is considered questionable.
Mogt
is
o
the Banks implied that size of loan in relation to required reserves
considered but they gave no clear indication of the manner in which the
^tio
C*BCq
is used.
On the other hand, New York, Cleveland, Dallas, and San Fran-
consider size of borrowing in relation to capital and surplus more
8lShificant than borrowing in relation to required reserves.
gavp
Only Cleveland
aa example of what it considers a significant level of borrowing.
It
tated that a bank borrowing for the first time an amount equal to or greater
a its capital or surplus would be questioned concerning the circumstances
Sivittr,
rise to the borrowing.
3. Maturity of loan.--All of the Reserve Banks except Chicago inilic
ated that applications for 90-day loans were rare and that most applications
for _
C1>edit are for less than 15 days.
St. Louis and Dallas have recently
Polished the practice of making no advances in excess of 15 days, and Boston
is
how limiting borrowing to
30
days.
PR-CONFIDENTIAL
-■ 7 Nearly all of the Banks indicated that the circumstances surrounding
a Particular application should determine whether or not a
aPpropriate.
90-day
loan is
With the exception of Chicago the Banks stated that applications
for such loans have come principally from country banks in agricultural areas
*>0r the purpose of providing seasonal credit needs.
Several banks stated that
such cases they encouraged banks to borrow for shorter periods with the idea
that renewals would be granted if the situation warranted it.
In spite of the fact that they had had few applications for 90-day
■'■°ans, Philadelphia and Atlanta said they had no restrictions on maturity of
t°ans, and Philadelphia indicated that when they are requested to do so, they
®ake loans for the full 90 days.
between a bank's rediscounting
Boston indicated that it saw little difference
90-<lay
commercial paper and borrowing for
90
days
Government securities.
The Chicago Bank indicated that
k2
per cent of all member bank appli
cations for loans in its District in the first four months of 1953 had maturi^ es in excess of 15 days.
This Bank felt that
90-day
loans were inconsistent
borrowing for temporary periods and that the appropriate sections of
^e8ulation A should be revised to substitute a 15-day for the 90-day limitation.
1+.
Continuity of borrowing.--All of the Reserve Banks indicated that
c°htinuous borrowing is considered when passing on a loan application and that
It
j
fs an undesirable practice.
Nevertheless, there appears to be no uniform
c°hcept among Reserve Banks as to what constitutes continuous borrowing.
r
Philadelphia indicated that when a bank has borrowed continuously for
^ e e months it is put on a "watch list" and when it has borrowed continuously
f°r six months, the case is reviewed by the Discount Committee and the Board of
Sectors.
PR-CONFIDENTIAL
- 8 Minneapolis, Dallas, and San Francisco said they did not relate
borrowing to consecutive reserve computation periods, but in the case of
Minneapolis to banks borrowing "rather continuously," in the case of Dallas
to borrowing over an "extended" period of time, and at San Francisco to the
number of days in which a bank borrows during a month.
Chicago and St. Louis indicated that if the borrowing is for tempotary periods and for seasonal or local needs, it is not questioned.
Apparently none of the Reserve Banks classify a bank that borrows
a few days and is then out of debt for a few days, in the same statement
Week or the same reserve computation period, as a continuous borrower.
Nor
any Reserve Bank indicate that a bank which borrows an amount equal to a
Slibstantial proportion of its average required reserves on one day of each
serve computation period is, in effect, a continuous borrower.
^P l ication of Criteria to Individual Loans
Most of the Reserve Banks make a distinction in applying the fore£°ing criteria to individual loan applications depending on whether the applicution
cia8sed as (l) routine or (2) unusual.
While there is no uniform
clear-cut definition from Bank to Bank as to what constitutes the "routine"
* bhe "unusual" loan, there are some areas of agreement concerning these loans
^
in the methods of handling them.
1.
The routine loan.--Most banks would classify as routine a loan
^Plication which is secured by Government obligatiors and which, when examined
Vj-th respect to size, maturity, and continuity of borrowing, raises no doubt
C°hcerning the desirability of extending the credit.
Ordinarily no information
k e r n i n g purpose is obtained in the case of a routine loan, except at Dallas
purpose is specified on all loan applications.
PR-CONFIDENTIAL
- 9 In the present period, when borrowing is confined chiefly to notes
Becured by Government securities, it appears that the bulk of all loan appli
cations fall into the "routine" category.
In these cases the discount depart-
aent of the Reserve Bank determines whether the technical requirements for the
^■°an have been complied with, and the loan is then approved by the appropriate
Reserve Bank official.
2.
The unusual loan.--Loan applications would be classified as unus
most of the Reserve Banks if the borrowing was for an emergency, if the bortowing bank was already under surveillance, if the loan application was con
sidered questionable on the basis of size, maturity, or continuity of borrowing,
0l> if the purpose of the loan (where known) was believed to be inappropriate.
If the problems raised by the application can be resolved by the
Responsible Reserve Bank officials, the unusual loan is handled in one of two
vays;
a.
The loan is approved and it is then discussed with the officials
of the borrowing bank.
At that time the reason the loan is being questioned
is indicated, the purpose of the loan is ascertained, and a program to reduce
°R to pay off the loan is agreed upon; or
b.
The appropriate Reserve Bank officer discusses the application
credit with officials of the borrowing bank and obtains an adjustment in
0lle or more of the questionable terms and determines the purpose of borrowing
RRior to approving the loan.
These discussions have led to a withdrawal of
application in some cases.
On the other hand, serious problems which the responsible officer
ls unable to resolve, such as a possible denial of credit, are referred to a
ccmmittee of officers, the President, or to the Board of Directors for their
^commendation.
No actual denials were reported by the Reserve Banks.
It
PR-CONFIDENTIAL
10
aPpears that such loan applications would be granted and subsequently adjusted,
as indicated above, unless, on the basis of the bank's borrowing record, a
decision to deny credit had already been made.
Sources of Information
The information used by the Reserve Banks in appraising loan appli
cations is obtained from two general sources: (l) reports regularly submitted
member banks to the Reserve Banks, and (2) infonaation supplied by the bor
rowing bank in its application for credit, and, in certain cases, in conversa
tions with officials of the borrowing bank.
1.
Information obtained from reports of member banks.— All Reserve
®&nks use examination and call report data for obtaining a general picture of
the current condition and changes in assets and liabilities of borrowing banks.
These reports appear to be the principal source of information for keeping the
^eserve Banks informed as to whether undue use is being made of credit for
8Peculative or other purposes inconsistent with the maintenance of sound credit
conditions.
Those Reserve Banks which commented on the use of examination re-
£°rts and reports of condition indicated that the data contained in these
tePorts are studied and analyzed by those responsible for approving loan appliCaUons.
In all districts except San Francisco, the vice president in charge
of hank examinations also serves on the Discount Committee of the Bank.
The weekly condition report obtained from banks in leading cities
mentioned by Richmond, St. Louis, Kansas City, and San Francisco as an
a^itional source of information.
Only Kansas City indicated the manner in
vhich the report is used, and that is to furnish members of the Discount
°®imittee with reports of a summary nature concerning the principal banks in
fading cities of the district and to supply information as needed on in^ n d u a l borrowing banks.
fr-confidential
- 11 -
Current information as to required reserves is obtained from the
reports of deposits submitted regularly by member banks for reserve compu
tation purposes.
Reports made by representatives of the public relations and bank
examination departments incorporating information obtained in the course of
regular visits to State member banks were listed as a source of information
by New York, Philadelphia, Cleveland, and Minneapolis.
Special studies and investigations were mentioned as sources of
information on the use of Reserve Bank credit by Boston and Minneapolis.
Boston did not indicate the nature of these studies, but Minneapolis dis
cussed a report made by the Research Department which was designed to develop
information concerning the possibility of a demand for Reserve Bank credit
secured by eligible paper.
2.
Information supplied directly by the borrowing bank.--The in
formation obtained from the borrowing bank varies from bank to bank.
The
Sttount of detailed information obtained from the borrowing bank depends on
the type of security offered, the maturity of the loan, and whether the
Reserve Bank considers the loan application "routine" or "unusual."
a.
Application for credit.--Nearly all Reserve Bank credit today
ia extended on the member bank's note secured by Government securities, and
th these cases a minimum of information is requested from the borrowing bank.
»•
Philadelphia, Minneapolis, and Kansas City indicated that no formal
r
application is required for advances on Government securities.
New York, Cleveland, and San Francisco ask for the amount of borrowfrom other sources including Federal funds, and in a doubtful situation,
the New York Bank would require daily or weekly condition statements.
PR-c o n f i d e n t i a l
- 12
A condensed report of condition is required by Cleveland, Atlanta,
Chicago, St. Louis, and Dallas, while at Dallas the purpose of the loan is
also requested.
Atlanta, Minneapolis, Kansas City, and Dallas indicated that addi
tional information is required on the application when the loan is secured
hy eligible paper or when the application represents an advance under
^action 10b, or an advance under the last paragraph of Section 13•
Since
8Uch credit has represented a very small part of the total at all Reserve
S&nks in recent years, very little information was given concerning the kind
°i‘ information required on these applications.
b.
Discussions with borrowing banks.--Additional information is
°htained by the Reserve Bank on applications considered "unusual" or ques
tionable by means of conversations with officials of the borrowing bank. All
of the Reserve Banks indicated that this manner of obtaining information is
Used, but only a few specified the types of information obtained.
FR-CONFIDENTIAL
Appendix B
USE OF THE DISCOUNT FACILITY TO MEET SEASONAL NEEDS
FOR RESERVE FUNDS
A marked seasonal pattern in the need for reserve funds on the
part of the whole banking system results from the seasonal movement in
the demand for bank credit and currency.
The Federal Reserve has a
responsibility for responding to these seasonal swings in reserve needs
and thus for moderating the changes in credit conditions that would other
wise result.
Problem of Relying on the Discount Facility for Seasonal Adjustment
The additional need for reserve funds by the banking system re
sulting from seasonal developments is not the same thing as the sum of the
additional seasonal needs for reserve funds on the part of individual
banks.
For some member banks, peak seasonal needs for reserve funds will
occur in a period of general seasonal ease.
For other member banks, peak
seasonal needs will coincide with that of the banking system.
The sum of the seasonal needs of these latter banks, however,
may exceed the seasonal need for supplementary reserves by the banking
system.
Hence, if all of their seasonal needs for reserve funds are
satisfied through the discount window, more reserve funds may be created
than are consistent with the Federal Reserve responsibility for responding
to the seasonal needs of the entire banking system.
An oversupply of
reserve funds through the discount window to meet seasonal needs of in
dividual banks may thus render more difficult the conduct of general credit
and monetary policy.
If the seasonal borrowing of individual member banks merely
supported a proportionate increase in their own loans and deposits or
FR— CONFIDENTIAL
- 2-
merely provided for meeting a seasonal outflow of currency, there might
be little problem in using the discount mechanism as a primary reliance
for meeting seasonal needs.
But if, because of a drain of deposits to
other banks, deposits of borrowing banks decline or do not rise by the
amount of their loan expansion, reserves will be transferred to other
member banks without corresponding seasonal need.
These funds will be
available for loan and investment expansion and for deposit growth in
excess of the seasonal needs of the entire banking system.
Liberal Federal Reserve lending to individual member banks for
seasonal purposes may also be questioned on grounds of sound banking
practice and equity among banks in the use of the discount facility as
well as on the basis of the possible oversupply of reserve funds.
The
bank which is permitted to borrow for a period of several months on
grounds of seasonal need may be said to be using Federal Reserve credit
in effect as a supplement to its resources.
This means of increasing a
bank’s resources, moreover, would not be available to other banks which
are similar in size and other respects, except that they are unable to
justify discounting for seasonal reasons because their loans and deposits
are relatively stable throughout the year.
Seasonal Needs of the Banking System
The seasonal need for reserve funds on the part of the banking
system in the United States increases appreciably late in the year and
declines early in the following year.
These seasonal svangs result from
two general economic factors and one factor associated with Treasury
finance.
First, there is a marked seasonal pattern in the demand for
business and consumer loans as a result of the concentration of activity
in a number of important industries late in the year.
Notable among these
FR— CONFIDENTIAL
- 3 -
are retail businesses and industries dealing with agricultural products,
which are heavy users of bank credit.
Such seasonal increases in credit
demands are offset by declines in the first half of the following year.
Seasonal variation in these credit demands results in seasonal variation
in loans, deposits, and required reserves.
Second, there is a seasonal peak late in the year in the demand
for currency to meet holiday and other needs that coincides rather closely
with the seasonal peak in the demand for business loans.
This increase
is offset by a very sharp decline early in the following year.
The con
version of deposits into currency requires an increase in reserve funds
equal to more than
80
per cent of the amount of the conversion.
A third factor heightening the seasonal shift in the demand for
reserve funds is the fact that, under the Mills Plan, Federal Government
borrowing has taken on a marked seasonal pattern, with the peak reached
in the latter part of the year.
To some extent, seasonal movements in
Government borrowing requirements may moderate seasonal swings in business
loans, as some businesses may be able to meet year-end needs from tax
accruals while they increase or maintain borrowings over the following
spring in order to make tax payments.
The seasonal movement in bank
holdings of Government securities resulting from seasonal Treasury borrow
ing does add, nevertheless, a further complication to the problem of
supplying the proper volume of reserves to commercial banks for seasonal
needs.
Seasonal Needs of Individual Banks
Each member bank has an underlying core of resources which is
relatively steady and these are available to meet year-around local credit
requirements.
Seasonal swings in operations are on top of this underlying
core of resources.
Individual banks will differ markedly in the extent of
FR— CONFIDENTIAL
-
these seasonal swings.
h -
The following pages examine some of the typical
cases of seasonal movement in the business of individual banks.
Seasonal needs for funds on the part of individual member banks
may take the form either of a drain of reserve funds or an increase in
reserve requirements,
A seasonal drain of reserve funds is commonly
found on the part of small banks serving one or a few industries; these
banks may have seasonal patterns of loans differing from that of the
economy as a whole.
A seasonal peak in deposits and reserve requirements
at about the same time as the loan peak is more common on the part of
large banks serving diversified industries.
Banks dominated by a single industry.
If a bank's reserve needs
are dominated by a single type of industry which has strong seasonal
fluctuations in its own needs for funds, then the bank is likely to lose
cash assets at the time of its peak seasonal needs and to regain them
subsequently.
Its loans would be expected to rise and its deposits to
decline as depositors drew on both borrowed and unborrowed deposits to
make payments outside the area.
The deposit drain would result in an
equivalent loss of cash assets.
Conversely, the bank's loans would decline
and its deposits increase later as payments were made into the area and
depositors used part of their funds to repay loans.
This sort of develop
ment may be found, for example, in banks in agricultural areas and in
resort areas.
The period of peak seasonal need for funds on the part of banks
dominated by a single industry may or may not coincide with that of the
economy as a whole.
In some of the most common cases it will differ.
The timing of the agricultural growing season, for example,
results in an increase in loans and a decrease in deposits at many
agricultural banks in the spring as farmers finance their planting and
FR— CONFIDENTIAL
- $ -
meet their living costs.
Deposits are built up and loans are repaid as
crops are harvested and sold in the fall.
The precise timing of the
seasonal movements for banks in agricultural areas, however, depends not
only on the particular crop of the area but also on the method of financing
its production and sale.
In cotton-raising areas the pattern of needs is
similar to that described above; cotton is harvested in the late summer
and early fall and is generally sold to commodity dealers soon thereafter.
Loans of banks in cattle-fattening areas, on the other hand, increase late
in the year and remain high until spring.
Summer resort areas, like many agricultural areas, experience
loan increases and deposit drains in the spring; their loans decline and
their deposits increase during the summer.
Winter resort areas, on the
other hand, have a loan increase and deposit decline in the summer and
fall and a loan decline and deposit increase in the winter and early spring
Banks vrith diversified customers.
If a bank is large and has a
diversified group of customers, the seasonal movement of its loans and
deposits is likely to coincide closely with that of the economy as a
whole.
Its seasonal problem is likely to consist largely of an increase
in required reserves rather than a loss of cash resources at the period
of its peak seasonal needs.
The diversity of its customers would be
expected to bring about a seasonal pattern similar to that of the economy
as a whole.
These banks have many customers in those lines, such as com
modity dealing, food processing, and trade, in which the demand for loans
increases late in the year.
They generally make relatively few loans in
fields like agricultural production in which the pattern of seasonal
demands is strikingly different.
FR— CONFIDENTIAL
- 6 -
The proceeds of loans by a large bank with diversified customers
may be left on deposit or redeposited by workers, merchants, or stock
holders to whom payment is made.
Although some of the proceeds of a given
bank's loans will be used to make payments outside the area, the bank
will in turn benefit from receipt of deposits generated by loan and in
vestment expansion of other banks.
Cash assets are undoubtedly lost by
some large and diversified banks, especially those that are lending a
substantial amount to commodity dealers and food processors that are making
payments outside the area, but many such banks are faced only with the
problem of an increase in required reserves.
Effect of correspondent banking relationships.
No consideration
of the seasonal reserve needs of banks would be complete without a con
sideration of correspondent banking relationships.
To the extent that
individual small banks meet seasonal reserve needs by borrowing from
their city correspondents, or by drawing down their balances with them,
they pass on their own seasonal pressures to their correspondents.
In
many cases the peak needs of country and city banks dovetail, and city
banks are in a position to meet country bank reserve pressures easily.
On the other hand, in some cases city banks seem to need increased re
serve funds to meet the seasonal needs of their nonbank customers at the
same time that they have to meet a loss ox’ cash assets as a result of
their correspondent bank activity.
For the banking system, however, and for most major classes of
banks, correspondent relationships appear to ameliorate rather than to
aggravate the seasonal problem.
Seasonal movements in interbank loans
are not consistent, and in any event the magnitude of such loans is small.
Interbank deposits are considerably larger and show considerably larger
FR— CONFIDF.NTI
- 7 -
fluctuations in dollar amounts over the year.
Their seasonal movement,
however, is similar to that for total customer loans and for total demand
deposits, with an increase late in the year and a decline early in the
following year.
Thus city banks actually gain funds at the period of
their peak seasonal need as a result of correspondent relationships.
The building uo of deposits with correspondents late in the
year is probably the result of two different sets of factors.
First,
it is known that many banks in agricultural areas which have favorable
clearing balances late in the year do not invest fully their excess
funds, but instead permit balances to pile up with correspondents and
draw on them only as they are needed in the following year.
Second,
other banks with increased oayments to make in regional or national
money markets may find it convenient to increase their balances in these
centers even though they are not in receipt of excess funds.
Seasonal Heeds of Individual Banks
vs. Seasonal Needs of the Banking System
The very nature of economic activity in a complex economy
results in marked differences in the pattern of seasonal needs of different
industries and hence of the banks serving these industries.
Different
types of activity are affected differently by seasonal changes in climate
and in consumer demand.
Moreover, the relation of the various types
of activity to each other necessitates that the periods of peak needs
for funds on the part of some industries precede or follow those on the
part of other industries.
For example, the peak needs for loans on the
part of dealers in agricultural commodities occur when the dealers are
making payments to farmers and thus permitting the latter to build up
deposits and repay loans.
In many cases banks which have marked dif
ferences in the pattern of their seasonal needs because of the difference
FR— CONFIDENTIAL
- 8 in the nature of their customers may be closely related by correspondent
relationships or otherwise.
Even when the seasonal pattern of reserve needs of individual
banks coincides rather closely with that of the banking system as a whole,
the sum of the seasonal needs of individual banks may be expected to ex
ceed the needs of the economy as a whole.
of bank reserve requirements.
This fact arises from the nature
The reserve needs of an individual bank
lending to finance purchases outside the area may equal its loan expansion,
or may even exceed it if depositors are drawing down unborrowed deposits
at the same time.
Except to the extent that a currency drain exists,
however, the needs for the banking system as a whole will be equal
only to the reserve requirements behind the increased deposits resulting
from the loan expansion.
As deposits and reserves are drawn from one
bank, they will generally be redeposited in another bank, which wall
thus find its reserves increased more than its reserve requirements.
It has already been noted that many banks with seasonal loan
patterns corresponding with that of the banking system gain deposits and
reserves as a result of the expansion of loans and investments on the
part of other banks at the same time that they are losing deposits and
reserves as a result of their own credit expansion.
Any realistic
definition of the seasonal needs of such banks would have to take account
of these movements.
Account would also have to be taken of any building
up of correspondent balances with these banks that typically takes place.
Despite the fact that many banks receiving deposits and reserves
as a result of expansion by other banks can use them to meet their own
seasonal needs, others receiving them may be at a period of seasonal ease,
and hence may seek other uses for the funds.
Excess funds supplied by
discounting for seasonal purposes may thus constitute a marginal supply
FR-CONFIDENTIAL
- 9 of reserve funds which makes it very difficult for the Federal Reserve
to exercise any effective control over the total supply of reserves.
Federal Reserve Role in Meeting Seasonal Monetary Needs
It was partly to make possible seasonal expansion and contrac
tion in the supply of reserves and currency that the Federal Reserve
System was established.
Prior to the establishment of the Federal Reserve
System the reserve and currency supply was highly inelastic, and seasonal
increases in the demand for bank credit and currency resulted in a growing
tightness of the credit market and at times in banking crisis.
The
Federal Reserve was expected to be able to permit bank reserves and cur
rency to expand and contract in accordance with seasonal needs; and despite
changes in the pattern of seasonal needs and the means of adjusting to
them since that time, its responsibility to respond to seasonal needs has
not been questioned.
Because the increase in the supply of money accompanying purely
seasonal credit expansion is offset by a subsequent decline and because
the Federal Reserve has an established responsibility for meeting seasonal
monetary needs, there has been a tendency to assume that meeting the
seasonal needs of individual banks through the discount window can never
conflict with the general objectives of System policy.
As made clear
earlier, however, the sum of the positive reserve needs of individual
banks can exceed in practice the needs for funds on the part of the entire
banking system.
If Federal Reserve credit is supplied through the discount
window to meet these individual needs, the total supply of reserves may
exceed the seasonal needs of the banking system as a whole and the excess
may encourage undesirable monetary expansion and subsequently prove hard
to recapture.
FR— CONFIDENTIAL
- 10 Because of the lack of identity of seasonal reserve needs of
individual banks with seasonal monetary needs of the banking system, it
is important for the System to have a carefully thought-out program for
the use of its instruments in meeting seasonal needs for Federal Reserve
credit.
A more effective regulation of the credit and monetary flow seems
likely to result if the System normally relies on open market operations
for responding to seasonal monetary swings of the banking system.
By
maintaining an adequate portfolio of short-term Government securities
and other money market paper which can be sold as needed, individual
member banks in providing for ordinary seasonal requirements may assure
themselves of a satisfactory access to funds available in the credit market.
The open market method of meeting the System's seasonal responsi
bilities cannot be counted on to cope with all seasonal reserve problems
of individual member banks, but it would work to limit the use of the
discount facility to requirements which in the view of the Reserve Bank
could not reasonably be anticipated and met by the use of the member
bank's own resources.
The adoption of a positive standard for seasonal
use of the discount facility would be in line with the System's general
credit and monetary responsibilities as well as with equity among banks
in access to and use of the discount facility.
Since one of its purposes
would be to help cope with the problem of continuous borrowing growing
out of seasonal reasons, it would generally assist the System in main
taining a system of strong and responsive individual member banks.
Individual Bank Handling of
Foreseeable Seasonal Reserve Needs
A key question is whether individual member banks can adequately
meet local year-around needs for credit and still administer their assets
so as to be in a position to provide for foreseeable seasonal swings out
of their ov/n resources.
As indicated previously, there are marked
FR— CONFIDENTIAL
- 11 differences in the bank to bank size of seasonal demands.
Nevertheless,
the proportion of resources that is stable is substantial for even the
highly seasonal bank.
Typically, banks hold a considerable amount of deposits which
either show little seasonal fluctuation or else show a seasonal pattern
differing from that of the seasonal activities which dominate the pattern
of the bank's reserve needs.
Local demands for credit, moreover, are not
all concentrated at a particular period of the year.
For example, most
banks in agricultural areas make a considerable amount of loans to retail
trade; such loans offset in part the seasonal demand for loans to farmers.
Then again bank lending to commodity dealers is generally characteristic
of large banks having a diversified customer clientele; the seasonal move
ment in commodity loans of such banks, while coinciding with the seasonal
movement of loans in general, may be counteracted by the action of other
types of loans having offsetting seasonal movements.
In addition, nearly
all banks hold a considerable amount of Government securities not only at
periods of seasonal ease but also on a continuing basis.
Member banks can meet seasonal needs for reserve funds arising
from deposit declines or increases in loans to seasonal-borrowing in
dustries in several ways besides borrowing from the Federal Reserve.
'Where cash asset holdings (deposits with correspondent banks and excess
reserves with the Reserve Banks) are sufficient, seasonal needs may be
met by drawing down these assets.
Where cash asset holdings are inadequate,
seasonal reserve needs may be met by the sale or run-off of liquid assets.
Short-term Government securities, which have little risk of capital loss,
are particularly appropriate for this purpose.
Under the pattern of
FR— CONFIDENTIAL
- 12 -
System operation assumed by the Committee, the Federal Reserve at periods
of seasonal pressure for the banking system would be supplying sufficient
funds to the market to take care of the aggregate seasonal drain.
This
action by the System, in keeping purely seasonal pressures from being
reflected unduly in the national money market, would foster market
conditions that would make it possible for individual banks to obtain
needed reserve funds by selling short-term Governments on satisfactory
terms.
There are grounds for believing that the undue seasonal
reliance of some member banks on discounts goes back more to inadequate
holdings of cash assets and short-term Government securities than to
the pressure of strong seasonal movements in deposits and loans.
It
would appear that if such banks regularly invested funds accruing to them
during periods of seasonal ease in short-term securities rather chan in
less liquid assets, their own resources would provide for their foresee
able seasonal requirements under most circumstances.
If this practice
were generally followed, any bank vrith seasonal reserve needs in excess
of its anticipation could properly meet these needs through temporary
use of the discount facility.
Member bank needs for extended advances
would then be limited for the most part to instances of extraordinarily
large deviation from usual seasonal developments.
The above discussion has been concerned with the broad problem
of seasonal borrovdng and the development of a general philosophy for
handling the bulk of the cases arising in this area.
It has not endeavored
to deal, of course, with those unique situations which may arise in con
nection with a few member banks.
Such exceptional seasonal borrowing
FR— CONFIDENTIAL
- 13 situations by definition fall outside the scope of general rules.
Their separate handling must be determined by the individual Reserve
Bank on the basis of a rule of reason applied in the light of the
special facts involved
FR-CONFIDENTIAL
APPENDIX C
THE PROBLEM OF DEFINING AND IDENTIFYING
CASES OF CONTINUOUS USE OF THE DISCOUNT FACILITY
A problem of continuous use of the discount facility has long
harassed administration of Federal Reserve discount policy, but the
issues of the continuous borrowing problem have not been sharply drawn.
There is apparent consensus regarding the undesirability of such a
practice, except under unusual and exigent circumstances, but no full
agreement as to how to define the malpractice or as to the standards
by which it is to be identified.
Objections to Continuous Borrowing
Perhaps the most useful way to approach the problem of
defining and identifying cases of continuous borrowing where unusual
and exigent circumstances are absent is through consideration of ob
jections to such borrowing on which System consensus is clearest.
VJithin the System, there are generally felt to be four important
objections to continuous borrowing:
(a) The conversion of the Federal Reserve role with
respect to individual member banks frt*m one of
temporary and emergency assistance to one of
semipermanent investment;
(b) The concentration of a Reserve Bank's lending
power in prolonged credit extensions to an
individual cr a few individual banks;
(c) The reflection on the soundness of individual
borrowing banks of large and continuous indebted
ness and the dangers this may entail to the
maintenance of banking stability;
(d > The injection of reserves into the banking system
in a manner at variance with over-all credit and
monetary policy.
FR-CONFIDENTIAL
- 2 By considering continuous borrowing in terms of these objections a
good deal can be learned about the problem of its meaning.
Implications of the "semipermanent investment" and "concen
tration of lending power11 objections.— Borrowing enlarges a member
bank's resources by adding to its reserve account and enabling it to
hold more earning assets than otherwise.
A bank may resort to bor
rowing in preference to disposing of a marketable asset either because
of convenience or because of lower total direct and indirect cost.
Aside from perhaps emergency reasons, the System has no
defensible stake— implied either by law or by custom— in becoming a
continuing or extended creditor of any one bank, however much the
borrowing bank might profit from the additional earning assets retained
with the help of such credit.
According to accepted principles govern
ing discounting, the discount facility is normally available to member
banks for meeting temporary reserve needs pending more basic adjust
ments in their operating positions.
In addition, the facility is
available in emergency situations, on the basis of the lender-of-lastresort principle, for such periods as may be necessary to prevent a
lack of liquidity from becoming a cause of insolvency.
Continuous discounting by individual banks, except in un
usual circumstances, has the danger of placing the System in the
untenable position of having a semipermanent investment in a number
of individual banks.
It also has the danger of absorbing, in a use
incompatible with the primary purposes of the discount function, an
undue part of the credit which the System can reasonably and safely
FR-CONFIBENTIAL
- 3 make available.
Lastly, it operates to reward those aggressive banks
which are willing to use the discount facility for profit opportunitie
at the expense of banks which follow more conservative practices and
meet their reserve needs through asset adjustments.
Most member banks recognize the inappropriateness of such
borrowing from Reserve Banks.
More aggressive banks may from time to
time take advantage of the discount facility by borrowing as much as
possible for as long as possible.
Unless the System takes positive
action in these cases, it becomes in effect a party to doubtful and
■unsound practices on the part of such banks.
Implications of the "banking soundness" objection.— The
System has a clear responsibility under the Federal Reserve Act to
take steps directed at maintaining the soundness of the banking struc
ture.
System operating experience over the years has made clear that
a system of unit banks, because of the close interdependence of its
members, is fundamentally little stronger for meeting the strains of
adverse financial and economic trends than the strength of the indi
vidual units of which it is composed.
Experience has also made clear
the essential unsoundness, from a going-bank and depositor-safety
standard, of reliance on borrowed funds of prior creditor status to
supplement a bank's resources.
For this reason, it is essential that
member banks keep in a position to meet operating needs from their own
resources rather than relying on System assistance to supplement an
inadequate capital structure.
FR-CONFIDENTIAL
-
h -
Implications of the "reserve11 objection.— From the stand
point of the banking system as a whole, discounting by individual banks
leads to an injection of reserves, which in turn can support a multiple
expansion of bank credit and deposits.
The supplying of reserves
through temporary borrowing pending mere permanent adjustment does not
seriously hamper System credit policy.
The total of such borrowing,
which shifts from bank to bank as each bank first becomes indebted
and then passes the indebtedness on to other banks through asset ad
justments, cannot rise above some minimum amount without becoming
significantly restrictive on commercial bank lending and investing
activity.
Indeed, the over-all level of such discounting depends in
large measure on other credit actions of the System.
If individual banks are willing to borrow continuously, how
ever, then the System runs the risk of finding itself in the position
of supplying reserves to the banking system at the initiative of
individual member banks which feel no compulsion to liquidate their
indebtedness through asset adjustments.
The reserves supplied in
this manner may seriously hamper the implementation of System credit
policy.
In a consideration of the effects of continuous borrowing on
the reserve position of the banking system, it is desirable to review
the mechanism by which such reserves are released.
In most cases, of
course, the specific reserves borrowed are not redistributed through
the System; they are simply held in the borrowing bank's reserve account
to redress a previous reserve 1<>s s .
But if that reserve loss stemmed
FR-CONFIDENTIAL
-
5
-
from any action other than a withdrawal of currency or payment to a
Reserve Bank, some other bank must have experienced a corresponding
reserve gain.
Whether there is a net increase in the System total
of bank reserves, therefore, depends on what the recipient bank does
with its newly-acquired reserves.
If the recipient bank uses the funds to repay borrowing, or
to avoid borrowing previously expected to be necessary, then there is
no net increase in bank reserves above the total which would otherwise
have obtained.
A similar result would be reached if the recipient bank
transferred its excess reserves (by a sale of Federal funds, an increase
in its correspondent balance, or the purchase of a marketable asset) to
another bank desiring reserves in order to repay or avoid borrowing.
On the other hand, if the recipient bank employs the funds received as
a base for loan expansion or exchanges them for other assets through
channels which do not quickly lead back to the Federal Reserve, then a
net increase in reserves of significant duration will have occurred
and a consequent loan and deposit expansion will have begun.
It is important to note that it is not the banks which gain
funds from borrowing banks through clearing balances that are primarily
affected by the decisions of the latter banks to borrow or not to bor
row.
The original transfer of reserves is generally independent of
action taken by the borrowing bank.
The banks which are affected by
the decision of a reserve-losing bank to borrow more or less continu
ously are those which would lose reserves if the borrowing bank made
its adjustments through the market rather than through discounting
FR-CONFIDENTIAL
- 6 with the Federal Reserve.
Only rarely are the banks gaining reserves
from reserve-losing banks those that would be influenced by the reserverecovery operations of the latter.
In general, it is banks in the
central money centers that are likely to be most influenced by the
decisions of reserve-losing banks to borrow or not to borrow.
In the long run a reserve-losing bank may curtail its loan
extensions with the aim of reducing the total of net deposit withdrawals
and eventually turning clearing balances in its favor.
The ultimate
return flow of reserves in this case could come from anywhere within
the banking system.
More immediate and certain alternatives to borrow
ing are the drawing down of correspondent balances or the sale of
easily marketable assets (presumably Treasury bills) in the money market„
Stop-gap assistance could be obtained by purchases of Federal funds,
if available.
Each of these three latter measures would in most cases
pull reserves out of the central financial markets— or, what amounts
to the same thing, would absorb reserves which would otherwise have
gravitated to the central markets.
Basically, the expansionary opportunities available to the
reserve-receiving bank are inevitable in a free-transfer financial
system.
VJhat borrowing, and particularly continuous borrowing, does
is to mitigate the compensating contractive influences upon the reserve
losing bank and ultimately upon banks in money market centers.
The
result is a net increase in the reserves of the banking system as a
whole and the possibility of multiple expansion of bank credit and
deposits.
FR-CONFIDENTIAL
- 7 -
Definition and Identification
of Continuous Borrowing
From the foregoing discussion, it follows that a useful
definition of continuous borrowing must have content in terms of these
objections.
In order to be meaningful in terms of that discussion, it
would seem that the definition of continuous borrowing needs to take
into account not only cases of uninterrupted indebtedness over an ex
tended period of time but also frequent, interrupted borrowing that
provides a member bank with reserves in all, or a considerable propor
tion of, consecutive reserve periods.
Such a definition is not without
its practical complications where applied to concrete cases, and these
are explored below.
Cases of extended indebtedness in which unusual and exigent
circumstances are not a consideration, are readily identified as con
tinuous borrowing.
The administrative question with respect to such
cases is at what point in time the borrowing becomes continuous.
discount policy which emphasizes
15
In a
days as the maximum maturity for
temporary borrowing, this question would arise first at the time of the
first renewal; the issue would sharpen on further applications for ex
tension.
It would be a matter for Reserve Bank discount administration
to decide, in the light of all the circumstances of the individual
borrowing, when an indebtedness should be regarded as continuous, thus
calling for special review and consideration.
Consultation and ex
change of information between the Reserve Banks could be helpful in
arriving at such System-wide consistency of standards as would prove
FR-CONFIDENTIAL
- 8 practicable in view of the economic differences between Reserve
districts.
Cases in which member banks are in and out of debt from day
to day over successive or nearly successive reserve periods are not
so readily identifiable as continuous b o n owing; superficially they
are not continuous at all.
A little reflection, however, will show
that cases of repetitive borrowing over successive reserve periods dif
fer little in effect from cases of extended indebtedness.
Reserve
requirements are based on average daily balances over a seven-day or
over a half-month period.
Hence, there is no rigid requirement ccn-
ceming the quantity of reserves to be held on any single day, and
excess reserves obtained by borrowing on a one- or two-day basis can
he used to offset reserve deficiencies over the rest of the reserve
period.
Fram the standpoint of the addition to a reserve city bank’s
resources, as an example, there is no difference between a one-day
loan for
70
million dollars and a seven-day loan for
long as all the days are in the same reserve period.
10
million, so
In each case,
the borrowing will have been large enough to permit the bank to hold
an average of
10
million dollars more of earning assets over its reserve
period than if there had been no borrowing.
From this relationship it follows that, from the standpoint
of the continuity of reliance on the Federal Reserve, there is no sub
stantive difference between a reserve city bank which remains in debt
for
10
million dollars for ninety days and a similar bank which borrows
FR -CON FI DEN TIAL
-
9
-
70 million for one day in each of 13 consecutive reserve periods.
Both
banks are patently to be regarded as continuous borrowers for the
ninety-day period, irrespective of the reasons why one procedure of
borrowing was followed in one case and a different procedure in the
other.
The fact that repetitive borrowing is logically to be in
cluded as a form of continuous borrowing makes necessary the develop
ment of some reasonable empirical standard fcr judging the number of
reserve periods that a bark may borrow successively before it is to be
considered a continuous borrower.
This basic standard needs to be
consistent with that adopted for identifying extended, uninterrupted
indebtedness as continuous borrowing.
The application of such a
standard, however, is by no means free of difficulty.
The chief complication involved in identifying repetitive
borrowing as continuous borrowing results from the imperfect predict
ability of the reserve flows to which member banks are subject, and
the consequent possibility that some member banks may chance to be in
debt at least once in a succession of reserve periods due to causes
beyond their own control.
Thousands of transactions add to and subtract
from the typical member bank's reserve account each day.
Although the
regularity of reserve flows varies among banks, any bank is subject to
the hazard that an unexpected net reserve drain (or a smaller than
expected reserve gain) may appear late enough in a reserve period to
make it inconvenient, costly, or even impossible to take redressing
FR-CONFIDENTIAL
- 10 action during the time remaining in the period.
The fact that this
is possible, of course, is one of the I'easons why the borrowing privi
lege is available.
Such chance combinations of late-period reserve movements
could conceivably lead a bank to unplanned borrowing from its Reserve
Bank in several reserve periods in a row.
It may be difficult to
judge whether borrowing for a few days in each of several successive
reserve periods is the result of such chance factors or whether, on
the other hand, it is intentional or complacent in the sense that the
bank does not attempt to make other adjustments to basic changes dn
its reserve position.
With each successive period in which borrowing
occurs, however, the probability that the borrowing stems from inad
vertent causes obviously decreases (although it never disappears).
Con
sequently, if a bank borrows at least once in each of a number of consecu
tive reserve periods, there exists a presumption that it is using this
means deliberately to avoid more basic adjustments in its position and
hence that the borrowing is continuous in the sense indicated here.
Still further complexity of the continuous, repetitive borrow
ing concept is encountered in considering cases of banks which borrow
in a large proportion of reserve periods over a period of time, but
which have occasional debt-free periods.
Such banks may be overextended
on the basis of their resources in the same sense as banks that are in
debt in each successive reserve period.
The debt-free period of these
banks may be the result either of unexpected late-period reserve gains
PR-CONFIDENTIAL
- 11 °r of action taken to free themselves from indebtedness periodically
in order to avoid review as continuous borrowers.
While such instances
may be difficult to identify, the definition of continuous repetitive
borrowing needs to take them into account.
It may be concluded that it is desirable to define continuous,
repetitive borrowing as borrowing in a sufficient concentration of re
serve periods as to make it probable that such borrowing is intended
or complacent rather than inadvertent.
The words intended or complacent
in this usage, of course, would include instances where a bank's money
position is managed in a way that makes it difficult to avoid borrowing
over a succession of reserve periods.
The specific guideposts for
identifying such borrowing can be established only on the basis of
broad discount experience of individual Reserve Banks and discussion
among the Reserve Banks.
It is enough to say here that such identifi
cation requires some standard of reasonableness based on experience.
The definition of continuous borrowing is independent of the
amount borrowed.
In considering the borrowing record of individual
banks, however, some attention would also have to be given to the rela
tionship of borrowing to required reserves and to bank capital.
The
amount borrowed is one piece of evidence to be taken into account in
judging whether the borrowing is intended or complacent.
The larger
the amount of borrowing in relation to required reserves and capital
(assuming no unusual and exigent circumstances to be associated with it),
the greater the presumption that borrowing is planned or complacent and
not the result of a succession of chance developments.
Further evidence
FR-CONFIDENTIAL
- 12 as to the purpose or occasion for borrowing may be obtained by studies
of changes over time in certain items in the bank's balance sheet, in
cluding deposits, customer loans, and money market assets as well as
borrowings, reserves, and capital accounts.
Finally, identification of cases of continuous borrowing
needs to take into account use of the regulative provision which allows
a bank to incur up to a two per cent deficiency in one reserve period
without penalty, provided the deficiency is made up in the ensuing
period.
This provision permits the avoidance of borrowing to that ex
tent, and, from one standpoint, use of this privilege could be considered
the equivalent of a Federal Reserve loan to the member bank.
The carry
over cf a reserve deficiency, therefore, needs to be taken into account
in the same way as discounting during the period in developing the bor
rowing record of an individual member bank.
Conclusion
This analysis of the problem of defining and identifying con
tinuous borrowing points to the conclusion that a member bank borrowing
one or two days in each of successive or nearly successive reserve
periods can be as much a continuous borrower as a bank that maintains
uninterrupted indebtedness over a number of reserve periods.
The fact
that one method of indebtedness was chosen by a member bank rather than
the other is not pertinent to the definition.
In order to identify
continuous borrowing the individual Reserve Bank must have standards
of evidence and standards of continuity.
A rationale for such standards
FR-CONFIDENTIAL
- 13 is indicated in the discussion, but it is recognized that these standards
must have a quality of reasonableness that can only be given specific
content in terms of actual discount experience.
The significance of defining continuous borrowing to include
both uninterrupted indebtedness over a period of time and frequent bor
rowing over successive reserve periods stems from the major objections
to such borrowing generally recognized by the System.
These objections
have equal force whether funds are supplied to member banks through
uninterrupted borrowing or through repetitive borrowing over a suc
cession of reserve periods.
If only uninterrupted indebtedness were
to be frowned upon as continuous borrowing, then the possibility of
borrowing through successive one- or two-day discounts would provide a
loophole through which aggressive banks could avoid any regulative
standard directed at continuous borrowing.
fr - confidential
March 12,
19$k
APFKNDIX D
SUGGESTED REVISION OF REGULATION A
There is attached a draft (dated 3-12-51; ) of a suggested
revision of Regulation A which has been prepared in connection with the
current study of the discount mechanism. There is also attached a docu
ment which shows the textual changes which would be made in the present
Regulation by the proposed revision.
As an aid to further consideration of this matter, there follows
a series of comments and explanations with respect to the principal changes
which would be made in the existing Regulation A by the suggested revision.
1*
New Statement of General Principles
The most important change would be the inclusion of a new
section 1 entitled "General Principles". Since these principles are
Fully discussed in the Report itself, no further comments seem necessary
here.
2•
Advances on Government Obligations
Section 2 of Regulation A as now in effect authorizes advances
ho member banks on Government obligations for periods not exceeding ninety
days, with a footnote explaining that, while paragraph 8 of section 13
limits maturity to fifteen days, paragraph 13 authorizes maturities of
n°h exceeding ninety days on advances to "corporations" including banks.
The proposed revision would restore the language of this section
ho the form in which it read prior to 19l|2, so that the text of the section
Would follow literally the eighth paragraph of section 13 by authorizing
advances to member banks on Government obligations with maturities not ex
ceeding fifteen days (except that references to bonds of the Farm Mortgage
Corporation and the Heme Owners' Loan corporation would be covered by a
Footnote). However, there would be added a new footnote v/hich would refer
ho the authority of the Reserve Banks under the thirteenth paragraph of
section 13 to make advances on Government obligations to corporations, in
cluding banks, with maturities not exceeding ninety days and which would,
ah the same time, state that ordinarily the maturity of temporary borrowings
by member banks should be limited to fifteen days. It has been suggested
hhat this change would make it easier, if desired, to differentiate between
hifteen-day and ninety-day advances and to fix a higher interest rate with
Aspect to such advances in excess of fifteen days.
-2-
3.
Advances on Eligible Paper
The present provisions of section 2 of the Regulation authorize
advances to member banks on their notes secured by eligible paper with
maturities not exceeding ninety days. No change would be made in this
language but, in keeping with the change made in the provisions with
respect to advances on Government obligations, a footnote would be added
calling attention to the general principle set forth in the new; section 1
that ordinarily the maturity of temporary borrowings by member banks should
be limited to short periods.
4*
Reversal of Order of Provisions Regarding Advances on Eligible
Paper and*Advances on Government~CbITga t3 oils
~
In the present Regulation A, advances on eligible paper are
mentioned before advances on Government obligations, both in the intro
ductory paragraph and in section 2 of the Regulation, The proposed re
vision would reverse this order of mention in both places on the theory
that advances on Government obligations are now of more importance and
deserve more emphasis than advances on notes secured by eligible paper.
Reversal of Order of Provisions Relating to Discounts and Advances
For somewhat similar reasons, the proposed revision would reverse
the traditional order of arrangement under which section 1 of the present
Regulation relates to discoi.ints, while section 2 relates to advances. In
the revision, after the new section 1 with respect to general principles,
section 2 would cover advances to member banks and section 3 vroula cover
discounts. In conformity with this change, the title of the Regulation
Would be changed to refer first to advances rather than discounts.
Advances under Section 10(b)
Subsection (d) of section 2 of the present Regulation enumerates
various classes of assets which may be accepted as collateral for sec
tion 10(b) advances. It is recognized that in 1937 when the Regulation
was last revised, there may have been adequate reason for an enumeration
of such classes of paper. However, the classes of paper listed do not
cover several classes which have grown up since 1937, and might just as
Well be included, e.g., obligations under Title VI and perhaps other titles
the National Housing Act, term loans, etc. It is believed that there
ls no necessity at this time for such a listing of acceptable classes of
Paper and that such a listing may in fact be misleading. Accordingly,
the revision would omit subsection (d) of section 2 of the present Regu
lation.
-3-
7•
Marginal Collateral
Subsection (d) of section 3 of the present Regulation, relating
to additional or marginal collateral, contains a sentence requiring a
Federal Reserve Bank to explain the circumstances of any discount or ad
vance with respect to which the required collateral exceeds 2£ per cent
of the amount of the paper discounted, or 12£ per cent of the amount of
the advance, as the case may be. This sentence would be omitted in the
Proposed revision as no longer necessary.
Amount of Credit Extended on Government Obligations
The proposed revision would also omit the present subsection (e)
°f section 3 of Regulation A which requires a Reserve Bank to explain
the circumstances of any advance on direct or fully guaranteed obliga
tions of the United States where the amount of the advance is less than
the face amount of such obligations. To the extent that this provision
implies that Federal Reserve Banks may make advances on Government obli
gations at less than par, it is inconsistent with the general policy
Follov/ed by the System since 1939 that all such advances shall be made
at par. On the other hand, it is recognized that the omission of this
subsection might be interpreted, although erroneously, as representing
a change in Federal Reserve System policy in this respect; and, if the
Provisions are omitted as suggested, it might be desirable to state in
ah accompanying public announcement that no change in present policy is
intended. This point may require further consideration.
Advances to
Nonmember Banks
The proposed revision would include a new section 6, authorizing
any Reserve Bank to make advances to a nonmember bank on the security of
direct obligations of the United States in unusual and exigent circum
stances and v.rhere the nonmember bank can show its inability to obtain
the credit from correspondent or other banks or from other usual sources
°F credit.
Because of the inclusion of this new section regarding advances
t° nonmember banks, the proposed revision would include also a change in
the title of the Regulation so that it would refer to discounts for, and
advances to, "banks", rather than "member banks". For similar reasons
a new clause has been inserted in the introductory paragraph of' the
Regulation referring specifically to advances to nonmember banks on
their notes secured by direct obligations of the United States.
It should be noted that the proposed revision, like the present
Regulation A, contains no reference to the authority in paragraph 13 of
the Federal Reserve Act to make advances to individuals, partnerships,
corporations other than banks* It has been suggested that this matter
ght be covered in a letter to the Federal Reserve Banks.
Information Which May Be Required by Federal Reserve Banks
s
.
The proposed revision would substitute for subsection (c) of present
r)eC^lon 3 of the Regulation a new paragraph which would authorize a Federal
s Serve Bank to obtain from its member banks such information as might be necesn°t only to determine whether speculative use is being made of bank credit,
So. a-'-so in order to determine compliance with any of the general principles
Torth in section 1 of the Regulation.
Bankers1 Acceptances
w
The present section of the Regulation relating to bankers’ acceptances
^•Ud be eliminated, but the substance of that section would be incorporated
a new subsection in section 3 of the proposed revision. This would be a
-lange in form only and not a change in substance.
Appendix Recommendations with Respect to Real Estate L o a n s and Loans
2.1* an Installment Basis
tjj
The proposed revision would omit the recommendations contained in
v.c*a^ P P endix to the present Regulation with respect to minimum standards for
to
estate loans and for installment paper used as collateral for advances
Saou? ^ er ban’
KSo If these recommended standards, which were drafted in 1937*
Staff
retainecI in the Appendix, they would require modification, and the
1 doubts whether their inclusion, even if modified, would serve any useful
°se.
13.
Other Changes
The present prefatory statement of "General Principles"' would be
it would be superseded by the ne<v section 1 of the Regulation.
02litted, since
of
For technical reasons, the reference to Regulation B in subsection (a)
^ssery^°n ^ °f
Present Regulation would be changed to refer to the Federal
counts
The new section 7 is changed to require the Board’s permission for
for Federal Intermediate Credit banks.
He J *
:2ctions
Appropriate changes are made in the revision in the numbering of
in cross references to sections, and in the table of contents,
ges would, of course, be necessary in the statutory provisions which
sot forth in the Appendix.
ents
PR-CONFIDENTIAL
DRAFT - 3-12-5U
APPENDIX D-l
REGULATION A
ADVANCES TO AND DISCOUNTS FCR BANKS BY
FEDERAL RESERVE BANKS
CONTENTS
Page
Introduction .................................................
Sec.
1.
Sec. 2.
General Principles ...................................
Advances to Member Banks ..................... .
(a) Advances on Government obligations .............
(b) Advances on eligible paper .....................
(c) Advances on other security under section 10(b)
of the Federal Reserve Act ...................
^ec- 3.
Discount of Notes, Drafts and Bills for Member Banks..
(a) Commercial, agricultural and industrial paper ...
(b) Bills of exchange payable at sight or on demand..
(c) Bankers' acceptances .............. .............
(d) Construction loans .............................
(e) Agricultural paper .............................
(f) Paper of cooperative marketing associations .....
(g) Factors' paper .................................
(h) Collateral securing discounted paper ...........
(i) Determination of eligibility ...................
(j) Limitations ...................... .............
-i-
Page
Sec. Iu
General Requirements as to Discounts and Advances ..
(a) Applications for discounts or advances .......
(b) Financial statements .........................
(c) Other information ...... ......................
(d) Additional or marginal collateral ............
Sec. 5.
Paper Acquired from Nonmember Banks ...............
(a) Prohibition upon acceptance of nonmember bank
paper ......................................
(b) Applications for permission ..................
(c) Paper acquired from Federal Intermediate Credit
banks ...... ..... ..........................
Sec.
60
Advances to Nonmember Banks .......................
Sec.
7.
Discounts for Federal Intermediate Credit Banks ....
(a) Kinds and maturity of paper ..................
(b) Limitations ..................................
Appendix ...................................................
Statutory Provisions ....... ......................
-IX-
REGULATION A
Revised Effective
,
ADVANCES TO AND DISCOUNTS FOR BANKS BY
FEDERAL RESERVE BANKS
INTRODUCTION
This Regulation is based upon and issued pursuant to various
Provisions of the Federal Reserve Act, the most important of which, to
gether with related provisions of law, are published in the Appendix
hereto.
The Regulation is applicable to the following forms of borrow
ing from a Federal Reserve Bank:
(1) advances to member banks on their
°wn notes secured (a) by direct obligations of the United States, by paper
eligible for discount or purchase by Federal Reserve Banks, or by ob
ligations of certain corporations owned by the United States, or (b) by
°ther security which is satisfactory to the Federal Reserve Bank;
(2) discounts for member banks of commercial, agricultural and indus
trial paper and bankers' acceptances; (3 ) advances to nonmember banks
°n their own notes secured by direct obligations of the United States;
and (ii) discounts for Federal Intermediate credit banks.
SECTION 1.
GENERAL PRINCIPLES
The basic objective underlying Federal Reserve credit policy
ls the advancement of the public interest by contributing to the greatest
e*tent possible to economic stability and growth.
The Federal Reserve
d°es this largely by influencing the supply, availability, and cost of
-2reserve funds to the banking system.
The Federal Reserve may take the
initiative in providing or absorbing reserve funds in accordance with
the needs of the banking system as a whole; this is done through open
market operations and at times through changes in reserve requirements.
On the other hand, an individual member bank may take the initiative in
obtaining reserve funds by borrowing at the Federal Reserve Banks, at
discount rates which are raised and lowered by the Federal Reserve from
time to time in accordance with the credit and economic situation.
This
borrowing facility is designed primarily to permit an individual member
bank to meet its temporary or emergency needs for reserve funds.
The
member bank is thereby enabled, pending other adjustments in its reserve
Position, to continue to accommodate the legitimate credit needs of
commerce, industry, and agriculture.
However, borrowings by individual
banks add to the supply of reserves of the banking system as a whole, and
therefore the manner and extent of the use of the borrowing facility
have an important bearing upon the effectiveness of System credit policy.
Accordingly, in considering applications for credit, a Federal
Reserve Bank must have regard not only to statutory and regulatory re
quirements with respect to the eligibility of the paper offered for
Rediscount or as collateral for advances, but also to certain general
guiding principles, particularly those set forth below, which have been
established by Congress in the law itself or by the Board of Governors
Pursuant to its authority to define the conditions under which such
credit accommodations may be extended.
These principles take account
-3-
°i' the obligation of the Federal Reserve Banks, as stated in the law,i^
to give due regard to the claims and demands of other member banks, the
maintenance of sound credit conditions, and the accommodation of com
merce, industry, and agriculture.
Access to the credit facilities of the
Federal Reserve Banks is a privilege of membership in the Federal Reserve
System which must be considered in the light of these principles:
(1) Due regard must be given to the effect of any extension
of credit upon the maintenance of sound credit conditions, both
as to individual institutions and as to the economy generally.
Accordingly, consideration should be given to the effect that
the granting or withholding of credit accommodations may have
upon the applicant member bank, its depositors, and the community
and its credit needs, and whether the member bank is conducting
its operations in a manner consistent with sound credit conditions.
(2) Federal Reserve credit should normally be extended for
short periods to meet temporary credit needs of member banks.
(For example, extension of Federal Reserve credit is appropriate
in order to enable a member bank to adjust its asset position
because of such developments as a temporary loss of deposits
or to assist a member bank in meeting requirements for seasonal
credit which cannot reasonably be anticipated and met by use of
the member bank's own resources.)
J7~~iee paragraph b of section U of the Federal Reserve Act set forth
P - ______of the Appendix to this Regulation.
-u(3)
In order to enable member banks to meet unusual and
exigent situations, Federal Reserve credit should be extended
for as long a period as may be deemed necessary - whether such
situations result from a national economic emergency, or from
exigent regional or local conditions, or, in certain situations,
from an emergency involving only the particular member bank.
(It) While unusual and exigent circumstances or special
local economic needs may justify continuous borrowing by a
member bank over a considerable period of time, under ordinary
conditions continuous use of Federal Reserve credit by a
member bank so as in effect to increase its resources,
whether by long-term borrowing or by frequent short-term
borrowings, would not be an appropriate use of Federal Re
serve credit.
(?) In determining whether to grant or refuse credit to
any member bank, the Federal Reserve Banks are required by
the law to consider the general character and amount of the
loans and investments of the member baric and whether the bank
is extending an undue amount of credit for speculative pur
poses in securities, real estate, or commodities.
(6) Federal Reserve credit should not be extended where
it appears that the member bank's principal purpose is to
profit from rate differentials or to obtain a tax advantage.
(7) The lav/ permits only such extensions of Federal Re
serve credit as may be "reasonably and safely made"; and the
- 5-
acceptability of paper offered for rediscount or as collateral
for advances must be determined in the best judgment of the
Federal Reserve Bank in accordance with the provisions and ob
jectives of the Federal Reserve Act and this Regulation.
(8)
The Board of directors of each Federal Reserve Bank
is required by law to administer the affairs of such Bank
fairly and impartially and without discrimination in favor
of or against any member bank or banks.
Accordingly, in
passing upon a member bank's request for credit, due regard
must be given to the claims and demands of other member banks.
Subject to consideration of the principles above stated and
to other provisions of this Regulation, credit accommodations may be
extended pursuant to any of the various provisions of the law authorizing
e*tensions of such credit.
In passing upon requests for credit accom
modation, the directors and officers of the Federal Reserve Bank should
give consideration to all of the principles stated above, together with
any other factors which may be pertinent.
SECTION 2.
(a)
ADVANCES TO MEMBER BANKS
Advances on Government obligations.— Any Federal Reserve
®ahk may make advances, under authority of section 13 of the Federal
Reserve Act, to any of its member banks for periods not exceeding
-62/
fifteen days—7 on the promissory note of such member bank secured (1 ) by
the pledge of bonds, notes, certificates of indebtedness, or Treasury
bills of the United States, or (2) by the pledge of debentures or other
such obligations of Federal Intermediate Credit banks having maturities
of not exceeding six months from the date of the advance.—'
/
(b)
Advances on eligible paper.— (1) Any Federal Reserve Bank
may make advances, under authority of section 13 of the Federal Reserve
Act, to any of its member banks for periods not exceeding ninety days—^
on the promissory note of such member bank secured by such notes, drafts,
bills of exchange, or bankers’ acceptances as are eligible for discount
by Federal Reserve Banks under the provisions of this Regulation or
for purchase by such banks under the provisions of the Federal Reserve
Act.
(2 ) In the event notes which evidence loans made pursuant to a
commodity loan program of the Commodity Credit Corporation and which
V
Under the provisions of the last paragraph of section 13 of the
Federal Reserve Act, any Federal Reserve Bank may make advances for
periods not exceeding ninety days to individuals, partnerships, or
corporations (including banks) on their promissory notes secured by
direct obligations of the United States at rates fixed for the purpose.
However, the maturity of any borrowing to meet the temporary credit needs
of a member bank should ordinarily be limited to fifteen days.
3/ Such advances may also be made on notes secured by the pledge of
Federal Farm Mortgage Corporation bonds issued under the Federal Farm
Mortgage Corporation Act and Home Owners’ Loan Corporation bonds issued
under section U(c) of the Home Owners' Loan Act of 1933* which are
guaranteed as to principal and interest by the United States.
h/
However, as stated in paragraph (2) of section 1 of this Regulation,
the maturity of any borrowing to meet the temporary credit needs of a
member bank should ordinarily be limited to short periods.
-7-
comply with the maturity requirements of subsection (a) of section
3
of
this Regulation have been deposited in a pool of notes operated by the
Commodity Credit Corporation, the certificate of interest issued by the
Commodity Credit Corporation which evidences the deposit of such notes
may be accepted as security for an advance made to a member bank under
this subsection,
(c) Advances on other security under section 10(b) of the
Federal Reserve Act.— Any Federal Reserve Bank may make advances, under
authority of section 10(b) of the Federal Reserve Act, to any of its
member banks upon the latter's promissory note secured to the satisfac
tion of such Federal Reserve Bank.
The rate on advances made under the
provisions of this subsection shall in no event be less than one-half of
1
per cent per annum higher than the highest rate applicable to discounts
for member banks under the provisions of sections 13 and 13a of the Fed
eral Reserve Act in effect at such Federal Reserve Bank.
Such an advance
must be evidenced by the promissory note of such member bank payable
either (l) on a definite date not more than four months after the date
°f such advance, or (2 ) at the option of the holder on or before a
definite date not more than four months after the date of such advance.
SECTION 3.
3/
DISCOUNT OF NOTES, DRAFTS AND BILLS FOR MEMBER BANKS-
(a) Commercial, agricultural and industrial paper.— Any Federal
Reserve Bank may discount for any of its member banks, under authority
Even though paper is not eligible for discount by a Federal Reserve Bank
for a member bank under the provisions of this Regulation, it may be used
as security for an advance by a Federal Reserve Bank to a member bank under
the terms and conditions of subsection (c) of section 2 of this Regulation
it constitutes security satisfactory to the Federal Reserve Bank. In
addition to the classes of paper mentioned in section 3 of this Regulation
a_Federal Reserve Bank may discount bankers' acceptances in accordance
V
the provisions of section 8 of this Regulation.
Digitized;ith
for FRASER
-8-
of sections 13 and 13a of the Federal Reserve Act, any note, draft, or
bill of exchange which meets the following requirements:
(1) It must be a negotiable note, draft, or bill
of exchange, bearing the endorsement of a member bank,
which has been issued or drawn, or the proceeds of which
have been used or are to be used, in producing, purchasing,
6/ in
carrying or marketing goods”
one or more of the steps of
the process of production, manufacture, or distribution, or
in meeting current operating expenses of a commercial, agri
cultural or industrial business, or for the purpose of carry
ing or trading in direct obligations of the United States
(i.e., bonds, notes, Treasury bills or certificates of in
debtedness of the United states);
(2) It must not be a note, draft, or bill of exchange
the proceeds of which have been used or are to be used for
permanent or fixed investments of any kind, such as land,
buildings or machinery, or for any other fixed capital
purpose;
(3) It must not be a note, draft, or bill of exchange
the proceeds of which have been used or are to be used for
As used in this Regulation the word "goods" shall be construed to
ihclude goods, wares, merchandise, or agricultural products, including
livestock.
-9-
transactions of a purely speculative character or issued
or drafln for the purpose of carrying or trading in stocks,,
tends
or other investment securities except direct obliga
tions of the United States (i.e., bonds, notes, Treasury
Dills or certiiicates of indebtedness of the United States);
(k)
It must have a maturity at the time of discount of
not exceeding ninety days, exclusive of days of grace, except
that agricultural paper as defined below in this section of
this Regulation may have a maturity of not exceeding nine
months, exclusive of days of grace; but this requirement is
not applicable with respect to bills of exchange payable at
sight or on demand of the kind described in subsection (b)
of this section.
(b)
Bills of exchange payable at sight or on demand.— Any
Federal Reserve Bank may discount for any of its member banks, under
authority of section 13 of the Federal Reserve Act, negotiable bills
°F exchange payable at sight or on demand which (1 ) bear the endorsement
°F a member bank, (2) grow out of the domestic shipment or the exporta7
tion of nonperishable, readily marketable staples,— and (3 ) are secured
j
2^A"read.ily marketable staple within the meaning of this Regulation
®eans an article of commerce, agriculture, or industry of such uses
as to make it the subject of constant dealings in ready markets with
®tch frequent quotations of price as to make (a) the price easily and
finitely ascertainable and (b) the staple itself easy to realize upon
y sale at any time.
-10by bills of lading or other shipping documents conveying or securing
title to such staples.
All such bills of exchange shall be forwarded
promptly for collection, and demand for payment shall be made promptly,
unless the drawer instructs that they be held until arrival of such
staples at their destination, in which event they must be presented for
Payment within a reasonable time after notice of such arrival has been
received.
In no event shall any such bill be held by or for the account
°f a Federal Reserve Bank for a period in excess of ninety days.
(c) Bankers 1 Acceptances.— Any Federal Reserve Bank may
discount for any of its member banks a banker's acceptance—
which
bears the endorsement of a member bank and (i) which grows out of
transactions involving the importation or exportation of goods, the
shipment of goods within the United States, or the storage of readily
9/
Marketable staples," as such transactions are more fully described
a banker's acceptance within the meaning of this Regulation is a
draft or bill of exchange, whether payable in the United States or
abroad and whether payable in dollars or some other money, accepted by
a bank or trust company or a firm, person, company, or corporation en
gaged generally in the business of granting bankers' acceptance credits.
2/
In the case of an acceptance growing out of the storage of readily
Marketable staples, the bill must be secured at the time of acceptance
by a warehouse, terminal, or other similar receipt, conveying security
^itle to such staples, issued by a party independent of the customer or
issued by a grain elevator or warehouse company duly bonded and licensed
and regularly inspected by State or Federal authorities with whom all
receipts for such staples and all transfers thereof are registered and
without whose consent no staples may be withdrawn; and the acceptor
Must remain secured throughout the life of the acceptance. If the
goods are withdrawn from storage before maturity of the acceptance or
rotireinent of the credit, a trust receipt or other similar document
oovering the goods may be substituted in lieu of the original docuMent, provided that such substitution is conditioned upon a reasonably
Prompt liquidation of the credit; and, to this end, it should be re
quired, when the original document is released, either that the proceeds
°f the goods will be applied within a specified time toward a liquida
tion of the acceptance credit or that a new document, similar to the
°riginal one, will be resubstituted within a specified time.
-11-
in paragraphs (1 ), (2), and (3 )* respectively, of section
Board's Regulation C
,— ^
1 (a)
of the
or (ii) which has been dra\vn by a bank or
banker in a foreign country or dependency or insular possession of the
United States for the purpose of furnishing dollar exchange as provided
m
section 2 of Regulation C; provided, that any such acceptance shall
have a maturity at the time of discount of not more than
90
days' sight,
exclusive of days of grace, except that an acceptance drawn for agri
cultural purposes and secured at the time of acceptance by warehouse
receipts or other such documents conveying or securing title covering
readily marketable staples may be discounted with a maturity at the time
°f discount of not more than six months' sight, exclusive of days of
11/
grace;—
and provided further, that acceptances for any one customer in
I|7"T'he bill itself should be drawn so as to evidence the character of
rhe underlying transaction, but if it is not so drawn evidence of eli
gibility may consist of a stamp or certificate affixed by the acceptor
ln form satisfactory to the Federal Reserve Bank.
11/ No acceptance discounted by a Federal Reserve Bank should have a
maturity in excess of the usual or customary period of credit required
to finance the underlying transaction or of the period reasonably necesSany to finance such transaction; and no acceptance growing out of the
storage of readily marketable staples should have a maturity in excess
°f the time ordinarily necessary to effect a reasonably prompt sale,
shipment, or distribution into the process of manufacture or consump
tion.
-12-
excess of
10
per cent of the capital and surplus of the accepting bank
must remain actually secured throughout the life'of the acceptance
(d)
12/
.—
'
Construction loans.— In addi.tion to paper of the kinds
specified above, any Federal Reserve Bank may discount for any of its
member banks, under authority of section
2h
of the Federal Reserve Act,
a negotiable note which (1 ) represents a loan made to finance the con
struction of a residential or a farm building whether or not secured
by lien upon real estate, (2 ) is endorsed by such member bank, (3 ) is
13;
accompanied by a valid and binding agreement, entered into by a person
acceptable to the discounting Federal Reserve Bank, requiring such
person to advance the full amount of the loan upon the completion of
the construction of such residential or farm building, and (U) matures
not more than six months from the date such loan was made and not more
than ninety days from the date of such discount by such Federal Reserve
Bank, exclusive of days of grace.
^ 7 In the case of the acceptances of member banks this security must
consist of shipping documents, warehouse receipts, or other such docu
ments, or some other actual security growing out of the same transac
tion as the acceptance, such as documentary drafts, trade acceptances,
terminal receipts, or trust receipts which have been issued under such
circumstances, and which cover goods of such a character, as to insure
at all times a continuance of an effective and lawful lien in iavor of
the accepting bank, other trust receipts not being considered such actual
security if they permit the customer to have access to or control over
the goods.
^3/ Such person may be the member bank offering the note for discount
or any other individual, partnership, association or corporation.
-13-
(e) Agricultural paper.— Agricultural paper, within the meaning
°f this Regulation, is a negotiable note, draft, or bill of exchange
issued or drawn, or the proceeds of which have been or are to be used,
for agricultural purposes, including the production of agricultural
Products, the marketing of agricultural products by the growers thereof,
°r the carrying of agricultural products by the growers thereof pending
orderly marketing, and the breeding, raising, fattening, or marketing
°f livestock.
(f) Paper of cooperative marketing associations.— Notes, drafts,
bills of exchange, or acceptances issued or drawn by cooperative mar
keting associations composed of producers of agricultural products are
deemed to have been issued or drawn for an agricultural purpose within
the meaning of the foregoing definition of "agricultural paper", if the
Proceeds thereof have been or are to be used by such association in
taking advances to any members thereof for an agricultural purpose, in
taking payments to any members thereof on account of agricultural products
delivered by such members to the association, or to meet expenditures in
curred or to be incurred by the association in connection with the gradprocessing, packing, preparation for market, or marketing of any
agricultural product handled by such association for any of its members,
fh addition, any other paper of such associations which complies with
the applicable requirements of this Regulation may be discounted.
Paper
°f cooperative marketing associations the proceeds of which have been
°r are to be used (1 ) to defray the expenses of organizing such
-Ill-
associations, or (2 ) for the acquisition of warehouses, for the purchase
°r improvement of real estate, or for any other permanent or fixed in
vestment of any kind, is not eligible for discount, even though such
warehouses or other property is to be used exclusively in connection
with the ordinary operations of the association.
(g) Factors 1 paper.— Notes, drafts, and bills of exchange of
factors issued as such for the purpose of making advances exclusively
tn
Producers of staple agricultural products in their raw state are
eligible for discount rath maturities not in excess of ninety days, exclusive of days of grace.
(h) Collateral securing discounted paper.— Any note, draft, or
kill of exchange eligible for discount is not rendered ineligible because
it. *
is secured by the pledge of goods or collateral of any nature, including paper ineligible for discount.
(i) Determination of eligibility.--(1) A Federal Reserve Bank
shall take such steps as may be necessary to satisfy itself as to the
eligibility of any paper offered for discount.
Compliance of paper with
th
e Provisions of paragraph (2 ) of subsection .(a) of this section may be
evidenced by a statement which adequately reflects the borrower's financial
rth and evidences a reasonable excess of quick assets over current lialities, or such compliance may be evidenced in any other manner satisctory to the Federal Reserve Bank.
(2) The requirement of this section that a note be negotiable
shan
n°t be applicable rath respect to any note evidencing a loan
-15-
which is made pursuant to a commodity loan program of the Commodity
Credit Corporation and which is subject to a commitment to purchase by
the Commodity Credit Corporation or with respect to any note evidencing
a loan which is in whole or in part the subject of a guarantee or commit
ment made pursuant to section 301 of the Defense Production Act of 1950.
(j)
Limitations.— (1) The aggregate of notes, drafts, and bills
uPon which any person, copartnership, association, or corporation is
liable as maker, acceptor, endorser, drawer, or guarantor, discounted
ior any member bank shall at no time exceed the amount for which such
Person, copartnership, association, or corporation may lawfully become
liable to a national bank under the terms of section 5200 of the Revised
Statutes of the United States, as amended.-— ^
(2) The law forbids a Federal Reserve Bank to discount for
any State member bank notes, drafts, or bills of exchange of any one
borrower who is liable for borrowed money to such State member bank in
an amount greater than that which could be borrowed lawfully from such
State member bank were it a national bank.
SECTION h.
(a)
GENERAL REQUIREMENTS AS TO DISCOUNTS AND ADVANCES
Applications for discounts or advances.--(1) Every
aPplication by a member bank for the discount of paper or for an advance
to such bank must contain a certificate of such bank, in form to be pre
scribed by the Federal Reserve Bank, that the paper offered for discount
^ S e c t i o n 5200 of the Revised Statutes of the United States is printed
the Appendix to this Regulation (page ____)•
-l6-
°r the security offered for the advance, as the case may be, has not
been acquired from a nonruember bank (otherwise than in accordance with
section 5> of this Regulation) or, if so acquired, that the applying
member bank has received permission from the Board of Governors of the
Federal Reserve System to discount with the Federal Reserve Bank paper
acquired from nonmember banks or to obtain advances from the Federal Re
serve Bank on security so acquired.
(2) Every such application shall also contain a notation by
the member bank as to whether it has on file a statement which adequately
reflects the financial worth of a party primarily liable on the paper
°ffered as security for an advance or for discount or of the person
from whom the member bank acquired such paper if such person is legally
liable thereon,
(3) Every application of a State member bank for the discount
°f paper must contain a certificate or guaranty to the effect that the
borrower is not liable and vail not be permitted to become liable to such
bank for borrowed money during the time his paper is under discount with
the Federal Reserve Bank in an amount greater than that which could be
borrowed lawfully from such State bank were it a national bank.
(b)
Financial statements.— In order to determine whether paper
offered for discount or security offered for an advance is eligible and
Acceptable, any Federal Reserve Bank may require that there be filed
th it statements, or certified copies thereof, which adequately reflect
-17;-
the financial worth (1 ) of one or more parties to any note* draft, or
bill of exchange offered for discount or to any obligation offered as
security for an advance and (2) of any corporations or firms affiliated
with or subsidiary to such party or parties.
A Federal Reserve Bank may
in any case require such other information as it deems necessary.
(c)
Other information.— Each Federal Reserve Bank is required
by law to keep itself informed of the general character and amount of
the loans and investments of its member banks with a view to ascertain
ing whether undue use is being made of bank credit for the speculative
carrying of or trading in securities, real estate, or commodities, or
any other purpose inconsistent with the maintenance of sound credit
conditions; and, in determining whether to grant or refuse discounts or
advances, the Federal Reserve Bank is required to give consideration to
stch information.
Each Federal Reserve Bank may require such informa
tion from its member banks as it may deem necessary in order to determine
whether such undue use of bank credit is being made.
It may also require
Su°h additional information as may be deemed desirable in order to
determine whether the granting of any requested credit accommodation
Vf°uld be consistent with the principles set forth in section
1
of this
filiation.
(d)
Additional or marginal collateral.— In connection with
ahy discount or advance under this Regulation, a Federal Reserve Bank
^
require such additional or marginal collateral as it may deem ad-
visable or necessary for its protection] and the requirements of this
-18Regulation with respect to collateral shall not be applicable to such
additional or marginal collateral.
In any case in which additional or
marginal collateral is required, it is expected that the Federal Reserve
Bank in determining the amount will give due regard to the public welfare
^ d the general effects that its action may have on the position of the
member bank, on its depositors, and on the community; and in general a
Federal Reserve Bank should limit the amount of collateral it requires
to the minimum consistent with safety.
SECTION £. PAPER ACQUIRED FROM NONMEMBER BANKS
(a) Prohibition upon acceptance of nonmember bank paper.— Except
v,ith the permission of the Board of Governors of the Federal Reserve System,
bo Federal Reserve Bank shall discount or accept as security for an
bdvance any assets acquired by a member bank from, or bearing the sig
nature or endorsement of, a nonmember bank, except assets otherwise
eligible which were purchased by the offering bank on the open market
°r otherwise acquired in good faith and not for the purpose of obtaining
credit for a nonmember bank.
(b) Applications for permission.--An application for permission
to discount paper acquired from nonmember banks or to use as security
tor advances assets acquired from nonmember banks shall be made by the
tomber bank which desires to offer such paper for discount or such assets
as security and shall state fully the facts which give rise to such ap
plication and the reasons why the applying member bank desires such
Permission.
Such application shall be addressed to the Board of Governors
-19°f the Federal Reserve System but shall be submitted by the member bank
to the Federal Reserve Bank of the district, wliich will forward it
promptly to the Board of Governors of the Federal Reserve System with
its recommendation.
(c)
Paper acquired from Federal Intermediate Credit banks.— The
Board of Governors of the Federal Reserve System hereby grants permission
to Federal Reserve Banks to discount for member banks paper bearing the
signature or endorsement of, or acquired from. Federal Intermediate
Credit banks or to make advances to member banks upon the security of
Paper or assets bearing such a signature or endorsement or so acquired,
if otherwise eligible under the law and this Regulation.
/
SECTION
6.
"15/
ADVANCES TO NONMEMBER BANKS-
Any Federal Reserve Bank may make advances to any nonmember
tank on the promissory note of such bank secured by direct obligations
°f the United States, subject to the same requirements as those applicable
Under this Regulation to advances to member banks, but only in unusual
and exigent circumstances and where the applicant submits information
adequately evidencing its inability to obtain the necessary credit on
reasonable terms from correspondent or other banks or from other usual
sources of credit.
SECTION 7.
DISCOUNTS FOR FEDERAL INTERMEDIATE CREDIT BANKS
(a) Kinds and maturity of paper.— Any Federal Reserve Bank,
^ d e r authority of section 13a of the Federal Reserve Act, may, with
^S^buch advances are authorized by the last paragraph of section 13 of
Federal Reserve Act (Appendix, p. ___).
-20-
the permission of the Board of Governors, discount for any Federal
Intermediate Credit bank (1 ) agricultural paper as defined in section
1
of this Regulation, or (2) notes payable to such Federal Intermediate
Credit bank covering loans or advances made by it pursuant to the provi
sions of section 202(a) of Title II of the Federal Farm Loan Act, which
are secured by notes, drafts, or bills of exchange eligible for discount
by Federal Reserve Ranks.
Any paper discounted for a Federal Intermediate
Credit bank must bear the endorsement of such bank and must have a
maturity at the time of discount of not more than nine months, exclusive
of days of grace.
(b) Limitations.— No Federal Reserve Bank shall discount for
any Federal Intermediate Credit bank any paper which bears the endorse
ment of any nonmember State bank or trust company which is eligible for
membership in the Federal Reserve System under the terms of section
°f the Federal Reserve Act.
9
In acting upon applications for the dis
count of paper for Federal Intermediate Credit banks, each Federal Re
serve Bank shall give preference to the demands of its own member banks
ar-d shall have due regard to the probable future needs of its own member
banks.
APPENDIX
Statutory Provisions
[Omitted from this draft]
PR-CONFIDENTIAL
DRAFT - 3-12-5U
APPENDIX D-2
Textual Changes Which Would Be Made in
Regulation A by Propose! Revision
[Old material stricken through] new material in all capitals]
REGULATION A
BISG9BN5S-F9R-ANB ADVANCES TO AND DISCOUNTS FOR MEMBER BANKS
BY FEDERAL RESERVE BANKS
CONTENTS
Page
Introduction .......................... ........................
SEC. 1.
GENERAL PRINCIPLES ....................................
2.
Advances to Member Banks ..............................
Sec.
ffe} (a) Advances on Government obligations ...........
fa-) (b) Advances on eligible p a p e r ..... ..............
(c) Advances on other security under section 10(b)
of the Federal Reserve Act .....................
fd-)-Kifids-ef-€eilate5?al-whiefe-aay-fee-used-as
seeuFity-fer-advaHees-HHceF-eeetieH-lQfb-)
ef-th©-Fade?al-Sese?ve-A«t .................
Sec. A 3«
Discount of Notes
,
Drafts and Bills for Member Banks..
(a) Commercial* agricultural and industrial paper...
(b) Bills of exchange payable at sight or on demand.
(c) BANKERS' ACCEPTANCES ..........................
fe) (d) Construction loans ....................... .
Page
4d4 (e) Agricultural paper ........................
(e} (f) Paper of cooperative marketing associations.
(f) (g) Factors' p a p e r ...... ................... .
(h) Collateral securing discounted paper .......
{k} (i) Determination of eligibility ..............
(i} (j ) Limitations ................... .......
Sec. 3
General Requirements as to Discounts and Advances ....
(a) Applications for discounts or advances..... .
(b) Financial statements ....... ..................
(c) Speeualtive-uee-ex-eredit-fey-a-mefakep-kaHk OTHER
INFORMATION............ .....................
(d) Additional or marginal collateral .............
4e}-Gredife-e:vten3ed-eH~8eeyFi%y-e£-&feiiga;oieHS-e#
%ke—trHxxed-Staxes ............................
Sec. j* 5.
Paper Acquired from Nonmember Banks ........ ........
(a) Prohibition upon acceptance of nonmember bank
p a p e r ............. .........................
(b) Applications for permission.................. .
(c) Paper acquired from Federal Intermediate Credit
banks ....................................
SEC. 6.
Sec. 3 7.
AD VAN CES
TO NONI.EMBER BANKS ...................
Discounts for Federal Intermediate Credit Banks .....
(a) Kinds and maturity of paper ...................
(b) Limitations ............ .......................
-ii-
Page
Appendix ...................................................
ReeeHHefidatieRs-er-tke-Seapd-es-S&vePBeps-ef-the-Fedepai
Reee?ve-S5r=%em-as--%&-4he-EiHiHafi-s%aHdaiids-whiek-erie«3:i
fee-efeaePved-tey-EeHfee?-feask&-in-isakiftg-ieaHB-'tipeH-£iea=
ReeeHEeadatieHS-e^-tke— Beapd-e#-GevepR©PS-e£-4k&-Fedepa=
Rseepve-SySfles-as-xe-xhe-KiHisHKi-eiaHdap^s-fep-iHsialljaeRt-papep-used-as-aekiadepai-seeupidy-rep-advaHees-t©
fii©Hfeep-bafik&
Statutory Provisions
-iii-
SEt-JEFAL-PEI EsiPLBS
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arideFlyifig--th-e-di-seeaat-poiiey-
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■Fedarafe-ka-s-eF-ve-feunke-ie- tk-e-advua-eesieni- ef- ike- jsaklie-dale-rest-— Ae •e«i’d4.«g:
Ty7--tke--e-fi'e34;-tkat- -tk«-granting- & f ~-vi4:kkeidias-ei~ -e-reddi-ae-
«©Piw;©da4i ©a-fey-a- Federal-Re-g-eyve- Bask-say- kave- «a-a- seHker- feaak7-ea
i-ia- deeasiter-s- aad- ©a- tke- eesefuaity- 4a- ei- grisaiy- iagertasee-s
la-©xteadiflg-aeeeEsaedaties-te-aay-aes-feer-kaak7-ike-Federal
Seeeave-Baaks-are-requiFed-fee-keve-dHe-regai'd-fee-fehe-deHiaads-ef-elkei’
rseafeeF-fe&akej-as-aeil-ae-fes-ferie-Haiakeaeaee-ei-seuad-eFedlfe-eeaditieas
aad- ifee-aeeeaweelatiea- sf- ee tmeree? -indus try-aad-agrieultus*e7-aad- te
eeasider-aet-ealy- ike- aature- e£- ihe-gaser- efsex’ed-y-feat-alse-the- geaea?al
ekaraetea-aad-aiaeuat-eF-trie-leaas-ftHd-iaaestrseate-eF-tke-seir^er-feafiky
aa&-wketker-tke-feaHk-k&s-keea-eateHdia-)-aa-uadue-aa6uat-el'-€reai%
feF-sgeeulative-euFjseses-iH-seeuritiesT-real-est&tey-er-eefiniedities^
e?-ia-aay-94keF-way-k&s-eeaauete&-its-egef-atieas-iH-a-aaaaei'-iaeeasisteat-witk-tke-Faiateaaase-ei-seuad-ereait-eeaditieasT
-IV-
REGULATION A
Revised effective___________, _____
DISCOUNTS FOR AND ADVANCES TO MEMBER BANKS BY
FEDERAL RESERVE B A M S
INTRODUCTION
This Regulation is based upon and issued pursuant to various
provisions of the Federal Reserve Act, the most important of which, to
gether with related provisions of law, are published in the Appendix
hereto.
The Regulation is applicable to the following forms of borrow
ing from a Federal Reserve Eank:
fS)- (1) advances to member banks on
their own notes secured _(a) BY DIRECT OBLIGATIONS OF TUE UNITED STATES^
by paper eligible for discount or purchase by Federal Reserve Banks, OR
by obligations of the-United-States-er certain corporations owned by
ihe United States, or (b) by other security which is satiefetory to the
Federal Reserve Panic; (!)• (2) discounts for member banks of commercial,
agricultural and industrial paper and bankers' acceptances; (3) ADVANCES
TO NONHEMBER BANKS ON THEIR OWN NOTES SECURED BY DIRECT OBLIGATIONS OF
THE UNITED STATESj_ and
(A) discounts for-Federal Intermediate Credit
banns.
SECTION 1.
GENERAL PRINCIPLES
THE BASIC OBJECTIVE UNDERLYING FEDERAL RESERVE CREDIT POLICY
IS THF ADVANCE! RENT OF ThF PUBLIC INTEREST BY CONTRIBUTING TO THE GREATEST
EXTENT POSSIBLE TO ECONOMIC STABILITY AND GROWTH.
THE FEDERAL RESEPVE DOES
THIS LARGELY BY INFLUENCING THE SUPPLY, AVAILABILITY, AND COST OF RESERVE
FUNDS TO THE BANKING SYSTEM.
THE FEDERAL RESERVE MAY TAKE THF INITIATIVE
-2IN PROVIDING OR ABSORB -TNG RESERVE FUNDS IN ACCORDANCE WITH THE NEEDS
OF THE BANKING SYSTEM AS A WHOLE; THIS IS DONE THROUffl OPEN MARKET
OPERATIONS AND AT TIMES THROUGH CHANGES IN RESERVE REQUIREMENTS.
ON
THE OTHER HAND, AN INDIVIDUAL MEMBER BANK MAY TAKE THE INITIATIVE IN
OBTAINING RESERVE FUNDS BY BORROWING AT THE FEDERAL RESERVE BANKS,
AT DISCOUNT RATES WHICH ARE RAISED AND LOWERED EY THE FEDERAL RESERVE
FROM TIME TO TIME IN ACCORDANCE WITH THE CREDIT AND ECONOMIC SITUATION.
THIS BORROWING FACILITY IS DESIGNED PRIMARILY TO PERMIT AN INDIVIDUAL
MEMBER BANK TO MEET ITS TEMPORARY OR EMERGENCY NEEDS BOR RESERVE
FUNDS.
THE MEMBER BANK IS THEREBY ENABLED, PENDING OTHER ADJUSTMENTS
IN ITS RESERVE POSITION, TO CONTINUE TO ACCOMMODATE THE LEGITIMATE
CREDIT NEEDS OF COMMERCE, INDUSTRY, AND AGRICULTURE.
HOWEVER,
BORROWINGS BY INDIVIDUAL BANKS ADD TO THE STIFFLY OF RESERVES OF THE BANK
ING SYSTEM AS A THOLE, AND THEREFORE THE MANNER AND EXTENT OF THE USE
OF THE BORROWING FACILITY HAVE AN IMPORTANT BEARING UPON THE EFFECTIVENESS
OF SYSTEM CREDIT POLICY.
ACCORDINGLY, IN CONSIDERING APPLICATIONS FOR CREDIT, A FEDERAL
RESERVE BANK MUST HAVE REGARD NOT ONLY TO STATUTORY AND REGULATORY RE
QUIREMENTS WITH RESPECT TO THE ELIGIBILITY OF THE FA PER OFFERED FOR
REDISCOUNT OR AS COLLATERAL TOR ADVANCES, BUT ALSO TO CERTAIN GENERAL
GUIDING PRINCIPLES, PARTICULARLY THOSE SET FORTH BELOW, WHICH HAVE
BEEN ESTABLISHED BY CONGRESS IN THE LAW ITSELF CR BY THE BOARD OF
GOVERNORS PURSUANT TO ITS AUTHORITY TO DEFINE THE CONDITIONS UNDER WHICH
SUCH CREDIT ACCOMMODATIONS MAY BE EXTENDED.
THESE PRINCIPLES TAKE AC
COUNT OF THE OBLIGATION OF THE FEDERAL RESERVE BANKS, AS STATED IN THE
La w , T O
GIVE DUE REGARD TO THE C L A M S AND DEMANDS OF OTHER MEMBER
h
^ S E E PARAGRA.PH 8 OF SECTION
OF THE FEDERAL RESERVE ACT SET FORTH
AT
P.
OF
THE
APPENDIX
TO
THIS REGULATION.
-3b a n k s , the maintenance o f sound credit c o n d itions , and the accommodation
OF COMMERCE, INDUSTRY, AND AGRICULTURE.
ACCESS TO THE CREDIT FACILITIES
OF THE FEDERAL RESERVE BANKS IS A PRIVILEGE OF MEMBERSHIP IN THE FEDERAL
RESERVE SYSTEM WHICH MUST BE CONSIDERED IN THE LIGHT OF THESE PRINCIPLES.
(1) DUE REGARD MUST BE GIVEN TO THE EFFECT OF ANY EXTENSION
OF CREDIT UPON THE MAINTENANCE O F SOUND CREDIT CONDITIONS, BOTH
AS TO INDIVIDUAL INSTITUTIONS AND AS TO THE ECONOMY GENERALLY.
ACCORDINGLY, CONSIDERATION SHOULD BE GIVEN TO THE EFFECT THAT
THE GRANTING OR WITHHOLDING OF CREDIT ACCOMODATIONS MAY HAVE
UPON THE APPLICANT MEMBER BANK, ITS DEPOSITORS, AND THE
COMMUNITY AND ITS CREDIT NEEDS, AND WHETHER THE MEMBER RANK
IS CONDUCTING ITS OPERATIONS IN A MANNER CONSISTENT WITH
SOUND CREDIT CONDITIONS.
(2) FEDERAL RESERVE CREDIT SHOULD MORMLY BE EXTENDED
FOR SHORT PERIODS TO MEET TEMPORARY CREDIT NEEDS OF MEMBER
BANKS.
(FOR EXAMPLE, EXTENSION OF FEDERAL RESERVE CREDIT IS
APPROPRIATE IN ORDER TO ENABLE A MEMBER BANK TO ADJUST ITS
ASSET POSITION BECAUSE OF SUCH DEVELOPMENTS AS A TEMPORARY
LOSS OF DEPOSITS OR TO ASSIST A MEMBER BANK IN MEETING
REQUIREMENTS FOR SEASONAL CREDIT WHICH CANNOT REASONABLY
BE ANTICIPATED AND MET BY USE OF THE MEMBER BANK'S OWN
RESOURCES.)
(3 ) IN ORDER TO ENABLE MBRIBER BANKS TO MEET UNUSUAL AND EXIGENT
SITUATIONS, FEDERAL RESERVE CREDIT SHOULD BE EXTENDED FOR AS LONG
A PERIOD AS MAY BE DEEMED NECESSARY - WHETHER^SUCH' SITUATIONS RESULT
-k FROM A NATION/iL ECONOMIC EMERGENCY, OR FROM EXIGENT REGIONAL
OR LOCAL CONDITIONS, OR, IN CERTAIN SITUATIONS, FRCM AN
EMERGENCY INVOLVING ONLY THE PARTICULAR MEMBER BANK.
(U} WHILE UNUSUAL AND EXIGENT CIRCUMSTANCES OR SPECIAL
LOCAL ECONOMIC NEEDS MAY JUSTIFY CONTINUOUS BORROWING BY A
MEMBER BANK OVER A CONSIDERABLE PERIOD OF TIME, UNDER
ORDINARY CONDITIONS CONTINUOUS USE OF F'EDERAL RESERVE CREDIT
BY A MEMBER BANK SO AS IN EFFECT TO INCREASE ITS RESOURCES,
WHETHER BY LONG-TERM BORROWING OR BY FREQUENT SHORT-TERM
BORROWINGS, WOULD NOT BE AN APPROPRIATE USE OF FEDERAL RESERVE
CREDIT.
(5) IN DETERMINING WHETHER TO GRANT OR REFUSE CREDIT TO
ANY MEMBER BANK, THE FEDERAL RESERVE BANKS ARE REQUIRED BY THE
LAW TO CONSIDER THE GENERAL CHARACTER AND AMOUNT OF THE LOANS
AND INVESTMENTS OF THE MEMBER BANK AND WITHER THE BANK IS
EXTENDING AN UNDUE AMOUNT OF CREDIT FOR SPECULATIVE PURPOSES
IN SECURITIES, REAL ESTATE, OR COMMODITIES.
(6) FEDERAL RESERVE CREDIT SHOULD NOT BE EXTENDED WHERE
IT APPEARS THAT THE MEMBER BANK'S PRINCIPAL PURPOSE IS TO PROFIT
FROM RATE DIFFERENTIALS OR TO OBTAIN A TAX ADVANTAGE.
(7) THE LAW PERMITS ONLY SUCH EXTENSIONS OF FEDERAL RE
SERVE CREDIT AS MAY EE "REASONABLY AID SAFELY MADE",* AND THE
ACCEPTABILITY OF PAPER OFFERED FCR REDISCOUNT OR AS COLLATERAL
FCR ADVANCES MUST BE DETERMINED IN THE BEST JUDGMENT OF THE
FEDERAL RESERVE BANK IN ACCORDANCE WITH THE PROVISIONS AND
OBJECTIVES OF THE FEDERAL RESERVE ACT AND THIS REGULATION.
(6 ) THS BOARD OF DIRECTORS OF EACH FEDERAL RESERVE BANK
IS REQUIRED BY LAW TO ADMINISTER THE AFFAIRS OF SUCH BANK
FAIRLY AND IMPARTIALLY AND WITHOUT DISCRIMINATION IN FAVOR
OF OR AGAINST ANY MEMBER BANK OR BANKS.
ACCORDINGLY, IN
PASSING UPON A MEMBER BANK'S REQUEST PGR CREDIT, DUE REGARD
MUST BE GIVEN TO THE CLAMS AND DEMANDS OF OTHER MEMBER BANKS.
SUBJECT TO CONSIDERATION OF THE PRINCIPLES ABOVE STATED AND
TO OTHICR PROVISIONS OF THIS REGULATION, CREDIT ACCOMODATIONS MAY EE
EXTENDED PURSUANT TO ANY OF THE VARIOUS PROVISIONS OF THE LAW AUTHORIZ
ING EXTENSIONS OF SUCH CREDIT. IN PASSING UPON REQUESTS PGR CREDIT
ACCOMODATION, THE DIRECTORS AND OFFICERS OF THE FEDERAL RESERVE EANK
SHOULD GIVE CONSIDERATION TO ALL OF THE PRINCIPLES STATED ABOVE,
TOGETHER WITH ANY OTHER FACTORS WHICH MAY BE PERTINENT.
SECTION 2. ADVANCES TO MEMBER BANKS
•ffe-) _(_a) Advances on Government obligations.— Any Federal Reserve
Bank may make advances, under authority of section 13 of the Federal
Reserve Act, to any of its member banks for periods not exceeding
fiasety FIFTEEN days
on the promissory note of such member bank
?'he-eigh±h-pafa^i’aph-of-'seeti©fl-13-e=*ifeRe-Federal-Reseiifve-Ae%
attthcri'Ses-advsfiees-to-Kanber-banks-fer-perieds-Ret-exceeding-fifteen
^fiys-seeured-fey-feends^-netesy-eertifieates-ef-ifidebtedfiessy-ear-Treasuafy
kiils-ef-the-Uaited-ftatesT— Hewevefy-the-last-pararyaph-ex-seetiefi-l^
autharises-any-Federal-Reserve-BaHk-xa-make-advaHees-f&r-periedfl-H&t
^xe©tdittg-fiiftfe4,y-days-ute-any-indivaduaT7-parifl6rship-©?-e6rpa5?a%ienu
SH-thc-proHisseiy-Hetes-ef-stteh-individttal^-pai’fcneyship-er-eergeratian
Seeui*ed-by-'idirfeet-efeiifa%i©R3-&f-the-UHited-£tat.esllf and-the-term
ue»rp©ye%ienti-iReludes-aR-iRe©i,p©i*a:
feed-teaHkT UNDER THE PROVISIONS OF
t h e LAST PARAGRAPH OF SECTION 13 OF THE FEDERAL RESERVE ACT, ANY FEDERAL
RESERVE BANK HAY MAKE ADVANCES PGR PERIODS NOT EXCEEDING NINETY DAYS TO
INDIVIDUALS, PARTNERSHIPS, OR CORPORATIONS (INCLUDING BANKS) ON THEIR
PROMISSORY NOTES SECURED BY DIRECT OBLIGATIONS OF THE UNITED STATES AT
RATES FIXED POR THE PURFOSE. HOWEVER, THE MATURITY OF ANY BORROWING TO
MEET THE TEMPORARY CREDIT NEEDS OF A MEMBER BANK SHOULD ORDINARILY BE
LIMITED TO FIFTEEN DAYS.
- 6secured C O by direet-obli-gatiens THE PLEDGE OF BONDS, NOTES, CERTIFICATES
OF INDEBTEDNESS, OR TREASURY BILLS OF THE UNITED STATES, OR and-fey
Pcriods-Ret-exeeeding-fifteen-daya-en-the-gi'eRiasary-Rete-ef-sueh-iaembe*'
feafik-seea i r e d - (2 ) by the dcposit-er pledge of debentures or other
such obligations of Federal Intermediate Credit banks having maturities
3/
of not exceeding six months from the date of the advance er-yS^-by
x.ke-dep&sit-ei’-pledge-oi-Feder’al-Fans-Kertgage-Gepperatisft-teeHds-aseued
Sfider-the-Federal-FafK-Kertage-Corpsffatian-Aet-and-ftiaraHteed-beth-as
%©-pi,iHeipaI-afid-intefes%-by-the-HHited-Statesy-©a?— (S^-by-^he-depesit
e?-p=edgfe-©f-HaHc-Ga-Rerg-l-£aaH-S©s,p©rati©n-b©Rdg-isgHed-aiide5:''-%he
grevisi©Hs-ef-sttbsee%i©H--(e')-of-seet'i©n-rj-©f-bhe-H©He-9«nei,s-I-aean-ne%
ef-1933--ag-afteRdedy-afid-gtiai:
'aR%eed-b©%h-as-t©-priReipax-and-iR:ceJi’cg%
by-tke-URited-States-r
(b) Advances on eligible paper.— (1) Any Federal Reserve Bank
may make advances, under authority of section 13 of the Federal Reserve
~3/k_
Act, to any of its member banks for periods not exceeding ninety days
on the promissory note of such member bank secured by such notes, drafts,
bills of exchange, or bankers' acceptances as are eligible for discount
by Federal Reserve Banks under the provisions of this Regulation or for
- SUCH ADVANCES MAY ALSO BE MADE ON NOTES SECURED BY THE PLEDGE
OF FEDERAL FARM MORTGAGE CORPORATION BONDS ISSUED UNDER THE FEDERAL
f a r m MORTGAGE CORPORATION ACT AND HOME OWNERS' LOAN CORPORATION
BONDS ISSUED UNDER SECTION
OF THE HOME OWNERS' LOAN ACT
OF 1933, WHICH ARE GUARANTEED AS TO PRINCIPAL AND INTEREST BY THE
UNITED STATES.
h(C)
3/y
“ HOWEVER, AS STAYED IN PARAGRAPH (2) OF SECTION 1 OF THIS REGULATION,
THE MATURITY OF ANY BORROWING TO MEET THE TEMPORARY CREDIT NEEDS OF A
MEMBER BANK SHOULD ORDINARILY BE LIMITED TO SHORT PERIODS.
-7purchase by such banks under the provisions of Regyiatien-B THE
FEDERAL RESERVE ACT.
( 2)
In the event notes which evidence loans made pursuant
to a commodity loan program of the Commodity Credit Corporation and
which comply with the maturity requirements of subsection (a) of
section i 3 of this Regulation have been deposited in a pool of notes
operated by the Commodity Credit Corporation, the certificate of in
terest issued by the Commodity Credit Corporation which evidences the
deposit of such notes may be accepted as security for an advance made
to a member bank under this subsection.
(c)
Advances on other security under section 10(b) of the
Federal Reserve Act.— Sufegeet-te-the-pyevisieB-s-ef-suteseetieK—
tki-s-s95ti9H7-any M Y Federal Reserve Bank may make advances, under
authority of section 10(b) of the Federal Reserve Act, to any of its
member banks upon the latter's promissory note secured to the satis
faction of such Federal Reserve Bank.
The rate on advances made under
the provisions of this subsection shall in no event be less than one-half
of
1
per cent per annum higher than the highest rate applicable to dis
counts for member banks under the provisions of sections
13
and
13 a
the Federal Reserve Act in effect at such Federal Reserve Bank.
of
Such
an advance must be evidenced by the promissory note of such member bank
payable either (1 ) on a definite date not more than four months after
the date of such advance, or (2) at the option of the holder on or before
a definite date not more than four months after the date of such advance.
_advaBge-s-yBd9g-9eatiaB-I9(b-)-9f-the-Fede=a=-3egegve-A9tT— A-Fede?ai
RQse?ve-Baak-aay-agaept-es-se«y?i4y-f6?-aH-adv9B6e-Hade-yHae?-th9
- 8p¥9visieRfi-e£—SHkse6bieR-4e}-e£-tki«~seefcieR-ass9k-s-e#-aRy-e#-%ke
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advaHees-Hake=-fiufeseeki©fi—fa^-Ss-kkis-seatieRy-efititled
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skask-rfeiak—a3?e-Haka—iR—©©R^sBsiky—wikk—kka-gFava-saaBS—a£
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ep-?ikl9-IJ-©£-kke-Rati9Rai-HeysiBg-A«ty
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bke-Fedepal-Reaerve-BaRk-r
SECTION 4 3.
DISCOUNT OF NOTES, DRAFTS AND .BILLS FOR MEMBER BANKS
y
5/
(a) Commercial, agricultural and industrial paper.— Any Federal
Reserve Bank may discount for any of its member banks, under authority
1/" 5/ Even though paper is not eligible for discount by a Federal Reserve
Bank for a member bank under the provisions of this Regulation, it may be
used as security for an advance by a Federal Reserve Bank to a member bank
under the terms and conditions of subsection (c) aRd-aykseati©R~(d-) of
section 2 of this Regulation if it constitutes security satisfactory to
the Federal Reserve Bank. In addition to the classes of paper mentioned
in section 4 3 of this Regulation a Federal Reserve Bank may discount
bankers' acceptances in accordance v/ith the provisions of section 6 8 of
this Regulation.
-10of sections 13 and 13a of the Federal Reserve Act, any note, draft, or
bill of exchange which meets the following requirements:
(1) It must be a negotiable note, draft, or bill of
exchange, bearing the endorsement of a member bank, which
has been issued or drawn, or the proceeds of which have been
used or are to be used, in producing, purchasing, carrying or
2/ 6/
marketing goods-
~ in one or more of the steps of the process
of production, manufacture, or distribution, or in meeting
current operating expenses of a commercial, agricultural or
industrial business, or for the purpose of carrying or trading
in direct obligaticns of the United States (i.e., bonds,
notes, Treasury bills or certificates of indebtedness of the
United States);
(2) It must not be a note, draft, or bill of exchange
the proceeds of which have been used or are to be used for
permanent or fixed investments of any kind, such as land,
buildings or machinery, or for any other fixed capital purpose;
(3) It must not be a note, draft, or bill of exchange
the proceeds of which have been used or are to be used for
transactions of a purely speculative character or issued or
drawn for the purpose of carrying or trading in stocks, bends
or other investment securities except direct obligations of
the United States (i.e., bonds, notes, Treasury bills or
certificates of indebtedness of the United States);
2/ 6/ As used in this Regulation the word "goods" shall be construed to
include goods, wares, merchandise, or agricultural products, including
livestock.
-11(li) It must have a maturity at the time of discount of
not exceeding ninety days, exclusive of days of grace, except
that agricultural paper as defined below in this section of
this Regulation may have a maturity of not exceeding nine
months, exclusive of days of grace5 but this requirement is
not applicable with respect to bills of exchange payable at
sight or on demand of the kind described in subsection (b)
of this section.
(b) Bills of exchange payable at sight or on demand.— Any
Federal Reserve Bank may discount for any of its member banks, under
authority of section 13 of the Federal Reserve Act, negotiable bills
of exchange payable at sight or on demand which (1 ) bear the endorsement
of a member bank, (2 ) grow out of the domestic shipment or the exporta3/ 7/
tion of ncnperishable, readily marketable staples,
and (3 ) are
secured by bills of lading or other shipping documents conveying or
securing title to such staples.
All such bills of exchange shall be
forwarded promptly for collection, and demand for payment shall be made
promptly, unless the drawer instructs that they be held until arrival
of such staples at their destination, in which event they must be pre
sented for payment within a reasonable time after notice of such arrival
has been received.
In no event shall any such bill be held by or for
the account of a Federal Reserve Bank for a period in excess of ninety
days,
3/ 7/ A readily marketable staple within the meaning of this Regulation
means an article of commerce, agriculture, or industry of such uses as
to make it the subject of constant dealings in ready markets with such
frequent quotations of price as to make (a) the price easily and definite
ly ascertainable and (b) the staple itself easy to realize upon by sale
at any time.
-12*1°) BANKERS1 ACCEPTANCES.— ANY FEDERAL RESERVE BANK MAY
DISCOUNT FOR ANY OF ITS MEMBER BANKS A BANKER'S ACCEPTANCE- TOUCH
BEARS THE ENDORSEMENT OF A MEMBER BANK AID (i) TOUCH GROWS OUT OF
TRANSACTIONS INVOLVING THE IMPORTATION OR EXPORTATION OF GOODS, THE
SHIPMENT OF GOOES WITHIN THE UNITED STATES, OR THE STORAGE OF READILY
9/
MARKETABLE STAPLES,
AS SUCH TRANSACTIONS ARE MORE FULLY DESCRIBED
IN PARAGRAPHS (1), (2), AND (3), RESPECTIVELY,OF SECTION 1(a) OF THE
? T A BANKER'S ACCEPTANCE WITHIN THE MEANING OF THIS REGULATION IS A DRAFT
OR BILL OF EXCHANGE, WHETHER PAYABLE IN THE UNITED STATES OR ABROAD AND
WHETHER PAYABLE IN DOLLARS OR SOLE OTHER MONEY, ACCEPTED BY A BANK OR
TRUST COMPANY OR A FIRM, PERSON, COMPANY, OR CORPORATION ENGAGED GENERALLY
IN TIE BUSINESS OF GRANTING BANKERS 1 ACCEPTANCE CREDITS.
2/
IN THE CASE OF AN ACCEPTANCE GROWING OUT OF TIE STORAGE OF READILY
Ma r k e t a b l e s t a p l e s , t h e b i l l m u s t b e s e c u r e d a t t h e t i m e o f a c c e p t a n c e
b y A WAREHOUSE, TERMINAL, OR OTHER SIMILAR RECEIPT, CONVEYING SECURITY
TITLE TO SUCH STAPLES, ISSUED BY A PARTY INDEPENDENT OF THE CUSTOMER OR
ISSUED BY A GRAIN ELEVATOR OR WAREHOUSE COMPANY DULY BONDED AND LICENSED
a n d REGULARLY INSPECTED BY STATE OR FEDERAL AUTHORITIES WITH WHOM ALL
RECEIPTS FOR SUCH STAPLES AND ALL TRANSFERS THEREOF ARE REGISTERED AND
WITHOUT WHOSE CONSENT NO STAPLES M Y BE WITHDRAWN; AND THE ACCEPTOR MUST
REMAIN SECURED THROUGHOUT THE LIFE OF THE ACCEPTANCE. IF THE GOODS ARE
WITHDRAWN FROM STORAGE BEFORE MATURITY OF THE ACCEPTANCE OR RETIREMENT
°F THE CREDIT, A TRUST RECEIPT OR OTHER SIMILAR DOCUMENT COVERING THE
GOODS MAY BE SUBSTITUTED IN LIEU OF THE ORIGINAL DOCUMENT, PROVIDED
THAT SUCH SUBSTITUTION IS CONDITIONED UPON A REASONABLY PROMFT LIQUIDA
TION OF THE CREDIT; AND, TO THIS END, IT SHOULU BE REQUIRED, WIEN THE
ORIGINAL DOCUMENT IS RELEASED, EITHER THAT THE PROCEEDS OF THE GOODS
WILL BE APPLIED WITHIN A SPECIFIED T H E TOWARD A LIQUIDATION OF THE
ACCEPTANCE CREDIT OR THAT A NEW DOCUMENT, SIMILAR TO THE ORIGINAL ONE,
WILL BE RESUBSTITUTED WITHIN A SPECIFIED TIME.*
*NOTE.— The substance of this subsection is not new; it represents
merely a restatement in somewhat condensed form of the pro
visions previously contained in section 6 of Regulation A
relating to bankers' acceptancesc
-13BOARD 'S REGULATION C , ~
OR (ii) WHICH HAS BEEN DRAWN BY A BANK OR
BANKER IN A FOREIGN COUNTRY OR DEPENDENCY OR INSULAR PCS SESSION OF THE
UNITED STATES FOR THE PURPOSE OF FURNISHING DOLLAR EXCHANGE AS PROVIDED
IN SECTION 2 OF REGULATION C; PROVIDED, THAT ANY SUCH ACCEPTANCE SHALL
HAVE A MATURITY AT THE TIME OF DISCOUNT OF NOT MORE THAN 90 DAYS’ SIGHT
EXCLUSIVE OF DAYS OF GRACE, EXCEPT THAT AN ACCEPTANCE DRAl’TJ FOR AGRI
CULTURAL PURPOSES AiD SECURED AT THE TIME OF ACCEPTANCE BY WAREHOUSE
RECEIPTS OR OTHER SUCH DOCUMENTS CONVEYING OR SECURING TITLE COVERING
READILY MARKETABLE STAPLES MAY BE DISCOUNTED WITH A MATURITY AT THE TIME
OF DISCOUNT OF NOT MORS THAN SIX MONTHS’ SIGHT, EXCLUSIVE OF DAYS OF
^
GRACE;
11/
AND PROVIDED FURTHER, THAT ACCEPTANCES FOR ANY ONE CUSTOMER IN
EXCESS OF’ 10 PER CENT OF THE CAPITAL AND SURPLUS OF THE ACCEPTING BANK
MUST REMAIN ACTUALLY SECURED THROUGHOUT THE LIFE OF THE ACCEPTANCE
W ~ T H E BILL ITSELF SHOULD BE DRAWN SO AS TO EVIDENCE THE CHARACTER OF
THE UNDERLYING TRANSACTION, BUT IF IT IS NOT 30 DRAWN EVIDENCE OF ELI
GIBILITY MAY CONSIST OF A STAMP OR CERTIFICATE AFFLXED BY THE ACCEPTOR
IN FORM SATISFACTORY TO THE FEDERAL RESERVE BANK.
11/ NO ACCEPTANCE DISCOUNTED BY A FEDERAL RESERVE BANK SHOUID HAVE A
MATURITY IN EXCESS OF THE USUAL OR CUSTOMARY PERIOD OF CREDIT REQUIRED
TO FINANCE THE UNDERLYING TRANSACTION OR OF THE PERIOD REASONABLY NECES
SARY TC FINANCE SUCH TRANSACTION; AND NO ACCEPTANCE GROWING OUT OF THE
STORAGE OF READILY MARKETABLE STAPLES SHOULD HAVE A MATURITY IN EXCESS
OF THE TIME ORDINARILY NECESSARY TO EFFECT A REASONABLY PROMPT SALE,
SHIPMENT, OR DISTRIBUTION INTO THE PROCESS OF MANUFACTURE OR CONSUMPTION.
12/ IN THE CASE OF IKE ACCEPTANCES OF MEMBER BANKS THIS SECURITY MUST
CONSIST OF SHIPPING DOCUMENTS, WAREHOUSE RECEIFT3, OR OTHER SUCH DOCU
MENTS, OR SOME OTHER ACTUAL SECURITY GROWING OUT OF THE SAME TRANSACTION
AS THE ACCEPTANCE, SUCH AS DOCUMENTARY DRAFTS, TRADE ACCEPTANCES,
TERMINAL RECEIPTS, OR TRUST RECEIPTS WHICH HAVE BEEN ISSUED UNDER SUCH
CIRCUMSTANCES, AND WHICH COVER GCODS OF SUCH A CHARACTER, AS TO INSURE
AT ALL TILES A CONTINUANCE OF AN EFFECTIVE AND LAWFUL LIEN IN FAVOR OF
THE ACCEPTING BANK, OTHER TRUST RECEIPTS NOT BEING CONSIDERED SUCH ACTUAL
SECURITY IF THEY PERMIT THE CUSTOMER TO HAVE ACCESS TO OR CONTROL OVER
THE GOODS.
-Hir-
f^7 id) Construction loanso-—In addition to paper of the kinds
specified above, any Federal Reserve Bank may discount for any of its
member banks, under authority of section 2^ of the Federal Reserve Act,
a negotiable note which (l) represents a loan made to finance the con
struction of a residential or a farm building vjhether or not secured by
lien upon real estate, (2) is endorsed by such member bank, (3) is ac~
k / ~~
13/
companied by a valid and binding agreement, entered into by a person
acceptable to the discounting Federal Reserve Bank, requiring such
Person to advance the full amount of the loan upon the completion of the
construction of such residential or farm building, and (Ij.) matures not
fcore than six months from the date such loan was made and not more than
ninety days from the date of such discount by such Federal Reserve Bank,
exclusive of days of grace.
fd) (e) Agricultural paper.— Agricultural paper, within the meaning
°f this Regulation, is a negotiable note, draft, or bill of exchange
issued or drawn, or the proceeds of which have been or are to be used,
lor agricultural purposes, including the production of agricultural
Products, the marketing of agricultural products by the growers thereof,
°r the carrying of agricultural products by the growers thereof pending
orderly marketing, and the breeding, raising, fattening, or marketing
°f livestocko
fc) (f)) Paper of cooperative rarketing associations.— Notes, drafts,
bills of exchange, or acceptances issued or drawn by cooperative mar
keting associations composed of producers of agricultural products are
deemed to have been issued or drawn for an agricultural purpose within
Such person may be the member bank offering the note for discount
°r any other individual, partnership, association or corporation.
- 15-
the meaning of the foregoing definition of "agricultural paper", if the
proceeds thereof have been or are to be used by such association in
making advances to any members thereof for an agricultural purpose, in
making payments to any members thereof on account of agricultural products
delivered by such members to the association, or to meet expenditures
incurred or to be incurred by the association in connection with the
grading, processing, packing, preparation for market, or marketing of
any agricultural product handled by such association for any of its
members.
In addition, any other paper of such associations which
complies with the applicable requirements of this Regulation may be
discounted.
Paper of cooperative marketing associations the proceeds
of which have been or are to be used (1) to defray the expenses of
organizing such associations, or (2) for the acquisition of warehouses,
for the purchase or improvement of real estate, or for any other permanent
or fixed investment of any kind, is not eligible for discount, even
though such 'warehouses or other property is to be used exclusively in
connection with the ordinary operations of the association.
'(g) Factors1 paper.— Notes, drafts, and bills of exchange of
factors issued as such for the purpose of making advances exclusively
to producers of staple agricultural products in their raw state are
eligible for discount with maturities not in excess of ninety days, ex
clusive of days of grace.
fj?) (h) Collateral securing discounted paper.— Any note, draft, or
till of exchange eligible for discount is not rendered ineligible because
it is secured by the pledge of goods or collateral of ary nature, in
cluding paper ineligible for discount.
“16-
(k) _(i) Determination of eligibility .— (1)
a
Federal Reserve Bank
shall take such steps as may be necessary to satisfy itself as to the
eligibility of any paper offered for discount.
Compliance of paper with
the provisions of paragraph (2) of subsection (a) of this section may be
evidenced by a statement which adequately reflects the borrower's financial
worth and evidences a reasonable excess of quick assets over current lia
bilities., or such compliance may be evidenced in any other manner satis
factory to the Federal Reserve Bank.
(2) The requirement of this section that a note be negotiable
shall not be applicable with respect to any note evidencing a loan which
is made pursuant to a commodity loan program of the Commodity Credit
Corporation and which is subject to a commitment to purchase by the
Commodity Credit Corporation or vdth respect to any note evidencing a
loan which is in whole or in part the subject of a guarantee or commit
ment made pursuant to section 301 of the Defense Production Act of 190>O.
(i) (j) Limitations.— (1) The aggregate of notes, drafts, and bills
upon which any person, copartnership, association, or corporation is
liable as maker, acceptor, endorser, drawer, or. guarantor, discounted
for any member bank shall at no time exceed the amount for which such
person, copartnership, association, or corporation may lawfully become
liable to a national bank under the terms of section 9200 of the Revised
9/ lb/
Statutes of the United States, as amended.- —
IrlX/Section 5200 of the Revised Statutes of the United States is printed
Tn THe ApDendix to this Regulation (page
) tegetker-wirk-a-tafeuiaj?
aHaiysie-ef-tk.e-seexieH-prepaFed-ifi-the-Qfxiee-ef-the-SeEpxyelier-ef-the
GuF3?efiey-fpage-22) *
-17
(2) The lew forbids a Federal Reserve Bank to discount for any
State member bank notes, drafts, or bills of exchange of any one borrower
who is liable for borrowed money to such State member bank in an amount
greater than that which could be borrowed lawfully from such state member
bank were it a national bank.
SECTION
9 k.
GENERAL REQUIREMENTS AS TO DISCOUNTS AMD ADVANCES
(a) Applications for discounts or advances.— (l) Every applica
tion by a member bank for the discount of paper or for an advance to such
bank must contain a certificate of such bank, in form to be prescribed
by the Federal Reserve Bank, that the paper offered for discount or the
security offered for the advance, as the case may be, has not been ac
quired from a nonmember bank (otherwise than in accordance with sec
tion 5 of this Regulation) or, if so acquired, that the applying member
bank has received permission from the Board of Governors of the Federal
Reserve System to discount with the Federal Reserve Bank paper acquired
from nonmember banks or to obtain advances from the Federal Reserve Bank
on security so acquired.
(2) Every such application shall also contain a notation by
the member bank as to whether it has on file a statement which adequately
reflects the financial worth of a party primarily liable on the paper
offered as security for an advance or for discount or of the person from
whom the member bank acquired such paper if such person is legally liable
thereon.
(3) Every application of a State member bank for the discount
of paper must contain a certificate or guaranty to the effect that the
borrower is not liable and vail not be permitted to become liable to such
-18bank for borrowed money daring the time his paper is under discount with
the Federal Reserve Bank in an amount greater than that which could be
borrowed lawfully from such State bank were it a national bank.
(b) Financial statements."—Xn order to determine whether paper
offered for discount or security offered for an advance is eligible and
acceptable,, any Federal Reserve Bank may require that there be filed with
it statements, or certified copies thereof, which adequately reflect the
financial worth (l) of one or more parties to any note, draft, or bill
of exchange offered for discount or to any obligation offered as security
for an advance and (2) of any corporations or firms affiliated with or
subsidiary to such party or parties.
A Federal Reserve Bank may in any
case require such other information as it deems necessary.
(c)
Speeulative-ase-ef-egedit-by-a-aeabeg-baHkT— OTHER
INFORMATION.— Each Federal Reserve Bank is required by law to keep itself
informed of the general character and amount of the loans and investments
of its member banks with a view to ascertaining whether undue use is being
made of bank credit for the speculative carrying of or trading in securi
ties, real estate, or commodities, or for any other purpose inconsistent
with the maintenance of sound credit conditions; and, in determining
whether to grant or refuse discounts or advances, the Federal Reserve Bank
is required to give consideration to such information.
Each Federal
Reserve Bank may require such information from its member banks as it
may deem necessary in order to determine whether such undue use of bank
credit is being made.
IT MAY ALSO REQUIRE SUCH ADDITIONAL INFORMATION
-19-
AS MAY BE DEEMED DESIRABLE IN ORDER TO DETERMINE WHETHER THE GRANTING
OF ANY REQUESTED CREDIT ACCOMODATION WOULD BE CONSISTENT WITH THE
PRINCIPLES SET FORTH IN SECTION 1 OF THIS REGULATION.
(d) Additional or marginal collateral,— in connection with
any discount or advance under this Regulation, a Federal Reserve Bank
may require such additional or marginal collateral as it may deem ad
visable or necessary for its protection; and the requirements of this
Regulation with respect to collateral shall not be applicable to such
additional or marginal collateral.
In any case in which additional or
marginal collateral is required, it is expected that the Federal Reserve
Bank in determining the amount will give due regard to the public welfare
and the general effects that its action may have on the position of the
member bank, on its depositors, and on the community; and in general a
Federal Reserve Bank should limit the amount of collateral it requires
to the minimum consistent with safety.
iR-any— sase-T-kere-xke-aasHRx
6f-xhe-as£ets-ex-a-Beafee?-feaftk3-a;o-%heiF-?easeHafeie-vaiue-de%e3:HiHed
ifi-a-Ha»Hep-sa%is£ae£e?7-:k9-the-Rese?ve-BaKk7-3?equii,ed-a3-eeiia%e¥a3:
iH-eeHHeetieH-with-aHy-diaeeaat-SF-a-tvanee-aRdeF-the-pravasxeHS-ex-thas
¥'eg«ia^iefi-eHaeed5-a^-tfee-%ime-ef-Th&-diseeaH%-SF-advaRee-25-pep-e6H%
©x-the-aKeHRt-af-aapeR-disee'dHted-ep-l-S^-per-eeRt-ai-xhe-aEeaRt-ef-tka
advaRee7 -as-Tke-€ase-Hay-fee3— xhe-Fede?al-Reee?¥e-BaRk-skaxl-iaelade-aR
eKplaRatiGR-ef-tke-faets-aR^-eaRSHKSxaReea-af-the-ease-iR-xxa-leaH
S6ne4Hle-8ubHixxed-x9-trhe-3&aFd-af-SaveFH5RS-6#-tke-rede¥al-Rese?¥e-Sj5%eRT
-20-
fe) Ggedit-eKtsnded-eH-seeagRty-eg-efeligati&Rs-eg-the-Uiated
oT-a-fees-T-— iR-aRy-ease-iR-rrhxek-the-aineuRb-ef-aR-advaRee-Hade-fey-a-Fedepai
Resegve-SaRk-iR-aee&Rdasse-W3:th-4h&-p=?e¥ieiefts-e£-this— ¥egalatieH-&R-a
HeabeF-baskis-p5>©ffiis6aFy-R©te-&eeag6i-fey-iipee%-ebiiga%ieHs-ef-ike-HHi%e4
kbates-er-©feligatieHs-wkiGk-age-gua2?a»teeb-kebh-as-te-p5?iRei]?al-and
iRteg&st-fey-ike~¥RRbed-S£abes-i&-les6-khaH-tke-faee-ameuRb-of-suek
ebiigatieRSj-tke-Re&epve-BaRk-skall-ifielude-aB-expiaHa-tieR-ef-the-faets
aRd-GisGaHstaRaes-ef-the-ease-iR-ite-IeaR-saked-aie-suksitted-ta-tke
BGaBd-af-G&veBReRS-ef-the-Federal-RoseBve-S-steH-r
SECTION k
PAPER ACQUIRED FROM NONMEMBER BANKS
(a) Prohibition upon acceptance of nonmember bank paper,— Except
with the permission of the Board of Governors of the Federal Reserve Sys
tem, no Federal Reserve Bank shall discount or accept as security for
an advance any assets acquired by a member bank from, or bearing the
signature or endorsement of, a nonmember bank, except assets otherwise
eligible which were purchased by the offering bank on the open market
or otherwise acquired in good faith and not for the purpose of obtain
ing credit for a nonmember bank.
(b) Applications for- permission.— An application for permission
to discount paper acquired from nonmember banks or to use as security
for advances assets acquired from nonmember banks shall be made by the
member bank which desires to offer such paper for discount or such
assets as security and shall state fully the facts which give rise to
-21-
su°h application and the reasons why the applying member bank desires
such permission.
Such application shall be addressed to the Board of
Governors of the Federal Reserve System but shall be submitted by the
member bank to the Federal Reserve Bank of the district, which will
forward it promptly to the Board of Governors of the Federal Reserve
System with its recommendation.
(c) Paper acquired from Federal Intermediate Credit banks.— The
Board of Governors of the Federal Reserve system hereby grants permis
sion to Federal Reserve Banks to discount for member banks paper bearing
the signature or endorsement of, or acquired from, Federal Intermediate
Credit banks or to make advances to member banks upon the security of
paper or assets bearing such a signature or endorsement or so acquired,
if otherwise eligible under the law and this Regulation.
,
SECTION 6.
l5/
ADVANCES TO NONMEMBER BANKS-
ANY FEDERAL RESERVE' BANK MAY MAKE ADVANCES TO ANY NONMEMBER
BANK ON THE PROMISSORY NOTE OF SUCH BANK SECURED BY DIRECT OBLIGATIONS
OF THE UNITED STATES, SUBJECT TO THE SAME REQUIREMENTS AS THOSE APPLICABLE
UNDER THIS REGULATION TO ADVANCES TO MEMBER BANKS, BUT ONLY IN UNUSUAL
AND EXIGENT CIRCUMSTANCES AND WHERE THE APPLICANT SUBMITS INFORMATION
ADEQUATELY EVIDENCING ITS INABILITY TO OBTAIN THE NECESSARY CREDIT ON
REASONABLE TERMS FROM CORRESPONDENT OR OTHER BANKS OR FROM OTHER USUAL
SOURCES OF CREDIT.
If/ SUCH ADVANCES ARE AUTHORIZED BY THE LAST PARAGRAPH OF SECTION 13
OF THE FEDERAL RESERVE ACT (APPENDIX, P. ____)
-22.
SECTION £ 7.
DISCOUNTS FOR FEDERAL INTERMEDIATE CREDIT BANKS
(a) Kinds and maturity of paper.— Any Federal Reserve Bank,
under authority of section 13a of the Federal Reserve Act, may, WITH
THE PERMISSION OF THE EOARD OF GOVERNORS^ discount for any Federal
Intermediate Credit bank (1) agricultural paper as defined in section 1
of this Regulation, or (2) notes payable to such Federal Intermediate
Credit bank covering loans or advances made by it pursuant to the pro
visions of section 202(a) of Title II of the Federal Farm Loan Act,
which are secured by notes, drafts, or bills of exchange eligible for
discount by Federal Reserve Banks.
Any paper discounted for a Federal
Intermediate credit bank must bear the endorsement of such bank and must
have a maturity at the time of discount of not more than nine months,
exclusive of days of grace.
(b) Limitations.— No Federal Reserve Bank shall discount for
any Federal Intermediate Credit baric any paper which bears the endorse
ment of any nonmember State bank or trust company which is eligible for
membership in the Federal Reserve System under the terms of section 9
of the Federal Reserve Act.
In acting upon applications for the discount
of paper for Federal Intermediate Credit banks, each Federal Reserve
Bank shall give preference to the demands of its own member banks and
shall have due regard to the probable future needs of its own member
banks.
Eiceept-rs'ith-the-perisissieH-ef-the-Sea^d-ef-SeveeHei’s-ef—tke
Fede¥al-ResePve-Systemj-H6-Fede?sI-Rese3rve-BaBk~shslA-dise6Hftt-pape“
f©p-aHy-?eee“al—xHte¥sediete-6-edit-kafik-¥7'hcH-its-ewH-i:esei,¥es-&Hey.H-:
o-%&
less-thea-bQ-per'-ceKt-ef-its-ewn-aggFeEa-te-iiafeiiaties-fep-dep&eiks-aftR
Fedei’ai-ResePve-fietes-ifi-aeta&i-eiPeuiatieRT
-23-
*SEGS»N-6 T.., BANKERS1-AS6EPTAN6ES(-a)-Berrni't i a n —A 'banksr-i-6-seseptanfie-within-the-meaning-of
■feb-is--Reg-ufat-ien--is--a--draf-'t--or- -bdrli-o-f--Kcchange,-"whether- payable--±ir-theUnited-States,-or..abroad-aid-whether-payable--i»-dollars--or--seme--othermone-y.^-accepted-by-a-bank.-or--tnus-b-e«apaa-y-r -or-a-firffl-r -perso*r •eGiapeayy
or.-corporation--engaged-generally-in--the--business--o-f--granting--bakers-'
acceptance,-credits^(-b.).-Eiigib-i-l-i-fy.— Any -Federal--Reserve-Bank- -may-d-is-oount -for1
aHy-ef-itB-HeHi:beF-feaBk&-any-s«Gh-baHkeFi-s-aeeeptanee-beaping-the-8ndopseffiefit-of-a-ffieHfeep-bank-afid-having-a-isatupity-at-the-tiffle-of-diseeunt-not
greater-thaR-that-ppe3erifeed-by-subse6tieR-f©.)-©£-this-seGti.©nT-whiGh-hag
beeR-drawH-uEder-a-eredit-epened-fe? the-purpese-ef-eendueting-er-sQttling
aeeeHnts-resHltifig-freffi-a-traHsaeti©H-ep-traasa6ti©Hs-iavelving-any-ene
of-the-f©llewiflgt
(l)-The-shipifient-ef-g6eds-hetweeH-the-UHited-States
and-any-foreign-eeantryj-er-between-the-UHited-States-aHd
any-of-its-dependeneies-er-instilar-pessessiefis'j-er-betweefi
dcpendencics-er-±ns«lar-pessessiene-and-fereigH-eeantries7
or-between-f©reign-countries?—'
tr "'T Fep-reg'ilati©H&-g©vepning-the-aeeeptasee-by-iBGKb9P-bank§-of-dpaftg
afld-feills-©f-e>:Ghange-dFawn-en-theiB7-see-R9g«lation-G»-
£/ /
iH-aeeeptiHg-aay-dra£t-©p-bill-G£-ex6hange-arising-eut-©£-a
shi’
pfflent-©f-th9-kind-nefGFned-te-in-Glause-l-©f-subsecti©n-(b^-ef
section £
of_this-Regulati©n7-the-aG©@pting-baHk-will-b@-©xpec-ted-to
©btain-substantiating-evidenGe-as-t©-tbe-eligibility-ef-the-transaetion
undeFlying-sueh-dFaft-eF-bill-of-exchange,
NOTE.— The substance of this section would be retained, though in
different form, in new subsection (c) of section 3 of the
revised Regulation.
(-2•)-fhe-shipment--ef-geeds-within-t-he-United-Statesj
provided-shipping-innument-s--sonveyirg--security-title-are
attaehed-at-the--time-at-aeeeptanee er
£3-)-The-&terage-in-the-United-States-er-in-any-foreign
9r'
eeuntry-ef-readily-marketable-staplesj — ----provixted""that""the
bill—i&—seeur©d—at-the-—time—ef—a&eeptanee—fey—a —warehouseyte-rminal-j--er-ether-similar-receiptj~conveying-security-titlete-eaeh-staples-,--issued-fey-a--party-independent-ef-the-easterner
er-is&aed -fey-e-grain-elevator-er-warehouse-company-daly-bended
and--iieensed--and--regularly-inspected--fey-State-er-Federal
aatheritiee-with--whom-all-reeeipte-fer -sued-staples-and-ail
transfers-thereef-are-registered-and-without-whose-eonsent
ne -staples-may-fee-withdrawn,*--end-provided-farther-that-the
aeeepter-remains-seenred-feh-roagheat-the-tife-ef-the-aeeeptanee;— In-the-event-that-the-goods-must--be--withdrawn--from
aterage-prier-te-the-maturity-ef-the-aeeeptanee-er-t-he-retipoment-•ef--the-credit,--a-i-rus-t-reeeipt-er-other-similardocument-eevering-the-geode-may--be-substituted--in--iieu-ef
tie--erigtnal--document-,--provided-that-such--substittrbiorr-±soorditioned-upon-a--reasonably-prompt--liquidation-of-the-eredit.
In.-opde-r-te-insure--Gomplianc-e-with--this-c-ond-i-tion-it--shouldte--required-,--when--the-erigina-1--document-is-released-,
either--{-A-^-thatfehe-proceeds-efthe-goods naii-fee
apf+lied-eithin-s-epeeified-t-ime-toward-a--tiqui-dart-iorr-ofT -readily-marketable-staple-within-t-hs-meaning--of--tins-ftegshrt-ionmeans-an-art-isleef -e-einmerce,--agricult-urey--or--industry-of--such--usess s
to--make--it--the-subject-ef -constant-dealings--in-ready-markets--with--s-ueh
frequent—quotationsef -pries--as-te-make-£a^-the-prise-easily-and-definitely
as-certaixmble-aid-fb•)-the-staple-itself-easy-te-realise--upon-by-sale-a-tany-timer
- 25 -
the -a6e-©pt&ft&©-&pe4it -w?-(-B-)-that■-a-R&w.-d©e.um©»tr-siieil&p
t©-the--e-r-igH©A •-©rs-r-wiAA-b©-pesubs-tit-uted-with-ift-a-s-ps-eiAied— tiK&r
£F9vi4e4j~That-a&&eptraR&&s-f©p--arRy-©H&-Gu&t©jB6P-iR-ex6&&&-©f-10-pe-p
©ant-e£ -the -eapitai-and-surplus--©£-Ahe -ae&e-pt-iRg-bank-aust- -peifiaia
aetruaily-6eeUFed-bhpeugheub-the-Ai£e--©£-the-ae&eptan&er-aad-iR-the-ea&e
e£-bhe-aeeepbaRees~e£-isejsbep-baRks--bhA&--seeu3?it-y-Hius-tr-e-&Rsis-t--e£-&h£pp£Rg
deeameRb&7->:apeheHBe-iieeeipba)— e-p-ebhep-stteh-deaHBeRb&j-ep-&eiBe-ebheF
aebual-9eeHpiby-gpewiRg-eHfe-ef-bhe-&affie-bpaR5ae'bieR-as—bhe-aeeepbaR&ejaueh-as-dseisaenbaFy-dratbaj-brade-aeeeptaRe-e&y-t-epiHiRal-peeeipbsj— ep
trru9fe-reeeip'b3-whieh-have-beeft-ia&ued-'aRdei’-9Ueh-&ipeHi5i5baneesy-aRd
whieh-cover-g©ed-5-efi-5«eh-a--eharacfeer7-as-'fe&-iR&tire“a'b-£ttl-bi-ffie&-a
a©nt:inuance-of-an-effcebive-and-±awf«l-li©n-in-fav©i*-ef-trhe-aeeepting
banky-other-brusb-reeeipbs--fieb-being-eensidered-3tteh--aeb«al-5eeRrifey
if-thcy-permi'b-thc-cncborr.er'be-have-aecess-bo-er-eenbrel-ever-'fehe-geedsT
(■c-)-Hafcuritie5y==No-sttch-aecepbanee-i5-eAigi-ble--i:er-d:i5eotint7
which-has-a-mattirity-afe-bhc-trima af-diseeanfe-in-excess-of-nineby-daya-1
sightj-exclnsivc'-ef-days-of-gracey-excepb-that-aeceptanees-drawi-for
agpieultuFal-purgeses-and-seeured-ab-the-tiifle-ef-aeseptaHee-by-wapeheuse
peeeipts-er-ebheF-BHeh-deeHjreRts-eeflveyiRg-eF-seeupiHg-tritrle-eevepiHg
readily-Karketable-steples-ff'ay-be-dieeeyRted-rdLth-fflaturities-at-bhe
iiR9-ei-diseeHnt-ef-R9i-ffiere-thaR-si3€-ffleRthsJ-sight7-esslHsive-ef days
ef-graee-j— Altiietigh-ft-Federal-Reserve-SaRk-may-iegally-diseeunb-afl-aeeepfeanee-having-a-fflattirity-at-fehe-time-ef-diseeuRtr-Ret-greater-thaR
-26-
bhab -ppe-gepi-bed-above---i-H-this -sttbseetieRr-an -a-eeeptasee -shauld-Ret -have.
a --Hat-Hpity-wbieh -i& -i-H-e-xe-e&s-©■£-the -us-ua-V-ep-eus-tosa-isy-pepied -e£ -er-edit
required -bo --finanee -bh& -undeplyiRg-bpaR&a&ti&B--ep~wki-eh~is-iR-exee&s-e£
bhe-peried-reaseRabiy-Reeeagapy-be-iiRanee sueh-bpaHsae-t-ioHT— Sineo-the-
purpege-e£-perfflibbi-ftg"bhe-aeeepbanee~e£-dpa£t&-s-eeuped-by-wapeb9usereeeipbs--er--ebher--sueh-deeufiienbs-is-be"pepiflib~bke~teffip©papy-h©MiRg-©£
readiiy-market-able-ebapleg--i-R-sberage-peRdi-Rg-a-peaeeRably-ppe}aph-&aler
shipment y -or -disferibabien p-ne -aeeh-aeeepbaiie-e--&h-euld-bave-a -fitabupiby
in-exeess-ef— 'fche-t-ime-erdin&rily-Reeeagapy-be-effeeb-a-peaeeRably-Brempb
aaiey-ehi-pKieRby-©r-di&bpibubieR-iRhe-bke-pFeeeee-e£--]aamj£aebure-ep-&&Rsumpfei9nv
fd-)-B&xiar-e>:&hang&-aeeepbaneegy—
A-Federal-Reserve-BaRk-Hay
aise-diseeHRb-any-biil-dpawR-by-a-bank~ep-baHbep-iH-a-r©peigH-e9HHbpy
©p--depefldeRey-ep-i-Hsulap-p©&&egsi0H-e^-bbe-United-§bates-fep-t-be~p«ppese
ef-furRishiRg-dellap-exehaRge-ag-ppevided-~iR-RegHiabieR-GT-ppevide4-bbab
it-has-a-natttriby-ab-bhe-bime-ef-digeeHRb-ef-Reb-mepe-bbaR-bhpee-meRthgy
exeiRsive-ef-dayg-ef-gpaeeT
ieJ-Evidence-of-eligibility^nraA-Eederal-Resgrye-Bank-must
bQ-sati.sfiedT-eithep-by-pe£erence_to_the_acceptaace_itself_Qr_QtheEwisej-that.-t-he-aec-ep'baHGe-is-eligible-fep-diseount.-URdep -the-tepBis-of
bhe-iaw-aad-the-BPevisieHS-oi-bhis-RegulatioH-r— The-bill-itsel£_should
be-drawn-se-as-te-evidenee-trhe-eharaebep-ef-the-HRdepiyiRg-bpaRsaeiieR7
but-if-it-is-neb-se-drawn-evidenee-ef-eligibiliby-may-eeRsist-ef-a-staffip
er-eepbifieabe-affixed-by-bbe-aeeepbep-iR-^eHH-sabi&faebopy-ie-ibe-Fedepai
Reserve-Bank^
- 27 -
APPENDIX
Ree9iHffl9R4a^ieas-e£-trke-Meapd-e£-GG¥e3?He3?s-e£-t'ke-FedeF£l-Resefive
Syst-9ffl-&&-£9-trfe9-M£RiHHa--§£aHdaFds-Whish-Sh9Hld-i9-0fes9RV9d
by-MeHbep-8aHks-iR-MakiHg-£eeR5-upeR-Real-Ssbab©
While-pe99gRisiRg-£ha£-F9qaiF9a9R£s-9£-iRdividHal-baHk&-iR
ffiakiRg-I©aRs-£GF-feh9-^aFpese-9£-£iR£R9iRg-9F-6a?FyiRg-peai-es£ate-will
vapy-aeeep<i±ag-:
fc9-£ke-9iFe«i?.staRees-©£~fapt.ieylap-tFaRsaekieRs7-£k9
BeaFa-9£-G9V9FR9Fs-0£-tfe9-F©de?ai-R659?V9-Syst9H-b9li9V©s-£hat~e©F£aiR
ffiiRimUH-s£aRdaFds-sh©uld-be-9bs©FveaT— §©:se-e£-'bk©3e-staada?ds-aF0
9p©ea£i9aliy-F©quiF9d-by-Iavf-wibb-F©sp96b-b9-l9aR&-©£-Rabi9Ral-baRks.
Ofeb©Fs-aFe— advieable-ae-a-fi&bkep-ef-seuad-baRkiHg-ppasbieeT— 5he—e-xamiR©ps-£9F-bh©-Fede?ai-Resepve-fiaHks-skaHid-fcake-stteh-5feaHdaFds-ifib©
e©Rsid9pabi9R-£R-pevie>fiRg-i:eaR5-&=:-Stab9-H!9irb©F-baRk&5— and-FadeRai
R©s©Fve-B&Rk9-iR-=assiRg-Hg9R-agplisabieR5-0£-H9Hb©p-baRks-£9F-sF0da:fe
a999fflK©4aba©R9-s«pp9Fb©4-b7-peai-e&bab©-ieaRs-sk©yid-giv©-gFe£9F©R&©
b9-bk9-a0e9pfeaRe©-as-99iIat-9FaI-9£-su©k-lsaRS-&s-&©eb-trk©s&-&taHia?d&.
yit,k-tk9&0-eeR&i49Fab£9R&-iR-f?.iRd-bke-B9aFa-?e&9pj=9R4&-bka£-H9Hib9F-baRk&
iR-JrakiRg-GF-aegUiFirHg-Paai-GSba^G-iGaRSj— 9bk9F-£kaR-£k9S9-aR&HF0d
HHd9P-¥ibIe-i5-e£-bk0-Mabi9Ra£-Hea&iRg-Aeb7-af5Rl5c-£fee-&baRdaFds-s9b
£ep£k-b©l9w-as-BiRiKiyH-pe%RiP©H:
.9R£s:
(.i^_ebIigabi©RS-issy9d-9?-4RawR-£9P-bke-pRPp©&9-9£
£iRaRS3rRg7-P©£iRaR©iRg7~©P—1©apppiag—:
R9ai~9stta£9—sk©ttld—b©
SeeHFQd-by-£ipsb-ii©R7-evid9Rsed-by-Ki©pbgag9T-brR&t-49©d7-0p
9^ej!_SHsk-iR&£pyj=9Ri7-RF©R-=iHgP^V9d-peal-esba:
fe67-iReiRdiRg
iftsFeV9d-££Prn-=aR4-aRd-=fHgP©V©d-b^&i’R9&S-aRd-peS=deR£iai
ppapGPbiGs;
- 28-
4k4-*b©-aHi©yRb-9f-'bke-i©aR-9p-i©aRs--e¥iieRGeb-b5i'-BHeh
ebiigabi9Re-sk©Hisi-Ret-e:-€eeed-5£-BeF-eeRi-©#-bke-afppai&e4
valu&-ef-th9-Feal-9siafce-&©eypiHg-sa3k-leaR-eF-leaRs-aHb-R©
sHek-ieaH-&keHi4-ke-£©¥-a-=9Hg9¥-te“H-kkaH-rive-y9a¥!S7
©K©ept-fekat-afiy-&a©k-i©aH-iaay-k©-iH-aH-aH.©HH^-H©k-ex6ee4iHg
6G-peF-6eRb-ef-fche-apppaased-valH©-©:?-bhe-Feai-e3tab©-0eeyFiRg
su©k-i©aa-aH4-£&p-a-:
fee?rs-Re'fe— lefige-F-kkafi-teH-yeaps-i^-tke
IeaH-±s-s©G9P©4-ky-aR-ame?t-is6k-!»9pfegag95— keed-er-kRaet--©?
etk&p-&uek-ift&kR9iH9Rk-9R=9R-t-ke-kepK9-e=:-'wkiek-n9-g©?-&9ftt
©P“Hi©pe-©f-tk©-pa?iH©ifai-er-4fee-l©&H-wil3:-fee-aH©ptiB©d
vribhiR-a-f?©?ied-©£-R©b-KeFe-thaR-fceH-yeaFs-by-H©aRS-e£
&afeskaRtiaii“-©qua=-H9Rtrk=yy-qya¥sk©F=“'j-5eHiaHRuai--GF-aRRaai
«ayHeats-©R-gFiHeieal->fikk-3rRtep9st~a4d©4-©“-©R-“?5:Rsigai
aRd-iRfe©F©st-e©KfeiRei7-aF.4-Hemkep-feaRk5-&ke«li-fe-ake-F©as©Hafel©
st9pe-fe9-&akis£y-kheffi&e-i¥©s~tkat— t-ka-'payEs-Rb&-aKd-©tk©-pFeqHi?©HaRks-e^-tke-9kiigakieHS-wiii-fee-Hek-iR-aas©F^aRee
watrk-kk©iF-t©Fgaf
£3^_?ke-re-&h9y==-b&-aR-£iie-Hfctk-bk©-ffleBb&F-baRk-wit-h
Fespeai-ke-suek-©biigatiefi&-fcke-£eile«iRg-d©&«E©ftfee-9p
pF9geFi-y-eeFwiri:&4-©P-^k9'k&5katr-&©pi©&-t-k9Fe©5©
(a^-aR-apppaisai-e^-kke-vaiae-e^-bks-paai-eskaba
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STATUTORY PROVISIONS
[Omitted from this draft]
@FedFRASER