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Circular N o . 16 FEDER AL R ESERVE BANK Series of 1922 OF D A L L A S Superseding Circular No. 23 Series of 1919 August 25, 1922. A M E N D M E N T T O S E C T I O N 9 , F E D E R A L R E S E R V E A C T . J U L Y 1, 1 9 2 2 , B R O A D E N I N G T H E R E D I S C O U N T P R IV IL E G E O F M E M B E R S T A T E B A N K S AND A N IL L U S T R A T IV E A N A L Y S I S O F S E C T I O N 5 2 0 0 U. S. R E V I S E D S T A T U T E S To the Member Bank Addressed: There is transmitted herewith, for your information, the text of the above amend ment, with an explanation of special provisions relating to rediscounts for member state banks, followed by an illustrative analysis of Section 5200 U. S. R. S. prepared by the Federal Reserve Board, and statement of what a Federal reserve bank may rediscount for its member banks. Under the act approved July 1, 1922, the rediscount privilege of member state banks is conditional only on compliance with the terms of Section 5200, Revised Statutes. The act approved July 1, 1922, amends Section 9 of the Federal Reserve Act by striking out the following proviso in the tenth paragraph: “ That no Federal reserve bank shall be permitted to discount for any state bank or trust company notes, drafts, or bills of exchange of any one borrower who is lia ble for borrowed money to such state bank or trust company in an amount greater than ten per centum of the capital and surplus of such state bank or trust company, but the discount of bills of exchange drawn against actually existing values and the dis count of commercial or business paper actually owned by the person negotiating the same shall not be considered as borrowed money within the meaning of this section” and substituting in lieu thereof the following: “ That no Federal reserve bank shall be permitted to discount for any state bank or trust company notes, drafts, or bills of exchange of any one borrower who is liable for borrowed money to such state bank or trust company in an amount greater than that which could be borrowed lawfully from such state bank or trust company were it a national banking association.” The provisions of Section 5200 of the Revised Statutes determine the amount which a single customer may legally borrow from a national bank and the effect of the amend ment to Section 9 of the Federal Reserve Act is, therefore, to permit a Federal reserve bank to rediscount for a member state bank [the eligible paper of a customer of that state bank whenever the total loans of the state bank] to that customer are not in excess o f the limits prescribed by Section 5200 o f the Revised Statutes. This section excludes from consideration as money borrowed, as did the old provision of Section 9 of the Fed eral Reserve Act, the discount o f bills of exchange drawn in good faith against actually existing values, and the discount of commercial or business paper actually owned by the person negotiating the same, and provides also that certain other kinds of paper, which were not referred to in Section 9, may be discounted in excess of the normal limit of ten per cent of the bank’s capital and surplus. The effect of the amendment is, therefore, to broaden the rediscount privilege of member state banks and to place these banks on an equality with national banks in this respect. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) Other Portions of Section 9 Not Affected by the Amendment of July 1, 1922 The above amendment does not, of course, affect any part of Section 9 except the proviso which is specifically referred to, and under the terms of the sentence that im mediately follows this proviso it is still necessary that “ The Federal reserve bank, as a condition of the discount of notes, drafts, and bills of exchange for such state bank or trust company, shall require a certificate or guaranty to the effect that the borrower is not liable to such bank in excess of the amount permitted by this section, and will not be permitted to become liable in excess of this amount while such notes, drafts, or bills of exchange are under discount with the Federal reserve bank.” Loaning Powers of National Banks Under Section 5200 U. S. R. S. as Last Amended by The Act Approved October 22, 1919 The amendment to Section 5200 of the Revised Statutes which became a law on October 22, 1919, made certain material changes in the loaning powers of national banks. For the convenience of member state banks particularly, and for the information of others interested in the effect of these changes, there is submitted herewith a reprint of the analysis of the provisions of Section 5200 now in force, as originally published in our Cir cular 23, Series of 1919. The analysis states the amount which may be loaned to any person, company, firm or corporation (including in the liability of a company or firm the liability of the several members thereof) under the various clauses of Section 5200, as last amended by the Act approved October 22, 1919. These amounts are stated in terms of the percentage of the paid-in and unimpaired capital and surplus of the lending bank. Amount Loanable Character of Loans (A ) Accommodation or straight whether or not single name. loans, Maximum limit, 10% of bank’s paid-up and unimpaired capital and surplus. (B) “ Bills of exchange drawn in good faith against actually existing values.” The law expressly provides that this phrase shall also include: (a) Drafts and bills of exchange secured by shipping documents con veying or securing title to goods shipped. (b) Demand obligations, when se cured by documents covering com modities in actual process of ship ment. (c) Bankers’ acceptances of the kinds described in Section 13 of the Federal Reserve Act. No limit imposed by law. (C) Commercial or business paper (of other makers) actually owned by the person, company, corporation or firm negotiating the same. No limit imposed by law. Character of Loans (D) (E) (F) Notes secured by shipping documents, warehouse receipts or other such doc uments, conveying or securing title covering readily marketable nonperishable staples, including live stock. No bank may make any loan under (D ), however, (a) Unless the actual market value of the property securing the obliga tion is not at any time less than 115% of the face amount of the note, and (b) Unless the property is fully covered by insurance, and in no event shall the privilege afforded by (D) be exercised for any one customer for more than six months in any consecu tive twelve months. Notes secured by not less than a like face amount of bonds or notes o f the United States issued since April 24, 1917, or by certificates of indebted ness of the United States. Notes secured by U. S. Government obligations of the kinds described under (E) the face amount of which is at least equal to 105% o f the amount of the customer’s notes. Amount Loanable 15% of bank’s capital and surplus, in addi tion to the amount allowed under (A ) ; or if the full amount allowed under (A ) is not loaned then the amount which may be loaned in the manner described under (D) is increased by the loanable amount not used under (A ). In other words, the amount loaned under (A ) must never be more than 10% but the aggregate of (A ) and (D ) may equal, but not exceed 25% . 10 % of bank’s capital and surplus, in addi tion to the amount allowed under ( A ) , or if the full amount allowed under (A ) is not loaned, then the amount which may be loaned in the manner described under (E) is increased by the loanable amount not used under ( A ) . In other words, the amount loaned under (A) must never be more than 1 0 % , but the aggregate of ( A) and (E) may equal, but not exceed 2 0 % . No limit, but this privilege, under regula tions of the Comptroller of the Currency, expires December 31, 1922. Some Examples of W hat a National Bank May Lend at Any One Time to Any One Cus tomer Under Section 5200 U. S. R. S., as Last Amended by the Act Approved October 22, 1919, Expressed in Terms of Percentage of the Bank’s Capital and Surplus (A ) (D ) (E) (B) (C) (F) Illustration 1 Illustration 2 Illustration 3 Accommodation or straight loans...... Notes secured by warehouse receipts, etc............................................................... Notes secured by a like face amount of Government obligations.................. 10% 5% 5% 15% 20% 15% 10% 10% 15% Total.................................... 35% 35% 35% Bills of exchange drawn against ac tually existing values........................... Commercial or business paper............ Notes secured by at least 105% of U. S. Government obligations.............. No limit imposed by law. No limit imposed by law. No limit imposed by law. What a Federal Reserve Bank May Rediscount for its Member Banks A Federal reserve bank may not, of course, under any circumstances, rediscount paper other than that which is eligible under the terms of the Federal Reserve Act. So also the limitations imposed upon the amounts of rediscounts which Federal reserve banks may make for member banks, whether state or national, are determined by the provisions of the Federal Reserve Act and are not in any way affected by the amendment to Sec tion 5200. Under the provisions of Section 13 of the Federal Reserve Act any Federal re serve bank may rediscount for any member bank, whether state or national, eligible paper of any one borrower to the extent of ten per centum of the member bank’s capital and surplus, but it is expressly provided that “ this restriction shall not apply to the dis count of bills of exchange drawn against actually existing values.” In the opinion of the Federal Reserve Board this phrase “ bills of exchange drawn against actually existing values” includes “ drafts or bills of exchange secured by shipping documents conveying or securing title to goods shipped” and “ bankers’ acceptances of the kinds described in Section 13 of the Federal Reserve A ct” even though Section 13 (un like the amendment to Section 5200) does not expressly state that those two classes of paper are bills of exchange drawn against actually existing values. In the opinion of the Board, however, accepted demand bills on which the drawer is released from liability are not “ bills of exchange” within the meaning o f Section 13 and must, therefore, be included in determining the limits on the amount of paper of any one borrower which a Federal re serve bank may rediscount for any member bank. Respectfully, Governor.
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