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FEDERAL RESERVE BANK OF DALLAS Dallas, Texas, October 10, 1934 H O W IN D U STR IA L LO A N S, M A D E U N D E R PROVISIONS OF SECTION 13(b ) OF F E D E R A L R E SE R V E A C T , A R E TO BE R E FL E C T E D IN CONDITION A N D E X A M IN A T IO N REPORTS To the Member State Bank A ddressed: The A ct o f Congress approved June 19, 1934, relating to direct loans fo r industrial purposes by Federal reserve banks, published on pages 430-434 o f the July, 1934, issue o f the Federal Reserve Bulletin, added a new section, 13 (b ) to the Federal Reserve A ct, paragraph (b ) o f which authorizes each Federal reserve bank to discount fo r, or purchase from , any m em ber bank or other financing institution operating in its district, obligations having maturities not exceeding five years entered into fo r the purpose o f furnishing w orking capital to an established industrial or com m ercial busi ness ; to make loans or advances direct to any member bank or financing institution on the security o f such obligations; and to make com m itm ents with regard thereto, including com m itm ents made in advance o f the actual undertaking o f such obligations. The A ct also provides that a m em ber bank or other financing institution, which discounts or sells such an obligation to a Federal reserve bank, shall obligate itself to the satisfaction o f the Federal reserve bank fo r at least 20 per cent of any loss which m ay be sustained thereon; also that, in lieu o f so obligating itself to the Federal reserve bank, a m em ber bank or financing insti tution m ay advance at least 20 per cent o f a working capital loan to an established industrial or commercial business and the Federal reserve bank the remainder, provided the total o f such loan is considered as one advance and repaym ent made pro rata under such regulations as the Federal Reserve Board m ay prescribe. In view o f the apparent m isunderstanding on the part o f some m em ber banks on this subject, the Federal Reserve Board has requested me to advise you as follow s in regard to the manner in which these loans should be included in condition reports submitted to the Federal reserve bank and in exam ination reports made by exam iners fo r the Federal reserve banks: 1. I f your bank discounts with, or sells to, the Federal reserve bank any obligation o f an industrial or commercial business issued fo r w orking capital purposes, only that portion o f such obligation rediscounted with, or sold to, the reserve bank on which your bank has obli gated itself to the Federal reserve bank fo r any loss sustained thereon is to be included am ong the assets and liabilities o f your bank in condition reports subm itted to the Federal reserve bank. The amount o f such obligation on which your bank is liable fo r any loss sustained is to be included in loans or investm ents and shown am ong liabilities as “ Obligations on indus trial advances transferred to Federal Reserve Bank.” 2. If, instead o f discounting a w orking capital obligation with, or selling it to, the Fed eral reserve bank, you r bank advances not less than 20 per cent o f such obligation and the remainder is advanced b y the Federal reserve bank, only the amount o f the advance by your bank should be included in the loans or investments in condition reports subm itted to the Fed eral reserve bank. The amount advanced by the Federal reserve bank should not be included in the balance sheet o f you r bank. 3. W hen your bank makes an industrial advance o f the kind described in the A ct o f June 19, 1934, and obtains a com m itm ent from a Federal reserve bank in regard thereto, the total advance should be included in the loans or investm ents o f y ou r bank in condition reports submitted to the Federal reserve bank, but the com m itm ent obtained from the Federal reserve bank should not be shown in the balance sheet o f you r bank. 4. Exam iners fo r the Federal reserve banks have been instructed not to include in the loan classification the portion o f a w orking capital advance which has been transferred to the Federal reserve bank w ithout obligation on the part o f your bank fo r any loss thereon or which, in accordance w ith a com m itm ent obtained from the Federal reserve bank, m ay be so transferred, and not to classify, except with respect to apparent losses, the remaining portion o f such w orking capital advance. Y ours very truly, Federal Reserve A gent This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)