Full text of Federal Reserve Bank of New York Circulars : 6703. Undivided Profits as Part of "Capital Stock and Surplus"

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F ED ER AL R E S E R V E BANK
OF N E W YORK
r Circular No. 6 7 0 3 1
L March 24, 1971 J

Undivided Profits as Part of “ Capital Stock and Surplus”

To the Member Banks of the Second Federal Reserve District:

Printed below is the text o f an interpretation adopted by the B oard o f G overnors o f the F ed ­
eral Reserve System on M arch 11. T he interpretation revises a 1964 B oard ruling on whether a
member bank’ s undivided profits may be included as part o f its ‘ 'capital stock and surplus” fo r the
purposes o f various provisions o f Federal law that limit the extent to which m ember banks
may engage in certain activities.
The interpretation will be published shortly in the Federal R egister and Federal R eserve Bul­

letin but is being sent to you now so that you m ight have prom pt notice o f its content.
A

lfred

H

ayes,

President.

Undivided Profits
Effective March 11, 1971, section 250.162 of Title 12
of the Code of Federal Regulations is revised to read as
follows:
§250.162 Undivided profits as “ capital stock and sur­
plus” .
(a)
The Board of Governors has reexamined the
question whether a member bank’s undivided profits
may be considered as part of its “ capital stock and sur­
plus” , as that or a similar term is used in provisions of
the Federal Reserve Act that limit member banks with
respect to the following: loans to affiliates (12 U.S.C.
371c), purchases of investment securities (12 U.S.C.
335), loans on stock or bond collateral (12 U.S.C.
2 4 8 (m )), deposits with nonmember banks (12 U.S.C.
463), bank acceptances (12 U.S.C. 372, 373), invest­
ments in and by Edge and Agreement corporations (12
U.S.C. 601, 615, 618), and the amount of paper of one
borrower that may be discounted or accepted as collateral
for an advance by a Federal Reserve Bank (12 U.S.C.
330, 345, 347).




(b ) Upon such reexamination the Board concludes
that its negative view expressed in 1964 is unnecessarily
restrictive in the light of the Congressional purpose in
establishing limitations on bank activities in terms of a
bank’s capital structure. Accordingly, the Board has
decided that, for the purposes of the limitations set forth
above, undivided profits may be included as part of
“ capital stock and surplus” .
(c ) As used herein, the term “ undivided profits” in­
cludes paid-in or earned profits (unearned income must
be deducted) ; reserves for loan losses or bad debts, less
the amount of tax which would become payable with
respect to the tax-free portion of the reserve if such
portion were transferred from the reserve; valuation
reserves for securities; and reserves for contingencies.
It does not include reserves for dividends declared or
reserves for taxes, interest and expenses.
(Interprets and applies 12 U.S.C. 24, 84, 248(m ),
330, 335, 345, 347, 371c, 372, 373, 463, 601, 615 and
618.)