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Minutes for
To:
Members of the Board
From:
Office Of the Secretary
April 21 1963
Attached is a copy of the minutes of the
Board of Governors of the Federal Reserve System on
the above date.
It is not proposed to include a statement
with respect to any of the entries in this set of
minutes in the record of policy actions required to
be maintained pursuant to section 10 of the Federal
Reserve Act.
Should you have any question with regard to
the minutes, it will be appreciated if you will advise
the Secretary's Office. Otherwise, please initial
below. If you were present at the meeting, your
initials will indicate approval of the minutes. If
you were not present, your initials will indicate
only that you have seen the minutes.
Chin. Martin
Gov. Mills
Gov, Robertson
Gov. Balderston
Gov. Shepardson
Gov. King
Gov. Mitchell
("4:1
City(
Minutes of the Board of Governors of the Federal Reserve
System on Tuesday, April 2, 1963.
The Board met in the Board Room
at 10:00 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Balderston, Vice Chairman
Mills
Robertson
Shepardson
Mr. Sherman, Secretary
Mr. Kenyon, Assistant Secretary
Mr. Young, Adviser to the Board and Director,
Division of International Finance
Mr. Cardon, Legislative Counsel
Mr. Fauver, Assistant to the Board
Mr. Noyes, Director, Division of Research
and Statistics
Mr. Farrell, Director, Division of Bank
Operations
Mr. Solomon, Director, Division of Examinations
Mr. Hexter, Assistant General Counsel
Mr. Hooff, Assistant General Counsel
Mr. Koch, Associate Director, Division of
Research and Statistics
Mr. Holland, Adviser, Division of Research
and Statistics
Mr. Conkling, Assistant Director, Division
of Bank Operations
Mr. Benner, Assistant Director, Division of
Examinations
Mr. Landry, Assistant to the Secretary
Mr. Young, Senior Attorney, Legal Division
Mr. Partee, Chief, Capital Markets Section,
Division of Research and Statistics
Mr. Loewy, Senior Economist, Division of
Research and Statistics
Mr. Melichar, Economist, Division of Research
and Statistics
Mr. Veenstra, Chief, Call Report Section,
Division of Bank Operations
Discount rates.
The establishment without change by the
Federal Reserve Bank of Boston on April 1, 1963, of the rates on
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4/2/63
discounts and advances in its existing schedule was approved unanimously,
With the understanding that appropriate advice would be sent to that
Bank.
Rate of interest on time certificates (Item No. 1).
date of January
Under
9, 1963, there were sent to all Reserve Bank Presidents
copies of the Board's letter of January
7, 1963, to a member bank
regarding the question whether the latter might continue to pay the
rate of interest specified in a 3-year certificate of deposit bearing
the maximum rate of interest permissible under Regulation Q, Payment
Of Interest on Deposits, if the Board should later reduce the maximum
Permissible rate below the contract rate.
The letter of January
7
pointed out that according to section 217.3(b) of the Regulation no
certificate of deposit shall be renewed or extended unless modified
to conform to the provisions of the Regulation, and, further, that
every member bank "shall take such action as may be necessary, as soon
as possible consistently with its contractual obligations, to bring all
of its outstanding certificates of deposit and other contracts into
conformity with the provisions" of the Regulation.
There had now been circulated to the members of the Board a
file containing a memorandum from Mr. Hooff dated March 22, 1963,
relative to a question raised by The Franklin National Bank, Mineola,
New York, as to whether the rates of interest paid on "Franklin Time
Savings Certificates" with stated maturities of twenty years and in
denominations (maturity value) ranging from $100 to $10,000 would be
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4/2/63
affected by any future downward revision of the maximum rates provided
in Regulation Q.
There was also included in the file a draft of reply
proposed to be sent to the New York Reserve Bank, through which the
request from the member bank had come.
Although, as noted in the
memorandum, the Board's letter of January 7 dealt with a 3-year
contract for deposit of public funds, whereas the present inquiry
concerned 20-year certificates issued to the general public, it was
believed that the January 7 letter answered the current inquiry and
that a letter from the staff might have been sufficient.
On the other
such
hand, because of the more general and long-term application of
a reply in the present case, the staff believed it appropriate for the
Reserve
Board to review the letter proposed to be sent to the New York
Bank.
The draft reply would state, in substance, that the Board's
The
letter of January 7 appeared to answer the question presented by
certificate
Franklin National Bank and would note that inspection of the
enclosed with that bank's letter suggested that the bank might "conto
sistently with its contractual obligations" modify the contract
Provide for a lower rate, since the certificate contained the express
the
Provision that "the obligation to maintain this deposit and pay
future
maturity value is dependent upon and subject to present and
Federal laws and regulations."
At the request of the Board, Mr. Hooff commented on the
on his memorandum.
question at issue, basing his comments substantially
I
_1.
4/2/63
In further discussion, it was noted by the Board that the
Proposed letter seemed to be called for in light of the present provisions
of Regulation Q.
However, several of the members spoke skeptically or
With disfavor concerning the adoption by banks of a practice of issuing
long-term certificates of deposit at a fixed rate of interest; in other
words, lending short and borrowing long.
Reference was made to the
Possibility of amending Regulation Q so as specifically to require longer
term certificates of deposit to contain language providing for modification of the interest rate thereon should the maximum permissible rate
subsequently be reduced.
It was suggested that such an amendment, which
had recently been discussed by the Board, should be given further
consideration.
The letter to the Federal Reserve Bank of New York regarding
the rate of interest payable on the "time savings certificates" issued
by The Franklin National Bank of Mineola, New York, was then approved
unanimously.
A copy is attached as Item No. 1.
Draft bill to amend Consolidated Farmers Home Administration
Act (Item No. 2).
Copies had been distributed of a draft of letter to
the Bureau of the Budget responding to its request of March 13, 1963,
for the Board's views on a draft bill proposed by the Department of
Agriculture to amend the Consolidated Farmers Home Administration Act
of 1961, as amended.
The draft would state that the Board had no
Specific comments regarding the proposed legislation for the reason that
it did not appear directly to concern the Board's primary responsibilities.
1114
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4/2/63
However, the letter would go on to question whether the legislation
adequately took into account the principles for Federal credit activities
advocated in the recent report to the President by the Committee on
Federal Credit Programs.
Reference would be made to the suggestion
in the report that new credit programs be assigned to existing agencies
Whenever they served the same general purposes already served by such
agencies and that every attempt be made to stimulate private lenders
to fill credit gaps through co-insurance and other means before
resorting to direct Federal lending.
staff
The foregoing draft of reply had been prepared by the
at the suggestion of Governor Shepardson following distribution of
an initial draft that stated merely that the Board had no comments.
Governor Shepardson noted that the tone of the revised draft
reply to the Budget Bureau had been purposely made restrained.
Although
a stronger and more detailed position against the draft bill might
be taken, it had usually been the Board's practice to refrain from
commenting in detail on bills that did not directly concern the Board's
primary responsibilities.
Therefore, the revised draft had been prepared
along the lines indicated.
changes
In answer to a question, Governor Shepardson itemized
In the Consolidated Farmers Home Administration Act of 1961, as amended,
that would be brought about by the draft bill, noting various reasons
Why the proposed changes would seem undesirable.
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4/2/63
In further discussion the thought was expressed that a more
Board
detailed evaluation of the bill might be in order should the
be requested to report to a Congressional committee, but that the
Budget
revised draft appeared to be adequate for submission to the
Bureau.
It was agreed, however, to modify the second paragraph by
that the Board had
eliminating a sentence that would have stated
no specific comments on the proposed legislation because it did not
concern the Board's primary responsibilities.
to the Bureau
The letter was then approved for transmission
of the Budget in the form attached as Item No. 2.
Reports on S. 607 and H. R. 258 (Item No. 3).
There had been
March 18, 1963,
distributed a memorandum from the Legal Division dated
S. 607, identical bills
regarding requests for reports on H. R. 258 and
"
"To authorize the establishment of Federal mutual savings banks.
Currency
A draft of letter to Chairman Patman of the House Banking and
with the memorandum; and
Committee reporting on H. R. 258 was submitted
son
it was proposed that a similar letter be sent to Chairman Robert
Of the Senate Banking and Currency Committee reporting on S. 607.
that H. R. 258
The memorandum from the Legal Division noted
the Board
and S. 607 were substantially the same as bills on which
Committee;
had previously reported to the Senate Banking and Currency
legislation by the
no reports had previously been requested on such
House Committee.
us
The memorandum referred to the fact that previo
not taken a position
reports of the Board on such legislation had
of mutual savings banks
concerning the principle of Federal chartering
4/2/63
-7-
although questions had been raised regarding particular features of the
bills as introduced.
In view of the widespread interest that had
developed with respect to the legislation, it was the view of the
staff that a similar report on the present bills might not be considered
adequate.
Therefore, it was recommended that there be submitted to
both the Senate and House Committees a report stating that the Board
had no objection in principle to the legislation but calling the
Committees' attention to a number of objectionable provisions; and
that there be enclosed a staff memorandum providing a detailed analysis
and appraisal of the proposed legislation.
In reply to a question, Mr. Young of the Legal Division said
that the proposed reports would not differ in essence from the position
Previously taken in letters of December 9, 1960, and January 19, 1962,
to the Senate Banking and Currency Committee, aside from the inclusion
of an explicit statement that the Board had no objection in principle
to legislation that would authorize Federal charters for mutual savings
banks.
Governor Mills raised the question whether it would not be more
appropriate to detail the various structural deficiencies of the draft
legislation in the Board's letter rather than to follow the procedure
Of attaching a staff memorandum.
He was fearful that the proposed
procedure could be interpreted as meaning that the Board was not taking
responsibility for the various criticisms made in the staff memorandum.
Following discussion of this point, it was agreed to specify in
the letter that the Board concurred in the views expressed in the memorandum.
I
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4/2/63
Attention was then directed to the memorandum itself, and a
general discussion of certain of the statements therein resulted in
agreement on several changes.
After further discussion, approval was given to the transmission to the Banking and Currency Committees of the Senate and House
of similar letters, each to be accompanied by a copy of the staff
memorandum in form reflecting the changes agreed upon at this meeting.
A copy of the letter, with enclosure, sent to the Senate Banking and
Currency Committee is attached as Item No.
3.
Messrs. Cardon, Yonng (Legal), and Loewy then withdraw from
the meeting.
Status of municipal bonds bought by a bank with option to
resell (Item No.
4).
Copies had been distributed of a memorandum
from the Legal Division dated March 27, 1963, regarding the status as
investments or loans of municipal bonds bought by a bank with an
Option to resell.
The question arose from a practice of Morgan
Guaranty Trust Company of New York, which for several years had made
funds available to dealers in municipal securities under circumstances
that gave rise to the problem whether such transactions should be
Classified in reports of condition and examination reports as loans
or as investments in securities.
The New York Reserve Bank had inquired
Whether the Board would acquiesce in the member bank's "continuing
to report these transactions as investments rather than loans."
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4/2/63
In reviewing the matter, the memorandum referred to the
Board
Position taken by the Comptroller of the Currency and the
in 1957 that sale and repurchase transactions, despite their investment
were
form, actually were loans in purpose and effect, and therefore
subject to statutory loan limits.
(Subsequently, the Comptroller
exercised his authority under section 5200(8) of the Revised
y of Federal Government
Statutes to permit unlimited loans on the securit
obligations maturing within 18 months.)
Guaranty
Although the transactions involved in the Morgan
dum noted a number
situation were repurchase arrangements, the memoran
type of
of features serving to distinguish them from the Federal funds
situation that prompted the 1957 ruling.
The securities sold were
Guaranty
municipal rather than Federal Government securities; Morgan
rather
received interest at the rate prescribed by the securities
two
than at a stated interest rate; the transactions covered at least
resale rights
weeks, with an average duration of over one month; and the
and obligations were not mutual since Morgan Guaranty had a unilateral
price paid
Option to resell the municipal securities involved at the
for them or "the then market, whichever is higher."
of the
Morgan Guaranty took the position that, as owner
was interest
municipal securities concerned, the interest received
income taxation.
on those securities and therefore was exempt from Federal
As noted in the memorandum, the Internal Revenue Service apparently did
!s,
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4/2/63
not object to this treatment by Morgan Guaranty of its interest income
from the securities involved.
The memorandum stated the opinion of the Legal Division that,
from the standpoint of bank supervision at least, the arrangement gave
rise to loans by the bank rather than ownership of municipal bonds.
However, there was admittedly some element of doubt.
Among other things,
Counsel for Morgan Guaranty, a leading New York law firm, had expressed
the opinion that the arrangement amounted to the purchase of securities
rather than a loan; the New York Reserve Bank had expressed the hope
that the Board could go along with the opinion expressed by Counsel
for Morgan Guaranty; and the Internal Revenue Service had not taken
by
exception to the manner in which these transactions were handled
Morgan Guaranty.
In view of these various considerations, it was the Legal
Guaranty's
Division's recommendation that the Board not object to Morgan
securities.
continuing to report such transactions as investments in
In
making this recommendation the Legal Division suggested that the
s
Board not go on record as either accepting or rejecting Morgan Guaranty'
to
position in this matter, and that the Reserve Bank be requested
character
inform the Board if and when the practice spread or changed in
to any material extent.
Attached to the memorandum was a draft of letter
to the New York Reserve Bank to this effect.
The Legal Division also
Currency be informed
recommended that the Office of the Comptroller of the
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4/2/63
of the Board's proposed action to afford opportunity for interagency
consultation if the Comptroller should so desire.
In commenting on the memorandum of the Legal Division,
Mr. Hexter reported advice from the New York Reserve Bank that leading
New York City State member banks were following divergent practices
regarding the type of transaction under consideration.
One bank was
reporting such transactions as loans but nevertheless claiming a tax
exemption on the interest income; another was reporting the transactions as
loans and paying taxes on the interest income; another had stopped
entering into such transactions.
In discussion, Governor Robertson stated that he realized
the difficulty involved in reaching a clear determination of the matter
In view of the intricacies of this kind of transaction.
Nevertheless,
he felt it was undesirable to send a letter to the New York Reserve
Bank phrased in terms that the Board would not object to such transactions
continuing to be reported as investments.
Should the Reserve Bank
transmit such a position to member banks, the practice might spread
quickly.
In the circumstances, he suggested revised language for parts
Of the proposed letter so as to state, in effect, that examiners for
the Reserve Bank need not question such transactions for the time being,
but that developments might make it necessary for the Board of Governors
to issue general interpretations on the subject.
There being general agreement with these suggested changes,
unanimous approval was given to a letter in the form attached as Item No.
4.
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4/2/63
At this point Mr. Hexter brought out that about two years ago
the Office of the Comptroller of the Currency had indicated informally to
the Board's staff that it would be inclined to regard such transactions as
loans, although perhaps without having the benefit of full information
at hand at the time.
He inquired whether it would be the Board's desire
that he check again with the Comptroller's Office to see whether there
had been any change in view, in the interest of achieving uniformity
of interpretations.
It was agreed that Mr. Hexter should check with
the Comptroller's Office and that he would report to the Board if
any
general disagreement were found.
Secretary's Note: Upon checking with the
Comptroller's Office, Mr. Hexter was
informed that the Office had changed its
position on the entire subject of repurchase
transactions; that if a transaction was in
the form of a purchase of securities, the
Office would not object to its being reported
as an investment in securities rather than a
loan and would not regard such a transaction
as subject to the statutory loan limitations.
It was understood that the Comptroller was
considering the issuance of an opinion to
such effect. This information was reported
to the Board in a memorandum distributed under
date of April 3, 1963.
withdrew
Messrs. Koch, Holland, Benner, Partee, and Melichar
from the meeting at this point.
Publication of reports of condition.
Under date of March 28,
1963, copies had been distributed of a memorandum from Messrs. Veenstra
and Farrell attaching a copy of a letter addressed by the Comptroller
1119
4/2/63
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of the Currency to all national banks under date of March
8, 1963. In
effect, the letter stated that for the purpose of reducing the
administrative and expense burden incident to publication of reports
of condition, national banks would have the option, effective immediately,
of deferring publication of the spring and fall reports and of publishing
the data so collected in comparative columnar form with the June and
December call reports.
The memorandum noted that this action on the
Part of the Comptroller raised a question as to whether State member
banks would be discriminated against if the Board continued to require
them to publish on a current basis spring and fall call report data.
A distributed memorandum from the Legal Division dated March 26, 1963,
stated the opinion that neither the Board nor the Comptroller may by
call
regulation or otherwise permit member banks to delay publication of
reports for a period of months.
In the circumstances, the staff proposed for the Board's
consideration as possible alternative courses of action the following:
(1) reference to the Attorney General of the conflicting interpretations
of law; (2) the sending of a letter to all Reserve Banks asking for
comments
their views on the question and suggesting that they solicit
from each State banking department in their districts as to whether
State banks could or should be given an option similar to that given
to national banks by the Comptroller; (3) a Legal Division review of
all State statutes to determine whether an amendment to the Federal
number of State
statutes would permit the Board to allow a significant
4 ?,
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4/2/63
;
member banks to delay or forego publication of certain call reports
and
(4) a Board-initiated proposal that the three Federal supervisory
call
agencies review the continuing need and format of spring and fall
reports and their publication, with the thought that the Board could
collect by means of sampling arrangements the needed statistical
reports.
information now being taken from the spring and fall call
on,
At the request of the Board, Mr. Farrell outlined the situati
basing his comments on the memorandum of March 28.
nal alternative
Governor Mills remarked that there was an additio
to those suggested in the memorandum, namely, for the Board simply
to adhere to its present position.
letter of March
He noted that the Comptroller's
8 was permissive in nature and that in recent conversa-
had
tion with representatives of a State bankers association who
in
visited the Board's offices, hardly any of the national bankers
the group indicated a desire to accept the option provided by the
Comptroller.
Governor Mills agreed with the position taken in the
of the
memorandum of the Legal Division to the effect that publication
of
call reports was required by statute and that the presumed purpose
on of
Publication was to acquaint the public with the current conditi
banks.
the spring
This purpose would not be served if publication of
ed.
and fall reports were delayed until the next report was publish
views expressed
There developed to be general agreement with the
by Governor Mills in this regard.
Hence, so far as the immediate
was concerned, it
question raised in the Veenstra-Farrell memorandum
-15-
4/2/63
was understood that the Board would leave unchanged, at least for the
time being, its outstanding instructions with regard to the publication
of reports of condition by State member banks.
Chairman Martin then turned to Mr. Noyes for comment on the
status of the work being done by the interagency staff group assigned
to study various phases of the call report procedure.
(This group
consisted of two representatives each from the Board, the Comptroller's
Office, and the Federal Deposit Insurance Corporation, with Messrs.
Noyes and Holland representing the Board.)
Mr. Noyes reported that he had been meeting both with the
interagency group and with representatives of the Federal Reserve Banks.
He noted that the Comptroller was pushing for a reduction in the number
of calls and for a reduction in the amount of detail required in
connection with each call.
legislation.
The first of the two steps would require
So far as the second was concerned, it seemed to Mr. Noyes
that perhaps some progress could be made toward reducing the number
of calls at which full detail would be required.
On the other hand,
substantially the current amount of detail as now obtained was thought
to be needed rather importantly at least once and perhaps twice each
Year, although there might be some modifications in the form of the
call report at each call date.
The matter was urgent in the sense
that the Comptroller apparently would like to announce certain changes
in the form of the call report in connection with the midyear call
even though the changes might not be made effective at such time.
1122
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4/2/63
After further comments by Mr. Noyes along these lines, Chairman
Martin expressed the view that it would seem desirable to have a meeting
shortly that could be attended by the Comptroller, members of the
Board (including Governor Mitchell), and some of the Reserve Bank
Presidents.
Secretary's Note: Such a meeting was held
on the afternoon of April 16, 1963.
Governor Mills noted that there were two different approaches to
be taken to the call reports.
On the one hand, they might be regarded
as reports designed to disclose to the public the position of individual
banks.
On the other hand, the reports provided statistical data for
the supervisory agency which, as indicated in the memorandum of
March 28, might be provided to a degree by sampling procedures.
Over
the years, Governor Mills noted, there had been a gradual tendency
to ask banks for more and more information.
It might be possible to
backtrack somewhat and require a lesser volume of statistical data
from the banks; but he thought it important not to abolish the periodic
Publication of bank statements.
It was noted, in further discussion,that the Comptroller
was not advocating elimination of publication of the face of the call
reports but was advocating a reduction in the frequency of these
reports from four to two times a year, which he realized would require
a change in existing law, along with simplification.
Request of Chairman Patman.
Chairman Martin and Mr. Sherman
of
reported, as a matter of information, that the Federal Reserve Bank
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4/2/63
New York was in receipt of a request from Chairman Patman of the House
Banking and Currency Committee for the minutes of the Bank's directors'
meetings for certain years, along with related papers.
The Reserve
Bank was reported to be studying the request, prior to presentation
of the matter to its directors, and it was understood that the Reserve
Bank would be in touch with the Board after further study.
The meeting then adjourned.
Secretary's Note: Governor Shepardson
today approved on behalf of the Board
the following items:
Telegram to the Federal Reserve Bank of Kansas City (attached
Item No. 5) approving the appointment of Peter V. C. Wasson as assistant
examiner.
Memoranda from appropriate individuals concerned recommending increases
In the basic annual salaries of the following persons on the Board's
staff, effective April 14, 1963:
Name and title
Division
Basic annual salary
To
From
Research and Statistics
Barbara A. Bosworth, Statistical Clerk
Jean C. King, Technical Editor
Dorothy E. Swink, Statistical Assistant
$ 4,110
6,675
$ 4,250
4,885
6,900
5,o45
3,925
11,515
4,o30
I1,880
11,150
11,150
11,150
4,390
11,515
International Finance
Katherine M. Bulow, Clerk-Typist
Thomas M. Klein, Economist
Examinations
Robert F. Achor, Review Examiner
John N. Lyon, Review Examiner
John M. Poundstone, Review Examiner
Jeannette Somlyo, Stenographer
11,515
11,515
4,530
4/2/63
Salary increases, effective April 2, 1963 (continued)
Basic annual salary
To
From
Division
Name and title
Administrative Services
Virginia F. Gums, Charwoman
$3,350
( („c
Secretary-)
3,455
Irjr"
"4,01 -3
BOARD OF GOVERNORS
Item No. 1
4/2/63
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON 25, D. C.
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
April 2, 1963
Mr. Howard D. Crosse, Vice President,
Federal Reserve Bank of New York,
New York 45, New York.
Dear Mr. Crosse:
This refers to your letter of February 20, 1963, enclosing
a letter from The Franklin National Bank, Mineola, New York, presenting
the question whether the rate of interest specified in the 20-year time
savings certificates issued by that bank would be affected by any
future downward revision of the maximum rates provided in Regulation Q.
Under date of January 9, 1963, the Board furnished each
Federal Reserve Bank a copy of the Board's letter of January 7, 1963,
answering a similar question presented by a member bank with respect to
3-year certificates of deposit. The Board referred to section 217.3(b)
of Regulation Q, which provides that no certificate of deposit shall be
renewed or extended unless modified to conform to the provisions of the
Regulation, and, further, that every member bank "shall take such action
as may be necessary, as soon as possible consistently with its contractual obligations, to bring all of its outstanding certificates of
deposit and other contracts into conformity with the provisions" of the
Regulation. The Board advised the bank that if, during the 3-year period
of the contract, the Board should reduce the maximum permissible rate to
a percentage lower than that stipulated in the contract, the member bank
could continue to pay the contract rate until the end of the 3-year
Period if it could not "consistently with its contractual obligations"
modify the contract to provide for the lower rate.
This recent pronouncement by the Board appears to answer the
question presented by The Franklin National Bank. However, inspection
of the certificate enclosed with that bank's letter suggests that the
bank might "consistently with its contractual obligations" modify the
contract to provide for a lower rate, since the certificate contains
the express provision that "the obligation to maintain this deposit
and pay the maturity value is dependent upon and subject to present
and future Federal laws and regulations."
M-
Howard D. Crosse
-2-
As you know, the Board has considered amending section
Regulation Q so as specifically to require certificates
of
217.3(b)
to contain a provision providing for modification of the interest
rate if the rate should subsequently be reduced and if the Board
should not permit the continued payment of interest at the rate
provided in the certificate. As an alternative, consideration has
been given to an amendment that would merely make clear the
authority of the Board to require reduction of the rate under outstanding contracts. However, the Board has not reached a decision
as to the need for and the nature of such an amendment, and, since
The Franklin National Bank's question was presented over a year ago,
it seem desirable to supply an answer on the basis of the Regulation
as it now exists.
Very truly yours,
(Signed) Merritt Sherman
Merritt Sherman,
Secretary.
Item No. 2
4/2/63
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON 25, D. C.
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
April 2, 1963.
Mr. Phillip S. Hughes,
Assistant Director for
Legislative Reference,
Bureau of the Budget,
Washington 25; D. C.
Dear Mr. Hughes:
This is in response to your communication of March 13,
by the
1963, requesting the Board's views on a draft bill, proposed
Home
Department of Agriculture, to amend the Consolidated Farmers
as
amended.
1961,
of
Administration Act
n
The Board questions whether the proposed legislatio
for
adequately takes into account some of the desirable principles
of
report
recent
the
in
described
new Federal credit activities
the Committee on Federal Credit Programs to the President. These
should
included, for example, the thought that new credit programs
be assigned to existing agencies whenever they serve the same general
that
Purposes already served by such agencies, and the suggestion
credit
fill
to
lenders
private
stimulate
to
made
every attempt be
direct
gaps through co-insurance and other means before resorting to
Federal lending.
Very truly yours,
(Signed) Merritt Sherman
Merritt Sherman,
Secretary.
(IL
Item No. 3
4/2/63
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON
OFFICE
OF THE CHAIRMAN
April 4, 1963
The Honorable A. Willis Robertson,
Chairman,
Committee on Banking and Currency,
United States Senate,
Washington 25, D. C.
Dear Mr. Chairman:
This is in response to your request of February 4, 1963, for a
report on the bill, S. 607, "To authorize the establishment of Federal
mutual savings banks."
While the Board has no objection in principle to legislation
that would authorize Federal charters for mutual savings banks, it is
the Board's view that S. 607 contains a number of objectionable provisions. These relate mainly to the very broad investment powers which
the bill would grant to such banks, the determination of the powers of
such institutions in accordance with the minimum standards set by State
law rather than by Federal law or regulation, and the limited regulatory
Powers of the chartering agency. With respect to the latter, while the
Home Loan Bank Board would be given authority under the bill to liberalize
mortgage lending terms further, no parallel authority is provided for
tightening terms, regardless of circumstances.
A more detailed analysis and an appraisal of these, as well as
Other provisions of the bill, are contained in the enclosed memorandum,
Which was prepared by the Board's staff and in which the Board concurs.
Sincerely yours,
WM. McC. Martin, Jr.
Enclosure
1129
STAFF COMMENTS ON H.R. 258 AND S. 607
TO AUTHORIZE THE ESTABLISHMENT OF
FEDERAL MUTUAL SAVINGS BANKS
H.R. 258 and S. 607 are identical bills to authorize the
establishment of Federal mutual savings banks as members of the Federal
Home Loan Bank System, either through the conversion of existing mutual
savings banks and savings and loan associations or the chartering of new
banks. As in previous bills introduced in the 86th, 87th, and 88th Congress, the explicit purpose of the proposed legislation is to promote
maximum employment and production by encouraging an "increased flow of
real savings to finance new housing and other capital formation on a
sustainable noninflationary basis."
In its reports on similar bills proposed in the past, the Board
questioned whether the establishment of Federal mutual savings banks would
do much more than redirect rather than increase the flow of savings, and
Whether the public interest would necessarily be served by the rearrangement of saving, financial, and competitive relationships among financial
institutions that would follow the establishment of Federal mutual savings
banks. The Board stated that in areas already served by the facilities of
existing thrift institutions, Federal mutual savings banks would compete
With institutions having large liabilities to millions of savers. The
Board's opinions on earlier bills apply with equal appropriateness to
H.R. 258 and S. 607.
Although there may appear to be no objection in principle to
increasing competition among savings institutions by establishing Federally-chartered mutual savings banks, H.R. 258 and S. 607 have a number of
serious defects. These relate mainly to the very broad investment powers
granted, the extent to which regulatory authority is circumscribed, and
the extent to which the powers of such institutions would be determined
by State law.
In reviewing earlier bills, the Board commented that the investment powers recommended for Federal mutuals were quite liberal compared with
the powers of existing thrift institutions and commercial banks. Of special
concern was authorization to invest in common stocks up to 5 per cent of
the assets of savings banks (or up to 100 per cent of reserve funds and
undivided profits), in conventional mortgages ,up to 30 years and 90 per
cent of appraised value, and in mortgages on "any other real property"
(Presumably including unimproved land) up to 75 per cent of appraised
value.
These investment powers are unchanged in the pending bills.
-2-
It may be argued that thrift institutions should hold no
Investments in corporate stocks. Any such holdings would be subject to
variations in market valuation over time, while the obligation to savers
must be to return the number of dollars deposited. On the other hand,
mutual savings banks have in practice invested moderate amounts in stocks
under the supervision of State banking departments. But consideration
Should be given to tightening the stock investment provision of these
bills by imposing, at the least, a strict limitation on the amount of
stock of any corporation that could be purchased, and a more restrictive
aggregate limitation on the total book value of such investments. Since
the banks would be authorized to invest up to 50 per cent of their undivided
Profits and reserve fund in real property assets, which also are variable in
value, a parallel limitation on corporate stock investment powers might seem
appropriate. .
There is no objection to the provision which permits Federal mutual
savings banks to invest without limit in the obligations of the United States,
guaranteed or insured Federal or State agency obligations (including Federal
Home Loan Bank Board debentures), municipal bonds, Canadian and provincial
obligations, bonds of the International Bank for Reconstruction and Development and the Inter-American Development Bank, and in first mortagage bonds
and notes.
Other types of investment permitted are promissory notes secured
by mortgages, stocks, and bonds, in which "a savings bank may invest".
This is not much of a limitation, given the wide investment powers otherwise provided. Federal mutuals could in fact become a significant source
of stock market credit if this provision and the authority to invest in
corporate stock is retained. The banks may also invest in promissory notes
secured by assignment of deposits or share accounts in any thrift institution subject to Federal or State regulation, and in other secured or unsecured promissory notes "containing terms conforming to regulations to be
Prescribed" by the FHLBB.
Of chief concern are the extremely liberal rules governing
mortgage investment. Investment in any one mortgage must not exceed 2 per
cent of the assets of a savings bank or $25,000, whichever is greater, but
the limitation does not apply if the Federal Home Loan Bank Board authorizes
greater amounts. With regard to mortgages on one-to-four family residential
Properties, loans may be made without limit for amounts up to 90 per cent of
the appraised value, and for maturities of up to 30 years. The savings banks
maY also lend up to 75 per cent of the appraised value of any other real
Property and this includes, presumably, unimproved land. There is no proneion requiring amortization of such loans. While the Home Loan Bank Board
ls given authority to liberalize mortgage lending terms further, there is no
Parallel authority to tighten terms, regardless of circumstances.
-3There is a real possibility that such liberal investment
Provisions could result in competitive deterioration in the quality of
Mortgage credit, tending to jeopardize the asset structure of not only
the Federal mutuals but also other financial institutions. This is
Particularly true, given the emergence of the new mutual institutions
as competitors and in view of the wide variation in appraisal and
valuation methods among institutions and from State to State. Vigorous
competition for mortgage loans already prevails, and abuses resulting
from appraisal procedures could multiply.
Although it would be inappropriate to specify in the proposed
legislation detailed rules of appraisal valuation, a general authorization permitting the FHLBB to apply strict rules of appraisal and valuation techniques, combined with authority to specify stricter credit terms
for specific Classes of mortgages, would seem highly desirable. Such
Provisions, warranted by the uncertainties of the future alone, are even
more appropriate where the introduction of a new competitive element may
have a significant impact on the structure of credit markets.
Along the same lines, there is nothing in the proposal to
suggest that Federally-chartered savings banks will be subject to regulation of interest rates paid on deposits. Obviously, competition for dePosits in areas where institutional savings facilities are abundant might
lead to severe rate competition with possible injury to thrift institutions generally. Also, minimum standards of liquidity are not provided,
even though the mutuals are ordinarily required to meet all deposit withdrawal demands within 90 days. In both cases, broad authority for the
Board, on a standby basis, would seem in order.
The proposed Federally-chartered mutual savings banks would have
irnPortant tax advantages over commercial banks. Although the Revenue Act
°f 1962 revised and tightened the provisions permitting mutual savings
Institutions to add to bad debt reserves, the law as amended still confers
?II mutual savings banks tax advantages over commercial banks. Furthermore,
present proposal insures unusually favorable State-local tax treatment
bY Prohibiting the imposition of an: tax on Federally-chartered mutual
savings banks greater than "the least onerous imposed or permitted by such
State or political subdivision on any other local financial institution."
The merger and consolidation provisions of the two bills are
ell?ject to none of the standards provided in the Bank Merger Act of 1960,
14111ch require the appropriate supervisory agency, before granting consent
0 a merger or consolidation, to find that the transaction would be in the
Pi.ublic interest, after taking into account a number of factors, including
.1"he convenience and needs of the community to be served, and the effect of
'he transaction on competition. Also, the bills provide that a savings
a7 tr
-14bank resulting from a merger may retain and operate any one or more
offices in operation on the date of the merger, and apparently would
permit, with the approval of the Federal Home Loan Bank Board, the
establishment of State-wide branches.
Three separate sections of the bills may be interpreted as
implying some latitude for the Federal Home Loan Bank Board to establish
qualitative standards of investment. Section 107 states that "A savings
bank may borrow funds [presumably from the Federal Home Loan Bank System]
subject to such regulations as the Board may prescribe." Section 114
requires that "The Board shall conduct an examination at least once in
each calendar year into the affairs and manaement of each savings bank
for the purpose of determining whether :,uch savings bank is being operated
in conformity.with the provisions of this Act, any rules and regulations
Promulgated hereunder, and sound banking practice. . . ." Section 115
states that "The Board shall have power to make and publish, as provided
by the Administrative Procedure Act, general regulations applicable to
all savings banks implementing this Act and not in conflict with it.
The Board shall have power to supervise savings banks and require conformity
to law and regulations."
Whether these very general provisions for regulatory authority
are adequate is debatable, particularly where it is also specified that
all Federal mutuals, regardless of any law or regulation, shall have all
the powers now or (with the approval of the Home Loan Bank Board) hereafter granted to State-chartered mutuals in the State where the Federal
mutual savings bank is located. It seems clear that this provision,
Which in effect permits minimum standards of performance for both the
Federal- and State-chartered institutions within a State to be set by
independent State legislation, presents a dangerous departure from
Present Federal financial legislation.
Item No.
4
4/2/63
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON 25, D. C.
PONDENCE
ADDRESS OFFICIAL CORRES
TO THE BOARD
April 4, 1963.
Mr, Howard D. Crosse, Vice President,
Federal Reserve Bank of New York,
New York 45, New York.
Dear Mr. Crosse:
presented in your
This is with reference to the question,
1960, and March 22, 1963,
Bank's letters of June 12, 1958, January 21,
n Guaranty Trust Company and
whether certain transactions between Morga
loan transactions or as
municipal bond dealers should be reported as
investments in securities.
arrangements of the
The Board is inclined to conclude that
reality loans rather than
kind described in said letters constitute in
information is a memorandum
securities transactions. (Enclosed for your
1963, that discusses the
of the Board's Legal Division, dated March 27,
and certain terms of such
problem.) However, because of the form
conflicting opinions. Accordarrangements the matter is susceptible of
absence of developments
ingly, in view of the circumstances and in the
this letter, no question
of
of the kinds described in the last sentence
actions continue to be
trans
such
need be raised, for the time being, if
reported as investments.
ion on the question
The Board believes that a definitive posit
ad, your Bank is requested to
Should not be taken at this time. Inste
ding the use of arrangekeep currently informed, as far as possible, regar
If the practice should became
ments of this nature by commercial banks.
r detrimental to the banking
Widespread or tend to develop in a manne
and the informative quality of
system or likely to impair the accuracy
become advisable for the Board
Published reports of condition, it might
ct.
Of Governors to issue a general interpretation on the subje
Very truly. yours,
N.,.•1
Merritt Sherman,
Secretary—
Enclosure
‘. ,e-t
1 134
Item No.
5
4/2/63
TELEGRAM
LEASED WIRE SERVICE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON
April 2, 1963.
MILLS - KANSAS CITY
IN ACCORDANCE WITH THE REQUEST CONTAINED IN YOUR LETTER OF MARCH 25, 1963,
TRE BOARD APPROVES .THE APPOINTMENT OF PETER V. C. WASSON AS AN ASSISTANT
CAllaNER FOR THE FEDERAL RESERVE BANK OF KANSAS CITY.
PLEASE ADVISE THE
SALARY RATE AND THE EFFECTIVE DATE OF THE APPOINTMENT.
IT IS NOTED THAT MR. WASSON IS INDEBTED TO THE AMERICAN NATIONAL BANK
4 DENVER, DENVER, COLORADO AND TO GUARANTY BANK AND TRUST COMPANY, DENVER,
COLORADO, A NONMEMBER BANK.
ACCORDINGLY, THE BOARD'S APPROVAL OF MR. WASSON'S
41)13°INTMENT IS GIVEN WITH THE UNDERSTANDING THAT HE WILL NOT PARTICIPATE IN.
411Y- EXAMINATION OF EITHER BANK NAMED ABOVE SO LONG AS HIS INDEBTEDNESS THERETO
1414AINS UNLIQUIDATED.
(Signed) Kenneth A. Kenyon
KENYON
@FedFRASER