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Minutes for December 16, 1965 To: Members of the Board From: Office of the Secretary Attached is a copy of the minutes of the °ard 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 Tinutes in the record of policy actions required to be maintained pursuant to section 10 of the Federal Reserve Act. th ,e Should you have any question with regard to minutes, it will be appreciated if you will advise It:1? Secretary's Office. Otherwise, please initial : 1°14- If you were present at the meeting, your 0 4.nitials will indicate approval of the minutes. If o Y 11 were not present, your initia14 will indicate 41Y that you have seen the minute4., Chm. Martin Gov. Robertson Gov. Balderston Gov. Shepardson Gov. Mitchell Gov. Daane Gov. Maisel Minutes of the Board of Governors of the Federal Reserve System on Thursday, December 16, 1965. The Board met in the Board R°am at 10:00 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Balderston, Vice Chairman Robertson Shepardson Mitchell Maisel Mr. Sherman, Secretary Mr. Kenyon, Assistant Secretary Mr. Young, Senior Adviser to the Board and Director, Division of International Finance Mr. Holland, Adviser to the Board Mr. Solomon, Adviser to the Board Mr. Molony, Assistant to the Board Mr. Cardon, Legislative Counsel Mr. Fauver, Assistant to the Board Mr. Hackley, General Counsel Mr. Brill, Director, Division of Research and Statistics Mr. Farrell, Director, Division of Bank Operations Mr. Solomon, Director, Division of Examinations Mr. Hexter, Associate General Counsel Mr. Hooff, Assistant General Counsel Mr. Koch, Deputy Director, Division of Research and Statistics Mr. Partee, Associate Director, Division of Research and Statistics Mr. Sammons, Associate Director, Division of International Finance Mr. Leavitt, Assistant Director, Division of Examinations Miss Eaton, General Assistant, Office of the Secretary Mr. Forrestal, Senior Attorney, Legal Division Mr. Eckert, Chief, Banking Section, Division of Research and Statistics Mr. Egertson, Supervisory Review Examiner, Division of Examinations Messrs. Goodfellow, Lyon, and Poundstone, Review Examiners, Division of Examinations Distributed items. The following items, copies of which are 4ttehed to these minutes under the respective item numbers indicated, slel'e a roved unanimously: 1,, 12/16/65 -2Item No. ' getter to Morgan Guaranty International Banking io .rPoration, New York, New York, granting perto purchase additional shares of RoyWest "king Corporation Limited, Nassau, Bahamas. 1 Z !xi ,!legram to the Federal Reserve Agent at ilneapolis authorizing the issuance to malicorporation of Montana, Great Falls, 8° t, ntana, of a limited permit to vote its ti.c)k i of Central Bank of Montana, Great Montana, Citizens Bank of Montana, 'Montana, and Liberty Bank of Montana, -ester) Montana. 2 V 13...eports on caTpetitive factors. A report to the Federal Deposit ItIsu rance Corporation on the competitive factors involved in the proPosed merger of Peoples National Bank of Hanover, Hanover, Pennsylvania, itlt rl -auphin Deposit Trust Company, Harrisburg, Pennsylvania, was approved ously for transmittal, the conclusion reading as follows: There is no significant competition existing between Peoples National Bank of Hanover and Dauphin Deposit Trust Company, Harrisburg. Consummation of the proposed transaction will give Dauphin Deposit Trust Company its first offices in York .0unty, and the community of Hanover would be served by .ranches of two large banks and by two well established, °cally headquartered banks. The overall effect of the Proposed merger on competition would not be adverse. 7 A report to the Comptroller of the Currency on the competitive .4et°1.8 involved in the proposed merger of Farmers and Citizens National 144k °f Montgomery, Montgomery, Pennsylvania, into The First National 11414k °f Montgomery, Montgomery, Pennsylvania, was approved unanimously tran smittal, the conclusion reading as follows: 12/16/65 -3- A merger of Farmers and Citizens National Bank of Montgomery into The First National Bank of Montgomery would eliminate the competition between them and reduce the local banking facilities from two to one; however, in view of the relatively small size of the participating banks, as well as the existence of other nearby banking alternatives, the overall effect of the proposed merger on competition would not be s ignificantly adverse. Messrs. Sammons, Egertson, Goodfellow, Lyon, and Poundstone Withdrew from the meeting at this point. LE2posals relating to Regulations Q and D. said the Governor Balderston Principal problem before the Board today was prompted by ques- tion_ that came up during the hearings before the Joint Economic Committee earl, .ter in the week about the impact on savings and loan associations of the recent change in maximum rates payable on time deposits, and by the 131.°tests relayed by the Chairman of the Home Loan Bank Board last Friday atid Yesterday at interagency meetings attended by representatives of the Treasury, Comptroller's Office, Federal Deposit Insurance Corporation, 11(3r4e Loan Bank Board, and the Board of Governors. Also, a letter of 1)(11test had been received by Chairman Martin dated December 13, 1965, N°rman Strunk, Executive Vice President of the United States Savings arld Loan League; copies had been distributed to the Board members. Governor Balderston reported having received a telephone call this 111°rning from Chairman Martin, who said he had now come to the conthat if the Board were to take an action to sharpen the distinctio, be twe _ n e savings and other time deposits, he would also favor action the Proposal to define promissory notes issued by banks as deposits. 12/16/65 -4- Governor Mitchell inquired as to the relationship between the Pt°r[lissory note proposal and the other matter. Mr. Hackley said an illustration would be that a bank which had been issuing savings certificates with a maturity of five years, but effect withdrawable by the depositor on 30-day notice, would no longer be able to issue such certificates. But theoretically, at least, it c(puld then offer five-year promissory notes at rates of interest up to per cent. Governor Mitchell then said he favored the note proposal but 8 trying to clarify what would be involved in the proposed package. Mr. Hackley said the proposal would involve two amendments to Regul . atl°n Q, Payment of Interest on Deposits, without any change in um rates. The first amendment would redefine time deposits so as to limit them to deposits with a single specified maturity. 14 It would, effect, exclude from the definition of time deposit any certificate that provided for automatic renewal at maturity. The second proposal lq°111(1 defi_ e a promissory notes, with certain limited exceptions, as deP"its for purposes of Regulation Q. Both amendments would also be Illade in Regulation D, Reserves of Member Banks. Heretofore, Mr. Hackley continued, the Board had discussed these Poss„ Lies on the assumption that any proposed action taken would be PUblished in the Federal Register for comment. He would like to mention a la0 that in making any changes in Regulation Q the Board in the past I IU16/65 had -5- consulted with the Federal Deposit Insurance Corporation, which had adopted similar amendments to its regulations. In present circum- staixes , with a vacancy on its directorate, it might not be feasible fez' the Corporation to take any formal action. Governor Balderston noted that there would be another meeting " of the interagency Coordinating Committee, which would be attended by L poth the Chairman of the Corporation and the Comptroller of the Cur%Icy . It seemed to him that if the Board were to put the proposed 4174411ants in the Federal Register and make an announcement at the same tim it would then be in a position to send a reply to Mr. Strunk. In answer to a question as to the minimum period of time for %le* 1Pt of comments, Mr. Hackley said there was no minimum prescribed. Nrm 1, 13-a-LIY the Board had allowed 30 days, but it could be 15 days. Then, UPo taking final action the Board normally deferred the effective date. Th e er was a specific requirement in the Administrative Procedure Act for ha deferment except in cases where deferment was found not to be i the public interest. In the interval it would be possible, of el4Irse, for banks to issue five-year savings bonds or certificates, and theY could continue in effect unless the Board specifically provided other ise. Governor Shepardson suggested that the proposed amendment could t4117Y an effective date of January 1, thus allowing about 15 days for Q0144 ellt but placing interested parties on notice. 1 f(.e, 12/16/65 -6- Governor Mitchell, referring to the fact that the draft of Pr°Posed amendment would eliminate from the time deposit category any deposit having more than one specified maturity, asked what this was aim A —eu at specifically. Mr. Hackley said it was aimed at savings bonds or certificates such as certain banks had been issuing that technically could be regarded 4s tin ' e deposits with a maturity of 90 days but were automatically renewed the end of that period for another 90 days on up to five years, with the option on the part of the depositor to withdraw his funds on 90-day notice. Governor Maisel asked whether such an amendment would affect the real issue involved, which he understood to be the issuance of certificates of deposit in smaller denominations. He asked what percentage of the market would be affected as compared with the market for certificates °f deposit. Mr. Brill said he did not think this was known. His impression was that the instruments that had flourished most in recent days were eate es rather than savings bonds, but with the certificates pro5 ror automatic renewal. The question was whether an elimination °f the Permissibility for automatic renewal would really be effective '314 Whether the banks would not be able to devise certain arrangements that would permit them still to offer the certificates. Governor Maisel noted that the payment of 4-1/2 per cent on bonds had been permitted for over a year, and there had been 12/16/65 banks that had been obtaining money at 4-1/2 per cent through the savings bond route. Now the Board would be telling those banks that they would have to do away with a source of funds they had developed. did not know how many banks it would hit hard. The Board The fact was that most °f the reports one read indicated that nothing was being done to change the 4-1/2 per cent rate on savings bonds. What one read about was the ground where large banks had been issuing certificates of deposit in smaller denominations. The Board, as he understood it, would now be telling the banks that they no longer could use the middle ground for deal. lng with individuals. It would be saying that 4-1/2 per cent could be na. r ldonly to large corporations. It would rule out the individual as 4 source of savings by saying that the banks did not have to pay the .4dividual for his funds on the same basis as large corporations. Governor Robertson remarked that he thought the Board had made a take more than a year ago when it raised the maximum rate on certif.;_eta 'es of deposit and did not raise the rate on savings deposits. j Thsreb Y it created a situation in which ingenious banks would circumlierlt the 4 per cent savings rate and pay 4-1/2 per cent (and recently .41(3 e than 4_ 1,2 / per cent) on the same sort of deposit as would normally be, ' ePresented by a savings account. It seemed to him there was merit the suggestion that the Board limit time certificates to a single 414t4rity. The banks could still issue time certificates and collect 410iiey from individuals or corporations on exactly the same basis as - 42' 12/16/65 -8- theY were now doing, but without going over into the savings deposit field and paying a higher rate of interest simply by a change in the form of instrument. If the Board were to make a single maturity require- illent, it could be evaded in the course of time. have to find ways of closing the loopholes. Then the Board would There was admittedly a Problem in trying to deal with the matter at this early stage of developIllent, but he would act now. He would also close the avenue of promissory 4c)tes as a means of evasion The Board would not be distinguishing etween depositors by size--and it should not--but it could limit the Use of certificates of deposit to people who were willing to leave their fund8 on deposit for a given length of time. The action would not have to be made retroactive; the Board would be solving this particular problem before it became a large one. Governor Shepardson said he was inclined to agree with Governor Robertson. On a legal basis it seemed to him there was no question about the so undness of differentiating in rates on the basis of maturities, 11(1 c41. an economic basis it seemed to him there was complete equity in different rates for different maturities. Of deP°aits. This did not bear on the size Whatever the size of the deposit, the maturity factor justi- fied different rates. The saver who needed to have the availability of his funds should not expect to get the same rate as if he were willing to commit his funds for a specified period. As to the position of the batiks that had been issuing savings certificates, he would say that if 12 12/16/65 -9- the amendments included a non-retroactive feature the strain on the banks should not be too severe, particularly if action were taken before the practice had spread too far. On the general approach of trying to ward off difficulty, he was in accord with the theory of not waiting utitil a significant problem clearly existed. in faVor of moving promptly. Accordingly, he would be The concern he had was whether or not this was as far as the Board could go in closing loopholes. He had 'esaed the view many times that if one believed in a free market the ell'I kegulation Q ceilings should be eliminated. However, there was a law te141.11 ring them to be established and in present circumstances he thought it w °uld be unfortunate to lift the ceilings entirely in any event. While he agreed basically with the free market approach, and with allowing free corl1Petition, he thought more problems would be created than solved in the Present circumstances. He was in favor of moving as expeditiously ld ef fectively as possible to stop problems from developing, and from Prese ht indications a serious problem in the area under consideration Seem ed to be developing in respect to shifts of funds. Governor Mitchell referred to Chairman Martin's assurances at the r ecent hearings that the Board would keep a close watch on developGovernor Mitchell suggested, therefore, that the Board embark 04 a 8 urveillance program in regard to member banks so that it would tic)t hav e to depend on press reports, rumors, or gossip. He thought that the Pt'°13°ea1 the Board had considered on promissory notes should be 12/16/65 -10- Published for comment. On the question of what to do about the other su ggested amendments to Regulation Q, it seemed to him that it was easy t° d istinguish between savings accounts and other time deposits on the ground that in practice the former were withdrawable on demand. further distinctions began to build up trouble. Any His preference would be t° wait and act on the basis of facts rather than rumors. If the 13eard was determined to act, however, he hoped it would come out with a ti me account description that would simply say in effect that a time eettificate could be paid only at maturity and must be paid at maturity. lie did not think it was good public policy to interfere unnecessarily in the details of financial arrangements between a bank and its depositors to s ubstitute the Board's judgment for the judgment of bank manageAt ' at least in the case of a well-operated bank. Also, the Board's Posture should be one of favoring the best possible treatment of the 1311utrY's savers. Governor Maisel agreed with Governor Mitchell that the Board rushing needlessly; it did not have the facts as yet. He felt even Dior, ' strongly that the Board had not analyzed the problem sufficiently; esmple, in terms of types of deposits and classes of depositors. It wae his feeling that in the past there had been a basic differentiati°11 between best or time and savings deposits. While it may not have been the most logical one, it seemed to him that before the Board changed It °tight to know what was wrong and have a good reason for wanting to citlge. His feeling was that the form of certificate was a sufficient 12/16/65 -11- tYPe of differentiation. He saw no reason to move away from that, but he would be agreeable to having a study made of the effect of this kind Of differentiation as contrasted with what was now being proposed. He would hate to take action without having a study made of the results of niaking any change. Governor Maisel felt that action such as suggested would represent uhlgarranted interference with the free enterprise economy, and it was not scluired by law. The Board would be acting as a regulatory agency to try to Protect other parts of the economy from the banking system. He °uld want to see a better reason for such action than he saw at present. 44)uld want to know why the Board felt it was necessary to try to stop Re' baAks from acting in the manner they thought most efficient, and what it felt the in economy would gain from an imposition of restrictions on banks fav r 0 of other institutions. If the Board did move, Governor Maisel assumed it would be doing 8° Pr• inciPally for public relations purposes, and he felt it would be Pool' Public favor of relations to penalize the small savers and small banks in large organizations. If the Board decided to take some action, he felt strongly that it should go back to the concept of a package, Which should include action on reserve requirements to provide a gradIlated scale and a 6 per cent requirement against negotiable certificates °f d• eP"it. The package would have to be thought out carefully in terms °f to• tal effect, but he thought the 6 per cent reserve requirement and the sliding scale would be necessary parts of that package. 12/16/65 -12- There followed a further lengthy discussion during which members ol the Board and the staff presented views on matters such as the probabi effectiveness and consequences of the proposed amendments relating tc the distinction between savings and other time deposits, means by which such provisions might be circumvented, and the inconvenience that w°41d be imposed upon banks and depositors. Views also were expressed Orl whether such amendments should be thought of principally in terms Of mitigating the protests that had been received from the savings and 1°41 industry or principally in terms of an administrative action to diffe rentiate more sharply between types of deposits on which different iliximuni interest rates were permitted. As to the position of the savings and 1clan industry, question was raised whether the vulnerability of the 488°ciations might not be greater on their larger and presumably more interest-conscious accounts than on their accounts of lesser size. There difference of views among the members of the Board as to whether it would be preferable to publish the proposed amendments and consider their adoption in light of comments received, or to defer such publicati°11 Pending the availability of better information on recent rate developments and pending further study of the rationale and apparent consequences of action along these lines. A consensus developed in favor of securing additional information as the basis for appraisal of the need for action. Accordingly, it was suggested that consideration be giveri to what type of information on recent and prospective rate 491 osiot.)( 12/16/65 Changes -13- could be obtained from member banks with a minimum of delay. Alternative procedures that might be employed were described, and the staff was then requested to prepare for the Board's consideration a recom-,mundation on procedures for obtaining from member banks such inforIllation as could be furnished promptly, perhaps supplemented by a request for d etailed data that would require somewhat more time to accumulate. At the conclusion of the discussion it was understood that the staff 14°41d prepare information-gathering proposals for the Board's consideratl°n tomorrow. The meeting then adjourned. Secretary's Note: Governor Shepardson today approved on behalf of the Board the following items: reaarLetter to the Federal Reserve Bank of New York (attached Item No. 3) Examiding arrangements for the assignment to the Board's Division of annati°ns of Warren C. Straub, an examiner for the Bank, for a period "Proximately three months beginning January 10, 1966. staffl:temoranda recommending the following actions relating to the Board's sal increase Peri:a Ann Faust, Stenographer, Division of Bank Operations, from $4).49 t ° $4,641 per annum, effective December 19, 1965. A tance resi nation ServicPe_rrY Williams, Jr., Supply Clerk, Division of Administrative 8, effective at the close of business December 15,1965. P. 4/20‘14 Item No. I 12/16/65 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 ADDRESS OFFICIAL CORRESPONDENCE TO THE SOARD December 16, 1965. Morgan Guaranty International ..1 1/411king Corporation, 43 Wall Street, New York, New York. 10015 Gentlemen: As requested in your letter of November 29, 1965, the 4ard Of 0 a/id , -- "4-70vernors grants consent for your Corporation to purchase Roywnold 45,070 additional shares, par value Bahamian El each, of app Banking Corporation Limited, Nassau, Bahamas, at a cost of 04;keximately US$126,996, provided such stock is acquired within Year from the date of this letter. that theTh foregoing consent is given with the understanding loanse investment now being approved, combined with other foreign and investments of your Corporation, Morgan Guaranty Trust Comp any of New York, and Morgan Guaranty International Finance Corn to e r Qration, will not cause the total of such loans and investments cred eed the guidelines established under the voluntary foreign iS Cei- restraint effort now in effect and that due consideration ng given to the priorities contained therein. Very truly yours, (Signed) Karl E. Bakke Karl E. Bakke, Assistant Secretary. t Item No. 2 12/16/65 TELEGRAM LEASED WIRE SERVICE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON December 16, 1965 BEAN -- MINNEAPOLIS RECEA A. Bancorporation of Montana, Great Falls, Montana B. Central Bank of Montana, Great Falls, Montana Citizens Bank of Montana, Havre, Montana Liberty Bank of Montana, Chester, Montana C. None. to. At any time prior to May 1, 1966, at the annual meetings of shareholders of such banks, or any adjournments thereof, to elect directors, and to act thereat upon such matters of a routine nature as are ordinarily acted upon at the annual meetings of such banks. (Signed) Karl E. Bakke BAKICE Befinition of KECEA: The Bo 'd authorizes the issuance of a limited voting permit, under the provisions of section 5144 of the Revised Statutes of the United States, to the holding company affiliate named below after the letter *An, entitling such organization to vote the stock which it owns or controls of the bank(s) named below after the letter *B11, subject to the condition(s) stated below after the letter *Co. The permit authorized hereunder i8 limited to the period of time and the purposes stated after the letter *Do. Please proceed in accordance with the instructions contairied in the Board's letter of March 10, 1947, (S-964). 42.4 BOARD OF GOVERNORS Item No. 3 12/16/65 OF THE FEDERAL RESERVE SYSTEM WASHINGTON, O. C. 20551 ADDRESS OrrICIAL CORREIBPONDICHCIE TO THE BOARD December 16, 1965 Alfred Hayes, President, 'ederai Reserve Bank of New York, NeieWirk! New York. 10045 Delt 14*. Hayes: In accordance with the tentative arrangements made with °14cer tkwitnc8 of the Bank Examinations Department of the Federal Reserve ume "' New York by the. Board's Division of Examinations, it is itatratood that your Bank will make available, for a period of approx!,1Y three months, beginning January 10, 1966, the services of New ryfo arren C. Straub, an Examiner for the Federal Reserve Bank of forei k- While in Washington, Mk. Straub will be assigned to the but iribanking section of the Board's Division of Examinations, fatail4 ' 8 4180 hoped he will have an opportunity to become generally dillsiar with the work of the Division as a whole and to visit other desi " 8 of the Board. While in Washington, W. Straub will be guated'as a Federal Reserve Examiner. It is Understood that the Federal Reserve Bank of New York " ab Qc)rb tectjo all of Mr. Straub's salary and travel expenses in conn with the assignment. 4kik in The Board of Governors appreciates the cooperation of your 11441.od. rciaking the services of lir'. Straub available during this Very truly yours, (Signed) Karl E. Bakke . Karl E. Bakke, Assistant Secretary.
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