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4L5;i- At a regular meeting of the Federal. Reserve Board held in the office of the Bord on Friday, December 16, at 3:00 p. m. PRESENT: :r. Hamlin Lr. Mr. Delano 1:r. Harding Mr. Miller. The Governor of the Board 'presided and H. P. acted as secretaryto the mooting. The rinutes of the freceiiing meeting were read and approved. Lr. Delano submitted a report from the Co: 2 ittee on the reclassification of rational bank examiners. On motion, after discussion, the re-port was approved as follows: First: The examining districts shall be revised so as to coincide with the districts of the Federal reserve banks. second: At the head of the bank examining staff of each district will be a Chief.1.1-xaminer who will, except in the case of the fifth district, have his headquarters at the headquarters of the district. In the case of the fifth district, for the present at least and until further notice, he will have his headquarters at 3ashington. Third: In lieu of the old fee system of paying for the services of examiners, the following grades 456 of pay for examiners are established: ( Grade A „;;6,000 per year 9 B 5,000 " ( 9 If 9 C 4,200 Examiners (% If ( If D 3,600 if , 9 E 3,000 ( Assistant ( Examiners ( % ( If 9 A B v 2,200 2,000 1,800 9 tt 9 In cities where there are very large banks, salaries above those named are approved, as follows: New York District )15,000 " Chicago 12,000 9,000 Philadelphia " Boston District -3,000 St. Louis It 8,000 Cleveland 9 8,000 San Francisco District .7,500 Minneapolis 7,500 If Richmond 7,500 In the above named cases each of these men will be an active examiner, with the title of Chief Examiner, with general supervision of the examination work of his district. Chief Examiners at salaries of ‘)6,000 or less shall also be provided for the Dallas, Atlanta, and Kansas City Districts. Fourth: The assignment of the examiners to these districts and the grading of the examiners now in the service, approximately 100 men in all, will be left to the discretion of the Comptroller of the Currency. The selection of the examining staff in tne future and the promotion of men entering the service shall be the subject of future consideration and report by the sub-committee, which has heretofore been working upon this subject. Fifth: In the consideration of the above natters, the committee has had the cordial assistance and cooperation of the Comptroller's office in coordinating the examination work of the Comptroller's office, as provided in the Na- 457 tional Banking it, under the charge of the Comptroller, with the examinations provided for in the Federal Reserve Act by the Federa/Reserve'banks and the Federal Reserve Board, and the Committee believes that great good will come from establishing headquarters of Chief Examiners of each district in tho city where the reserve bans have been established, so permitting the interchange of data and mutual consultation, concerning the data in trio posses— sion of the Examiners of the Federal lieserve banks and the Federal Reserve Board, represented in each district by the Federal Reserve.Agent. Sixth: It is,the senso,of this Committee that no bank examiner should,be permitted to engage in any other business; but shall give his entire ti—e to the work of the office, except that a bank examiner .may be allowed to hold also the office of Class "C" Director of a Federal Reserve bank, and shall be allowed such pay as he would be entitled to as such Director or as a member of the Executive Committee of a Federal Reserve bank if he should be a member of such committee. Respectfully submitted for the Committee: By F. A. DMAITO December 17,'1914. Mr. Delano moved to take from the table the report of the Committee on Audit and Examination regarding the orgallization of the Division of Audit and Examination under the Ft'dt oral Reserve Board. 04 The report as thus submitted was appr0 and ordered spread on the minutes as follows: 45d Washington, D. December 3, 1914. The Examination and Audit of Federal Reserve and Member Banks under the direction of .the Federal Reserve Board. There has been created a Division of Audit and Examination. As an outline of its duties the following is submitted for the information of all concerned: 1. TAKLEINATION AND AUDIT OP FEDaaAL RESERVE BANKS. (a) Federal reserve banks. .(b) (a) Books and accounts of Federal reserve agents. Federal Reserve Banks. Sec. 11; Par. A - Authorizes and empowers the Federal Reserve Board "To examine at its discretion the accounts, books and affairs of each Federal Reserve Bank." , Sec. 21; Par. 5 - Provides that the "Federal Reserve Board shall, at least once each year, order an exam-. ination of each Federal reserve bank, and upon joint application of ton member banks the Federal Reserve . Board shall order a special exaMination and report of the condition of any Federal reserve baak." The LTN provides for an examination of each Federal reserve bank at least once a year, but it is proposed that examinations shall be held ordinarily twice each year, covering a thorough ,investigation of rediscounts, collateral loans, investments and open-market transactions, particular attention being T)aid to compliance with the provisions of the Federal Reserve Act and regulations )romulgated.by the Federal Reserve Board. Paper accepted for rediscount should,be analyzed, in order to determine its eligibility under the regulations issued. Inriuiry should also be made as to the condition of member banks offering Paper for rediscount. Every examination should cover a complete audit of the bank and a renort made to the Federal 450 Reserve Board as to the condition of each bank, competency of management, adequacy of records and atLention given by the directors to the affairs of the reserve bank. Attention should be called to any unsafe or unsound condition, or any vicious tendency that might appear in any department of the bank. (b) Federal Reserve Agent. Section. 11; Par. I.-. The Federal Reserve Board shall be authorized "to require bonds of Federal reserve agents, to make regulations for the safeguarding of• all collateral, bonds, Federal reserve notes, money or property of any kind deposited in the hands of such agents, * * * and make all rule and regulations necessary to enable said Board effectively to perform the same." The records and accounts of the Federal reserve. agent in each Federal reserve district shall be examined at least quarterly, and a complete report made to the Federal Reserve Board. The examination shall cover a verification of the money, Federal reserve notes and collateral in the hands of .the Federal reserve agent. // 2. 3P7.0IAL ZIALLINATIONS OF MELIB3R BANKS OR BANKJ APPLYING FOR Kalic1R3IIIP. (A) idember Banks. . Sec. 11; Par. A - The Federal Reserve Board shall be authorized "to examine at its discretion the accounts, books and affairs of each Federal reserve bank and of each member bank." It is expected that the exercise of this function will be confined to special examinations or investigations to be made only wnen deemed necessary by the Federal Reserve Board, or with the approval of the Board upon a request by any Federal reserve bank. The primary purpose of such examination should be to ascertain tne condition of a member banIc or of the lines of credit which are being extended by it. The Federal Reserve Act also grants authority to the Comptroller of the Currency and to the Federal reserve banks the right to examine member banks. Therefore, in order 1 1 4G0 to prevent confusion and secure cooperation and coordination with the examinations of National banks by the examiners on the staff of the Comptroller of the Currency and in order to aveid duplication in examinations a plan has been suggested, details of which are embodied in the report of a special committee on this subject appointed by the Comptroller acting with a committee of your Board to suggest a means of standardizing the salaries of National bank examiners and the method of assessing banks for the cost of such examinations. A copy of that portion of the report relating to the matter above referred to is attached to this memorandum. (B) State Institutions Applying for flembership. Sec. 9; Par. 2. - "The Organization Committee or the Federal Reserve Board shall establish by-laws for the general government of its conduct in acting upon applications made the State banks and banking associations and trust companies for stock ownership in Federal reserve banks. Such by-laws shall require applying banks * * * to submit to the examination and regulations prescribed by t:le Organization Committee or by the Federal Reserve Board." The examinations of such institutions shall be made when ordered by the Federal Reserve Board. It is recommended, however, that all such applications shall be referred to the Division of Audit and Examination, which shall comunicato with the Reserve bank of the District and with the State banking authorities. In connection with this inquiry, the Division of Audit and Examination shall be authorized to call -for such supplemental information as may be deemed necessary, for example, the following: A copy of report of the last examination by State authorities; Loans over a stated amount; ' Real estate investments, loans secured by roal estate collateral, loans secured by stock of real estate corporations, real estate mortgages with data as to maturities; (4) The business, firm and corporation affiliations of officers and directors; A detailed statement of investments. (5) 401 (3) Special Illxaminations - State Banks and Trust Ooupany Hembers. Sec. 21; Par. 1. - The Federal les rve Board "may authorize examination by the State authorities to be accepted in the case of State banks and trust companies and may at any time direct the holding of a special examination of State banks or trust companies that are stockholders in any Federal Reserve Bank." The intent of the law seems to be to accept the examination made by State authorities wherever it can be done without discrimination. It should therefore be a function of this Division to investigate the examining methods of Stite authorities in order,to ascertain whether or not the standard of examinations is such as to be acceptable to the Federal Reserve Board. It will be necessary to iequest State authorities to furnish the Federal reserve banks information as to the condition of each State institution that is a member of the Federal Reserve System. Whenever a special examination is necessary by either the Federal Reserve Board or a Federal reserve bank it is usually desirable that such examination should be made in connection with an examination made by State authorities. 3. SPECIAL INVESTIGATIONS. Special investigations will be held only when deemed advisable or ordered by the Reserve Board, either when warranted by general business or Other conditions. Applications for the establishment of domestic or foreign branches, or of member banks to exercise trust company powers shall be investigated by this Division. 4. JREDIT BUREAUS. The establishment of credit bureaus in Federal reserve banks, and of a central credit bureau at Washington is so closely related to examinations, that it is desirable that the Division of Audit and Examination shall be responsible for the development of the system. The 462 purpose of the credit bureau is to collect and record data concerning member banks and the standing of indiyiduals, firms and corporations discounting at and borrowing from these banks, or selling raper to them. Furthermore, it is very desirable that credit bureaus be established in each Federal reserve bank, under the joint supervision of the Federal Reserve agent and the . Governor of the Bank, in order that material may be there collected, recorded and indexed for the benefit of the board of directors or Executive Committee passing upon the paper offered for rediscount, and open for inspection by examiners of the Federal Reserve Board. Under the accounting system which has been adooted reports of various loans made are reported daily to the Washington office. It is proposed a few months hence to require a furtner weekly report giving the aggregate liability of the makers or payers of the paper rediscounted. This data will then be analyzed at the Washington office and re,3oLlmandations made which will assist the credit bureaus of the different districts. It will be necessary to establish a system of cooperation and interchange of information between the district credit bureaus and also establish cooperation betaeen National bank examiners and the Federal reserve banks in each district. This subject is more fully covered in the report of the connittee of examiners to the Comptroller and the Federal Reserve Board, to which reference is now made. 5. REPORTS 11.1:•D ::).TAT:z":1723. Various detailed and periodical reports are forwarded to the Federal Reserve Board by the reserve banks. Information as to rediscounts and loans is received daily and the figures recorded on the records of the Division of Reports and statistics and that of the Division of Audit and Examination are so closely related that it is essential that close cooperation shall exist between the two. 6. AUDIT. The Board will determine later whether it will include under the Division of Audit and Examination a Department for audit of bills for its own purchase of material, or disbursements. 463 STA-21 OP nIT.77, DIVI3IOU OF AUDIT AND '-rCUIIIIkTIOIT. The Board does not contemplate making general examinations until January, 1915. The number of men who will be required on this work will depend entirely upon the extent of the special examinations and investigations demanded, and it is expected to draw upon the staff of the Comptroller of the Currency for assistance in these examinations. For the routine work of examination, three to four Federal reserve examiners and say two assistant examiners will be necessary. An auditing clerk will be required to pass upon the bills for disbursement, a report clerk to analyze the reprots made by the Federal reserve banks and record loan data on.the Credit Bureau records -will be needed. At least one stenographer will be required for the use of the Division. Recanaended to the Board on behalf of the Committee on Audit and Examination. P. I. DIMINO. December 18, 1914. ELIIIIITION 02 1.LL:13.L.: BA Ia:J. section 11, l'ar. A. The Federal Reserve Board shall be authorised (a) "To examine at its discretion the accounts, books, and affairs of each Federal Reserve Bank and of each member bank." II. 'Section 21, Par. 1. provides that "The Comitroller of the Currency, with the approval of the secretary of the Treasury, 5:119"1 ail.point examiners who ahall twice 111 every member bank at least I. 4G 4 each calendar year and oftener if considered necessary. The Federal Reserve Board may authorize examination by State authorities to be accepted in case of State Bank and Trust Companies." III Section 21, Par. 3. provides that "In addition to the examination made and conducted by the Comptroller of the Ourrency, every Federal Reserve Bank may, with the approval of the Federal Reserve agent or the Federal Reserve Board provide for special examination of member banks within its district. * * * Such examinations shall be so conducted as to inform the Federal Reserve Bank of the condition of its member panks and of the lines of credit which are being extended by them." The law requires that two examinations of every member bank shall be made in each calendar year by examiners appointed by the Comptroller of the Currency. An exception is made, however, of State banks and trust companies where the Federal Reserve Board has authorized the acceptance of examinations by State authorities. It will be seen further that the Federal Reserve Act gives to the Federal Reserve Board the power to examine each member bank, and also that each Federal Reserve bank has the power to examine its member banks. At present many banks supplement Federal or State examination by independent examinations by clearing house examiners, public accountants or directors. State institutions are examined by State bank examiners and under the laws of some States compulsory examinations by directors are also required. If advantage is taken of the right to examine member banks, by all of the authorities upon whom the power is conferred, it will place member banks under continuous examination, at a tremendous expense, cause duplication and confusion, and defeat the purpose which the law is intended 46o -to serve. The law contemplates not an increase in exr aminations but rather an increase in the effectiveness of examinations in both city and country districts, SUGGESTIONS AS TO EXAMINATIONS - LEUBER BANKS. (a) National Bank Examinations. It is plainly the intent of the law that all re,,gular examinations of member banks shall be made by national bank examiners. The Act permits the Federal Reserve Board to accept examinations by State authorities as to State banks and trust companies admitted to the Federal Reserve System. The primary purposes of all examinations are to ascertain that the institutions are solvent, that business is being conducted in accordance with the law, and to correct unsafe and unsound tendencies. (b) Federal Reserve Bank Examinations. The primary purpose of such examinations is to "inform the Federal Reserve bank of the condition of its member banks and of the lines of credit which are being extended by them." In order to determine the line of rediscount which may be safely and wisely extended, the Federal reserve bank in each district will be interested in obtaining detailed information concerning each member bank, as to financial condition, character of management, competeneY of officers and directors, care exercised in granting and checking credits, customs in extending accomodation to directors and officers, or to corporations which theY may awn, control or be interested in, and relations with large borrowers. The necessary information could be obtained by the national bank examiners in connection with the regular. examination, If the plan of cooperation is approved, it is suggested that the Federal reserve agent be furnished with - 466 1. Record of loans over a stated amount as shown at each examination in order that the data may be recorded on the Credit Bureau records and made available for future reference. 2. Such other information as may be desired by the Federal Reserve bank. 3. Copies of the reports of examinations of member banks, upon request made to the Supervising National Bank Examiner of the district. These copies to be later returned to the Supervising Examiner. Under the proposed plan of cooperation between the Federal reserve banks and the National Bank Examination system information will be obtained by the examiners for the use of each Federal reserve bank. On the other hand, the records will be available to the examiners for use at subsequent examinations. Each bank will have a record of the business, firm and corporation affiliations of directors and officers of each member bank; credit information concerning member banks and the standing of borrowers, and record of failures and bankruptcies. The loan lists, after being recorded on Credit Bureau records will be returned for use at following examinations. If a special examination by an examiner appointed by a Federal reserve bank, is thought to be necessary, it should be made, whenever possible, in connection with the regular examination made by national or State examiners, but under no circumstances without the approval of the Federal Reserve Board. (c) Federal Reserve Board - examination of member banks. The exercise of this function should be confined to special examinations or investigations, to be made when and as deemed necessary by the Federal Reserve Board, or with the approval of the Board upon a request made by any :federal Reserve bank. It will frequently be desirable to have the examination made by national bank examiners acting under assignment or instructions from the Comptroller of the Currency in cooperation with the Federal Reserve Board. 0 EXPENSES OF EXAMINATION. Federal Reserve Board Examinations. Section 10 of the Federal Reserve Act provided that "The Federal Reserve Board shall have power to levy semi-annually upon the Federal reserve banks, in proportion to their capital stock and surplus, an assessment sufficient to pay its estimated expenses and the salaries of its members and employees." It is apparent that the expenses of examinations made by direction of the Federal Reserve Board must be provided for in the semi-annual assessment above referred to. In connection with the preliminary examination of State institutions seeking admission, it may be possible to charge the institutions investigates the actual expenses incurred. December 3, 1914. A redraft of the regulation relating to the purchase of acceptances by Federal reserve banks was taken up and tentatively approved. On motion, it was referred to sub-Committee B on Discounts, Standing Corznittee #3, for final revision. The question of permitting Federal reserve banks to purchase Government bonds was discussed, and on motion it was voted that Federal reserve banks may buy such bonds within the limits of prudence, and that all Federal reserve banks shall be notified of this action of the Board. A draft of the telegrapi of notification on the subject was submitted to the Board and 46o approved. An application from Federal Reserve Agent Ingle for Federal reserve notes was referred to Er. Delano as Chairman of Standing Committee #7. A letter from Gibson Arnoldi and Co. relative to the establishment of public depositories was referred to the Secretary of the Treasury. Mr. Miller presented a draft of his reply to questions raised by Federal Reserve Agents Austin and Perrin regarding the issue of Federal reserve notes, and the draft, after being discussed and amended in detail, was approved. A communication from the Secretary of State, addressed to the Secretary of the Treasury with reference to trade between the United States and Italy was called to the attention of the Board and ordered filed. An opinion received from the office of Counsel with reference to the question of early payments of stock by member banks in the Boston district, was ordered transmitted to Federal Reserve Agent Curtiss for such action as he may deem best. On motion, at 5:00 p. in. the Board adjourned to meet at 3:00 p. in. Monday, December 21st. APPROVED: Secretary. *
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