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60g Minutes for To: Members of the Board From: Office of the Secretary December 19, 1966 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. Chm. Martin Gov. Robertson Gov. Shepardson Gov. Mitchell Gov. Daane Gov. Maisel Gov. Brimmer Minutes of the Board of Governors of the Federal Reserve SYstem on Monday, December 19, 1966. The Board met in the Board Room at 10:00 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Robertson, Vice Chairman Shepardson Daane Maisel Brimmer Sherman, Secretary Kenyon, Assistant Secretary Molony, Assistant to the Board Cardon, Legislative Counsel Fauver, Assistant to the Board Hackley, General Counsel Farrell, Director, Division of Bank Operations Mr. Solomon, Director, Division of Examinations Mr. O'Connell, Assistant General Counsel Mr. Partee, Associate Director, Division of Research and Statistics Mr. Kiley, Assistant Director, Division of Bank Operations Mr. Leavitt, Assistant Director, Division of Examinations Assistant Director, Division of Smith, Mr. Examinations Miss Wolcott, Technical Assistant, Office of the Secretary Senior Attorney, Legal Division Forrestal, Mr. Assistant, Division of Technical Ring, Mr. Bank Operations Mr. Egertson, Supervisory Review Examiner, Division of Examinations Mr. Mr. Mr. Mr. Mr. Mr. Mr. Approved items. after The following items were approved unanimously consideration of background information that had been made avail- able to the Board. indicated. Copies are attached under the respective numbers 12/19/66 -2Item No. Letter to Wachovia Bank and Trust Company, 1 Winston-Salem, North Carolina, approving the es tablishment of a branch in or adjacent to the Arrowood-Southern Industrial Park, Mecklenburg County. Letter to Arkansas Bank and Trust Company, Rot Springs, Arkansas, approving the establ ishment of a branch at 200 Park Avenue. 2 Letter to United California Bank, Los Angeles, Ca lifornia, approving the establishment of a branch in Livermore. 3 Letter to the Bureau of the Budget regarding a raft bill prepared by the Office of Emergency rlanning "to amend the Defense Production Act °f 1950, as amended, and for other purposes." 4 In connection with Item No. 3, it was noted that an examination Of United California Bank had been begun on December 5, 1966. The con- sensus was not to mention the bank's capital position in the letter a PAroving the branch but to review the situation carefully after the e°nclusion of the current examination. With respect to Item No. 4, the Division of Research and Sta tistics had indicated that the draft legislation, if enacted, would havn no adverse effects from the standpoint of monetary policy. ' The Proposed bill would increase from $2.1 billion to $2.8 billion the b°rrowing authority of the Revolving Fund established under section 304(b) Of the Defense Production Act for purposes of providing Government encourto certain types of industrial expansion related to the national cl fense It would also eliminate the restriction of $100 million in the 12/19/66 -3- Act for new contracting, thus permitting the evaluation of all expansion Proposals on the basis of probable ultimate net cost, as originally Stipulated in the Act. Further, it would extend the expiration of the a uthorities contained in the Act to June 30, 1969. "Guaranty fund" in Bank of the Commonwealth. There had been d istributed a memorandum dated December 15, 1966, from the Legal Division relating to a question raised by the Federal Reserve Bank of Chicago as to whether a $10 million "guaranty fund" maintained by the Federal Deposit Insurance Corporation in Bank of the Commonwealth, betroit, Michigan, was a deposit liability for purposes of the reserve requirements of Regulation D, Reserves of Member Banks. The guaranty fund came into existence in connection with the Purchase of assets and assumption of liabilities of Public Bank, Detroit, llichigan, by Bank of the Commonwealth from the Federal Deposit Insurance Cor poration, as receiver, at a gross purchase price arrived at in accordance with certain specified guidelines. Under the terms of the agreement dated September 19, 1966, it was understood that a net purchase price be determined on a settlement date 18 months from the execution of the agreement. In order to afford Bank of the Commonwealth some protec- ti°n against potential losses on the assets of Public Bank, the Federal 1)e13°81t Insurance Corporation agreed to place with Commonwealth a socalled guaranty fund of $10 million. be . The full amount of the fund could intermingled with the assets of Commonwealth without obligation on 12/19/66 -4- it5 part to pay interest to the Corporation. In addition, Commonwealth reserved the right to require the Federal Deposit Insurance Corporation to withdraw all or part of the fund at any time, in which event the withdrawn funds would bear interest at the rate of 5 per cent. After the settlement date, in accordance with a schedule in the agreement, a certain percentage of the fund would be maintained, which would also bear interest at 5 per cent annually. In view of the unique nature of the fund, which was not established within the ordinary business of a commercial bank but for the s pecific purpose of facilitating the purchase of assets and assumption °f liabilities of Public Bank by Bank of the Commonwealth, the Legal Division concluded that prior to settlement date the guaranty fund was 4c)t a deposit liability against which reserves must be carried. After se ttlement date, however, the principal reason for which the fund was established would cease to exist. For reasons set forth in the dis- tributed memorandum, the Legal Division concluded that any remaining P°rtion of the fund would then be held by Commonwealth in the course of its commercial business and should be classified as a demand deposit against which reserves should be carried. Attached to the memorandum 14a8 a draft of letter to the Federal Reserve Bank of Chicago that would set forth these conclusions. After summary comments by Mr. Forrestal based largely on the dis tributed material, and supplementary remarks by Messrs. Hackley and -5- 12/19/66 O'Connell, discussion developed a general view on the part of the Board members that the circumstances were such that the guaranty fund should not be regarded as a deposit, at least prior to settlement date. Mr. Rackley observed that it was his understanding that the Federal Deposit Insurance Corporation did not expect the guaranty fund to be so regarded for insurance assessment purposes. Question was then raised whether the guaranty fund should not in fact be construed as a loan. Such a disposi- tion of the matter would eliminate interpretation problems under Regulations D and Q (Payment of Interest on Deposits), including the question °f deposit classification for such purposes after settlement date. Following further discussion, it was agreed that the Legal bivision would determine whether the classification of the fund as a °au would present any difficulty from the standpoint of the Federal Deposit Insurance Corporation. In view of certain questions that had come up during the fore' cling discussion relating to the extent of the Board's awareness of the tlegotiations that resulted in the creation of the guaranty fund, it was 4greed, at the suggestion of Governor Brimmer, that the staff would endeavor to construct a complete record, for future availability as needed, covering the System's knowledge of and participation in the variol, -s steps that were taken at the bank supervisory level in connection with - the Public Bank matter. Local destruction of Federal Reserve notes (Items 5 and 6). On ember 12, 1966, the Conference of Presidents approved the recommendations $1, 12/19/66 -6- of its Subcommittee on Currency and Coin that redemption credit for unfit $5 and $10 Federal Reserve notes destroyed without sort by Bank of issue be allocated in proportion to the previous year's issues, but that $20 and higher denomination notes continue to be sorted pending further study. The Conference suggested that January 1, 1967, be set aS the effective date for discontinuing the sort by Bank of issue on $5 and $10 notes. There had now been distributed a memorandum dated December 14, 1966, from the Division of Bank Operations recommending that the Board adopt the formula approved by the Presidents' Conference, which formula Igas the same as that now used in allocating redemption credit for $1 Federal Reserve notes. Attached to the memorandum was a draft of letter 63 the Presidents of all Federal Reserve Banks that would inform the Banks that the sorting of $5 and $10 notes should be discontinued at the end of December and transmit procedures for apportioning credit among Federal Reserve Banks for unfit Federal Reserve notes destroyed without sort by Bank of issue. After discussion based on the distributed material and supplementary remarks by Mr. Farrell, the letter to the Federal Reserve Banks was aprcp_2-_ved unanimously. A copy is attached as Item No. 5. On November 18, 1966, the Board agreed to a proposal of the Treasury Department that local verification and destruction of unfit $5 and $10 Federal Reserve notes be started on December 1, 1966, using 12/19/66 -7- a percentage verification at or near the limits imposed by the regulations of the Secretary of the Treasury, namely, not less than 10 per cent of the $5 denomination and not less than 20 per cent of the $10 denomination. At that meeting Mr. Smith noted concern on the part of the General Auditors of the Federal Reserve Banks that the suggested sampling procedures for verification of cancelled currency in lieu of the complete verification previously followed would open up possibilities for fraudulent acts by Reserve Bank personnel unless operating Procedures were so drawn as to provide strengthening controls and safeguards. The auditors did not feel that compliance with minimum proce- dures required in the Treasury Department's covering regulation would be sufficient. There had now been distributed a memorandum dated December 14, 1966, from the Divisions of Examinations and Bank Operations recommending that a letter be sent to the Reserve Banks endorsing the principle of verification by sampling procedures but emphasizing the importance of a dherence to sound procedures in carrying out the System's responsibilities. Attached to the memorandum was a proposed letter along the lines s uggested. In commenting on the situation, Mr. Smith expressed the view of the auditors that a tendency might develop on the part of Reserve Banks tO drift toward compliance with no more than the minimum procedures liot( 12/19/66 - -8- required in the Treasury's covering regulation because of the cost factor. He felt an appropriate balance should be struck between cost and security. A letter along the lines suggested would at least mark the area as one deserving careful consideration. The ensuing discussion turned mainly on the question whether the letter to the Reserve Banks should merely call attention to the Board's concern that sound procedures be followed or whether it should endeavor to provide more specific guidance to the Banks in determining a ppropriate standards. One view expressed was that the individual Banks might appreciate having the benefit of guidance from a central source to help them in coordinating with what other Banks were doing. It was noted, however, that on most operational matters the Board had typically relied on the management of the individual Reserve Banks for the maintenance of adequate standards, particularly since conditions might vary to a certain degree from one Bank to another. It was noted that inter- Bank communication was provided through the periodic conferences of the General Auditors, and that the Board's examiners were charged with r eviewing operations at the individual Reserve Banks from a security standpoint, thus tending to minimize deviations from normal standards. It was agreed that the question of appropriate standards in the area under discussion should have consideration at the next General Auditors' co nference. A suggestion for a change in the third paragraph of the proposed letter was then agreed upon in light of the foregoing discussion, following ; 12/19/66 -9- which unanimous approval was given to a letter to the Federal Reserve Banks in the form attached as Item No. 6. The meeting then adjourned. Secretary's Note: Governor Shepardson today approved on behalf of the Board memoranda recommending the following actions relating to the Board's staff: AATzaiaLmaL Chester Earl Jordan as Messenger, Division of Administrative Services, with basic annual salary at the rate of $3,609, effective the date of entrance upon duty. Transfer Nathan L. Hunter, from the position of Messenger to the position of 14essenger-Driver, Division of Administrative Services, with no change in basic annual salary at the rate of $3,609, effective December 19, 1966. Secretar 1704 BOARD OF GOVERNORS Item No. 1 12/19/66 OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 AlaaRasa arrictm. CORRESPONDENCE TO THE SCARE) December 19, 1966 Board of Directors, Wachovia Bank and Trust Company, Winston-Salem, North Carolina. Gentlemen: The Board of Governors of the Federal Reserve System approves the establishment by Wachovia Bank and Trust Company, Winston-Salem, North Carolina, of a branch in or adjacent to the Arrowood-Southern Industrial Park, Mecklenburg County, North Carolina, provided the branch is established within six months from the date of this letter. Very truly yours, Elizabeth L. Carmichael, Assistant Secretary. (The letter to the Reserve Bank stated that the Board also had approved a six-month extension of the period allowed to establish the branch; and that if an extension should be requested, the procedure prescribed in the Board's letter of November 9, 1962 (S-1846), should be followed.) BOARD OF GOVERNORS Item No. 2 12/19/66 OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 ADDRESS OFFICIAL CORRESPONDENCE TO THE HOARD December 19, 1966 Board of Directors, Arkansas Bank and Trust Company, Hot Springs, Arkansas. Gentlemen: The Board of Governors of the Federal Reserve System approves the establishment by Arkansas Bank and Trust Company, Hot Springs, Arkansas, of a branch (teller's window) at 200 Park Avenue, Hot Springs, Arkansas, provided the branch is established within one year from the date of this letter. Very ,truly yours, .44//tht Elizabeth L. Carmichael, Assistant Secretary. (The letter to the Reserve Bank stated that the Board also had approved a six-month extension of the period allowed to establish the branch; and that if an extension should be requested, the procedure prescribed in the Board's letter of November 9, 1962 (S-1846), should be followed.) 1706 BOARD OF GOVERNORS Item No. 3 12/19/66 OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 AOONICSIO arroatm. cartncorooimmat TO MC •OARIO December 19, 1966. Board of Directors, United California Bank, Los Angeles, California. Gentlemen: The Board of Governors of the Federal Reserve System approves the establishment by United California Bank, Los Angeles, California, of a branch in the vicinity of the intersection of First and 0 Streets in Livermore, Alameda County, California, provided the branch is established within one year from the date of this letter. Very truly yours, (Signed) Kenneth A. Kenyon Kenneth A. Kenyon, Assistant Secretary. (The letter to the Reserve Bank stated that the Board also had approved a six-month extension of the period allowed to establish the branch; and that if an extension should be requested, the procedure prescribed in the Board's letter of November 9, 1962 (S-1846), should be followed.) 4707 BOARD OF GOVERNORS OF THE Item No. 4 12/19/66 FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD December 19, 1966. Mr. Wilfred Rommel, Assistant Director for Legislative Reference, Bureau of the Budget, Washington, D. C. 20503 Dear Mr. Rommel: This is in response to your Legislative Referral Memorandum of December 9, 1966, requesting the Board's views on a draft bill "To amend the Defense Production Act of 1950, as amended, and for other purposes", prepared by the Office of Emergency Planning. The Board has no objection to the proposed legislation. Very truly yours, (Signed) Merritt Sherman Merritt Sherman, Secretary. 17(S BOARD OF GOVERNORS Item No. 5 12/19/66 OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 S-2010 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD December 19, 1966. Dear Sir: The Board has adopted the formula approved by the Conference °f Presidents on December 12, 1966, for allocating redemption credit it3or unfit $5 and $10 Federal Reserve notes destroyed without sort by 44k of issue. As recommended by the Presidents, the sorting of $5 and $10 notes should be discontinued at the end of December. Enclosed is a statement of "Procedures for Apportioning Among Federal Reserve Banks for Unfit Federal Reserve Notes 13festroyed Without Sort by Bank of Issue." These proced ures provide weekly and month-end settlement through the Interdistrict ..ettlement Fund of all unfit $1, $5, and $10 Federal Reserve Notes 'ellrned over to the curren cy verification and destruction units uring the preceding period. Credit Credit for the notes cleared through the settlement will be 10_8allocated on the basis of net issues of notes by the Federal ;: erve Agents during the preceding calendar year. Percentages for tuch allocations will be computed each January for use during the lo?lve months beginning with the first settlement in February. You ' 11 be notified of the percentages upon their establishment. This letter supersedes the Board's letter of May 6, 1966 (1/1.L.S. #5800;S-1991 ) and supplements outstanding instructions for hd]. en that ing unfit Federal Reserve notes (F.R.L.S. #5800) to the extent notes are destroyed locally without sort by Bank of issue. Very truly yours, t'closure Merritt Sh‘rmn, Secretary. 1° TR8 PRESIDENTS OF ALL FEDERAL RESERV E BANKS S-2010A PROCEDURES FOR APPORTIONING CREDIT AMONG THE FEDERAL RESERVE BANKS FOR UNFIT FEDERAL RESERVE NOTES DESTROYED WITHOUT SORT BY BANK OF ISSUE 1. Federal Reserve Banks and branches destroying unfit Pederal Reserve notes will maintain two additional accounts, as follows: (1) For Federal Reserve notes of own Banki/ delivered to currency verification and destruction unit, but not yet cleared through settlement. (2) For Federal Reserve notes of other Federal Reserve Banks delivered to currency verification and destruction unit, but not yet cleared through settlement. 2. The accounts will be charged with a pro rata portion of amount of cancelled Federal Reserve notes delivered to the verification and destruction unit. The amounts allocated to the pee two accounts will be determined by each office on the basis of a iod sampling or test check of the notes of own Bank and of other ' IlKa received from circulation. the 3. The amount in the first account will be reported on form, anTrR 34 in the item "Federal Reserve notes: Forwarded for redemption," of that in the second account will be reported in the item "F.R. notes other P.R. Banks." 4. The total of the two accounts at the close of business Tuesday and the next to the last business day each month, combined ope the district, will be wired to reach the Board (Division of Bank t6rations) by 1:30 p.m. each Wednesday and the last business day of month under code CYROR, the definition of which is; each "Unfit Federal Reserve notes were turned over to currency verification and destruction unit (units) of this Bank for destruction and credit during in total amount of (date) period ending (C) Fives; $ $ (B) Ones; $ Total. Tens; $ (D) in the, disn - case of a holiday observed by all the Banks and the Board, the 14 rtttch of wires and the note clearing will take place one day earlier. "e case of holidays observed by one or more Banks or the Board "nee notice will be given with regard to the clearing. -" 5. The Board's Division of Bank Operations will calculate bank's portion of the notes turned over to currency verification "Inches may wish to designate the account as Federal Reserve notes of parent Bank, in order to conform with form FR 34. S-2010A -2 and destruction units by all Reserve Banks and the Treasury's Cash Dtvision during the period. 6. Settlement will be made by direct entries to the In terdistrict Settlement Fund. If a Bank's portion of the combined total of notes delivered for destruction and credit exceeds the amount it delivered for destruction and credit during the period, its Participation in the Fund will be decreased by such excess. If a Bank's portion of the combined total of notes delivered for destruction and credit is less than the amount it delivered for destruction and credit during the period, its participation in the Fund will be increased by such difference. 7. The Division of Bank Operations will dispatch a book essage to all Banks and Assistant Federal Reserve Agents at about 100 p.m. on the settlement day under code CYRUS, the definition of which is: 3 "Your Bank's portions all unfit Federal Reserve notes delivered to currency verification and destruction (A) are $ (date) units in period ending Fives; (C) Ones; $ (1) Total; $ Tens. Federal Reserve Agent is (D) requested to make settlement direct with your Bank for the amount. We debit (-) or credit your account (E) Interdistrict Settlement Fund today $ between amounts differences to adjust for the sum of the and your credit and destruction your Bank delivered for destruction for delivered Bank's portions of total amounts period." during Banks and credit at all Reserve 8. Upon receipt of Board's wire each Bank will make an entrY closing out the previous day's balances in the two currency erification and destruction unit accounts, with the offsetting entries ,eing reflected in the Federal Reserve Notes Outstanding and the : nterdistrict Settlement Fund accounts in accordance with items B-D nd E l respectively, in the settlement wire. Z 9. Branches destroying unfit Federal Reserve notes will settle with their head offices. J ; Item No. 6 12/19/66 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM S-2011 WASHINGTON, D. C. 20551 ADDRESS OFFICIAL CORRESPONOENCE TO THE BOARD December 19, 1966. Dear Sir: This refers to Treasury Department regulations governing the redemption, verification, and destruction of unfit United States Paper currency and Federal Reserve notes as revised effective December 1, 1966. In authorizing the destruction by the Reserve Banks of Federal Reserve notes of $5 and $10 denominations the Treasury regulations provide that the verification include a minimum piececount of specified percentages and it is noted that this piece-count requirement is the same for each type of currency (U.S. and Federal Reserve) whether the verification is performed at the Reserve Banks or the Treasury Department. The experience of the Treasury DepartOver the years seems to warrant this procedure of verification of canceled currency on a sampling basis in amounts at or near but .riot less than the minimum percentages suggested by the Treasury Partment, and the Board suggests that any higher percentage count °Y the Currency Verification Units be made only in special circumstances rather than as a daily operating routine. However, since the main purposes of the test verification to Ire obtain satisfactory assurance that the currency to be °:stroyed actually is in the amounts represented and that the work the currency sorters attains the established standards of accuracy, the manner of selecting the currency to make up the sample segments should be such as to assure that the tests (1) are !Presentative of all the currency making up the lots for destruct"ns and (2) expose each sorter's work to the possibility of verification on any given day. S-2011 -2- rtiAc, .) The Board shares with the Reserve Banks a concern that the important responsibility of currency destruction be discharged vxth credit to the System. The Board assumes that the Auditing Departments in the Banks will give careful attention to the currency verification and destruction procedures and expects a similar careful review by its own examining staff.. Very truly yours, . Merritt Sherman, Secretary. TO Ttin on -“1-4 PRESIDENTS OF ALL FEDERAL RESERVE BANKS -vDIES TO CHAIRMEN AND GENERAL AUDITORS OF ALL nDERAL RESERVE BANKS