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'9/63
Minutes for February 10, 1964.
To:
Members of the Board
From:
Office of the Secretary
Attached is a copy of the minutes of the
Board of GoverLors 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
Goy. Robertson
Gov. Balderston
Cov. Shepardson
Gov. Mitchell
Gov. Daane
424
Minutes of the Board of Governors of the Federal Reserve
System on Monday, February 10, 1964.
at 10:00
The Board met in the Board Room
a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman 1/
Balderston, Vice Chairman
Mills 2/
Robertson 1/
Shepardson
Mitchell
Daane
Mr. Sherman, Secretary
Mr. Kenyon, Assistant Secretary
Miss Carmichael, Assistant Secretary
Mr. Broida, Assistant Secretary
Mr. Young, Adviser to the Board and Director,
Division of International Finance
Mr. Fauver, Assistant to the Board
Messrs. Brill, Holland, Koch, Garfield, Partee,
Williams, Altmann, Axilrod, Eckert, Keir,
Weiner, and Wernick of the Division of
Research and Statistics
Messrs. Furth, Sammons, Katz, Wood, Gekker,
Gemmill, Irvine, and Maroni of the Division
of International Finance
Economic review.
The staff of the Division of International
Finance commented on international financial and business conditions,
with special reference to the U. S. balance of payments, and the staff
Of the Division of Research and Statistics presented information
l'eleting to the domestic economy.
During the latter presentation Chairman Martin and Governor
Robertson withdrew from the meeting and Governor Mills entered the room.
ithdrew from meeting at point indicated in minutes.
Entered meeting at point indicated in minutes.
425
2/10/64
-2-
After discussion based upon the reports presented, all members
°f the Board's staff withdrew except Messrs. Sherman, Kenyon, Young,
?aUver, and Brill and Miss Carmichael, and the following entered the
room:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Molony, Assistant to the Board
Cardon, Legislative Counsel
Solomon, Director, Division of Examinations
Johnson, Director, Division of Personnel Administration
Hexter, Assistant General Counsel
Shay, Assistant General Counsel
Hricko, Senior Attorney, Legal Division
McClintock, Supervisory Review Examiner, Division of
Examinations
Circulated item.
The following item, a copy of which is attached
to these minutes under the item number indicated, was approved unanimously:
Item No.
utter to The
Connecticut Bank and Trust
rallanY, Hartford, Connecticut, approving
Ii4e establishment of a branch at h 45-457
eat Main
Street, Norwich.
j
1
Application of Rhode Island Hospital Trust Company (Items 2
Pursuant to the decision reached at the meeting on February
1964) there
4,
had been distributed a proposed order and statement reflecting
ElIPI)r°val of the application of Rhode Island Hospital Trust Company,
'1'(31ridence, Rhode Island, to acquire the assets of Wickford Savings Bank,
14Ickford, Rhode Island.
After discussion, during which certain changes in the statement
\fere
suggested and agreed upon, the issuance of the order and statement
authorized subject to those changes being made.
Copies of the
-"Jents, as issued, are attached as Items 2 and 3, respectively.
4213
2/10/64
-3Messrs. Hricko and McClintock then withdrew from the meeting.
Reply to Chairman Fascell (Item No.
4). In accordance with the
discussion at the meeting on February 7, 1964, there had been distributed
4
revised draft of reply to a letter dated February 3, 1964, from
Chairman Fascell of the Legal and Monetary Affairs Subcommittee of the
Rouse Committee on Government Operations relating to conflicting interand possible duplications of supervision between the Board
or Governors and the Comptroller of the Currency.
Chairman Fascell had
asked for comments regarding the extent to which there had been
differences in interpretations of statutes and duplication of regulation
between the two agencies, haw the operations of the agencies had been
4rfected, how the supervised banks had been affected, efforts that had
been made to prevent such differences and duplications, andmeans for
preventing
disparate actions by the agencies.
During discussion a number of changes in the letter were sugeeted, principally (1) to emphasize that the chief differences that had
alllsen between the two agencies were based on conflicting interpretations
c)f various provisions of the law and, in that light, (2) to delete certain
13°e81ble
suggestions for solving the differences, including the reference
to recommendations made in the April 1963 report of the Committee on
Institutions that had been appointed by President Kennedy.
The letter to Chairman Fascell was then approved unanimously in
tile form attached as Item No.
4. It was understood that the letter
440 if
2/10/64
-4-
would be accompanied by a memorandum that had been prepared in the Legal
Division analyzing the Comptroller's position on corporate savings deposits.
It was also understood that copies of the letter to Chairman Fascell would
be sent to the
Chairmen of the Senate and House Banking and Currency
ttees as a matter of information.
Cornil
1/
Question was raised as to whether the letter should be released
to the press or made available in response to inquiries regarding conflicting interpretations of the Board and the Comptroller.
While some
sentiment was expressed in the direction of feeling that it would be useful
to make
available the information in the reply, at least in response to
inquiries, it was understood that such a step would not be taken until it
c°41a be determined what disposition the Legal and Monetary Affairs Sube°mmittee might make of the letter.
It was suggested that if the Board
f°11nd need for a general release, a somewhat different type of statement
nlight be
considered for that purpose.
Messrs. Young, Molony, Cardon, and Shay then withdrew from the
'fleeting.
Outside activities and financial transactions of Reserve Bank
°rricers and employees (Item No. 5). On the basis of discussion at
the
meeting on February 5, 1964, there had been distributed a revised
4raft of
letter to the Presidents of all Federal Reserve Banks that
lairman Martin subsequently decided
TZgainst
sending copies of the letter to
'he Banking and Currency Committees.
428
2/1o/64
_5_
I'las designed to incorporate in a single communication the Board's
views concerning outside activities and certain financial transactions
of Federal Reserve Bank officers and employees.
Following comments by Mr. Sherman on the changes from the
earlier draft, the letter was approved unanimously.
a
ttached as Item No.
A copy is
5.
All members of the staff then withdrew from the meeting and the
Board went into executive session.
Editorial Committee of Bulletin.
The Secretary was informed
later that
during the executive session the Board approved the
l'ecommendation in a memorandum from Mr. Molony dated February
that
4, 1964,
Mr. Brill, Director, and Mrs. Sette, Chief of Economic Editing,
Division of Research and Statistics, be added to the Editorial
ecamittee of the Federal Reserve Bulletin, which currently consisted
(pf Messrs.
Molony, Young, and Noyes.
The meeting then adjourned.
Secretar,
429
BOARD OF GOVERNORS
Item No. 1
2/10/64
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS orriciAL CORRESPONDENCE
TO THE BOARD
February 10, 1964.
Board of Directors,
The Connecticut Bank and
Trust Company,
Hartford, Connecticut.
Gentlemen:
The Board of Governors of the Federal Reserve
SYstem approves the establishment by The Connecticut Bank
and Trust Company, Hartford, Connecticut, of a branch at
445-457 West Main Street, Norwich, Connecticut, provided
the branch is established within one year from the date
of this letter.
Very truly yours,
(signed) Elizabeth L. Carmichael
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
°f November 9, 1962 (S-1846), should be followed.)
Item No. 2
2/10/64
UNITED STATES OF AMERICA
BEFORE THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON, D. Co
la the
Matter of the Application of
1111C/DE ISLAND HOSPITAL TRUST COMPANY
fo
aPproval of acquisition of assets of
4ickford Savings Bank
ORDER APPROVIUG LCQUISITION OF BANK'S ASSETS
There has come before the Board of Governors, pursuant to
_ n.
a k Merger Act of 1960 (12 U.S.C. 1828(c)), an application by
'
the
Rhode
Island Hospital Trust Company, Providence, Rhode Island, a
M"lbet bank of the Federal Reserve System, for the Board's prior apPr"al of its acquisition of assets of Wickford Savings Bank, Wickford,
114de Island.
11.ust Comp
As an incident to such application, Rhode Island Hospital
any has applied, under section 9 of the Federal Reserve Act,
f(Ir the Board's prior approval of the establishment of a branch by that
,
bar
I-4, present location of Wickford Savings Bank. Notice of the
'tc at -“e
h°13°Sad accuisition of assets, in form approved by the Board of Govnor .
,
has been published pursuant to said Bank Merger Act.
Upon consideration of all relevant material, including the
rQp
ts furnished by the Comptroller of the Currency, the Federal
431.
-2Deposit Insurance Corporation, and the Department of Justice on the
eftPetittve factors involved in the proposed transaction,
IT IS HEREBY ORDERED, for the reasons set forth in the
13ardis
Statement of this date, that said applications be and hereby
et'e aPProved, provided that said acquisition of assets and establishtae
"of a branch shall not be consummated (a) within seven calendar
4Ya following the date of this Order, or (b) later than three months
iter said
date.
Dated at Uashington, D. C., this 10th day of February, 1964.
By order of the Board of Governors.
Voting for this action:
Unanimous, with all members present.
(Signed) Merritt Sherman
Merritt Sherman,
Secretary.
432
Item No.
3
2/10/64
BOARD OF COVERNORS
OF THE
FEDERAL RESERVE SYSTEM
APPLICATION OF RHODE ISLAND HOSPITAL TRUST COMPANY
FOR PRIOR APPROVAL OF ACQUISITION OF ASSETS OF
WICKFORD SAVINGS BANK
STATEMENT
Rhode Island Hospital Trust Company, Providence, Rhode Island
"t"t
Company"), with deposits of $341.7 million as of June 29, 1963,
ePPlied, pursuant to the Bank Merger Act of 1960 (12 U.S.C. 1828(c)),
the Board's prior approval of its acquisition of assets of the
llickford Savings Bank, Wickford, Rhode Island ("Savings Bank"), a
tialtuel savings bank with deposits of $4.4 million as of the same date.
Incident to such application, Trust Company also has applied,
1.11
section 9 of the Federal Reserve Act (12 U.S.C. 321), for the
13%cils
Of th
prior approval of the establishment of a branch at the location
e sole office of Savings Bank, increasing the number of offices
°Persted b—
Y Trust Company to 24.
41111t"a 1 to
In addition, Trust Company has received
establish three other branches which are not yet operative.
Under the Act, the Board is required to consider, as to each
(1 the
banks involved, (1) its financial history and condition, (2) the
cY of its capital structure, (3) its future earnings prospects,
(4) tile
general character of its management, (5) whether its corporate
Nlers are
consistent with the purposes of 12 U.S.C., Ch. 16 (the
433
-2-
l'"[aral Deposit Insurance Act), (6) the convenience and needs of the
COtlitillinity to be served, and (7) the effect of the transaction on
competition (including any tendency toward monopoly).
not approve
The Board may
the transaction unless, after considering all these factors,
it finds the transaction to be in the public interest.
Banking factors. - Both of the banks have satisfactory
financial histories.
Each has a sound financial condition, an adequate
capitI
a- structure, satisfactory management, and favorable future earninas
Prospects. It is expected that this would be true also of the
cqui1in3 bank.
There is no indication that the powers of the banks involved
are
°r would be inconsistent with the purposes of 12 U.S.C., Ch. 16.
Convenience and needs of the communities. - Wickford, an
uruoc
°rPorated community in the Town of North Kingstown on the western
shore
of Narragansett Bay, is 20 miles south of the city of Providence.
The
Proposed
transaction would affect only the banking needs and con-
vente
nee in the Wickford-North Kingstown area, which comprises the service
l'ea of
Savings Bank.*
North Kingstown's 1960 population of about 19,000 represents
0.0
increase of around 28 per cent for the preceding decade.
For the
Period, Wickford's population increased by 20 per cent to approxitQl' 3 nn-,
While the economy of Savings Bank's service area is based
That
ofitwarea from which a bank obtains 75 per cent or more of its deposits
'
I viduals, partnerships, and corporations.
434
-3-
larlelY on local retail outlets and small manufacturing concerns, North
4141gstavn has experienced substantial growth because of extensive military
installations in the area.
Industrial expansion in the a:ea is in progress
"4 is expected to increase.
The only commercial bank with offices in the Wickford-North
4ngstown area is Industrial National Bank of Rhode Island, the State's
lar„
''st commercial tank, which has one office at Wickford and two elsebete in the service area of Savings Bank.
While leaving unchanged the number of banking offices where
41,1„
"gs accounts can be maintained in the Wickford-North Kingstown area,
COns
umirrlation of the proposal would make available at the Wickford branch
oirrIlSt Company, the State's second largest commercial bank, significant
ng services not available at Savings Bank.
These would include
ng accounts, installment and other loans, a substantially higher
lencling limit, and trust services.
As a result, the residents of the
lliekford.North Kingstown area would have the benefit of a convenient
tilternative source of banking services.
People's Savings Bank in
1°vid n
e-ee, with a branch three miles north of Savings Bank, would retain
e°4veniently available to those residents of the area desiring
the
'ervices of a mutual savings bank.
.S2E2L5.Lian. -
The effect of the proposed transaction on
t°11115etition would be limited to the service area of Savings Bank.
Trust
e°411344Y ts service area includes almost all of the State and encompasses
-4the
service area of Savings Bank.
However, there is no more than a
rairier amount of competition between the two banks.
Trust Company's
ffiees nearest to Wickford are at East Greenwich, seven miles north,
44d at
Wakefield, ten miles south of Wickford; but the Industrial
Illatic'nal Bank of Rhode Island, mentioned above, has a branch midway
bet
lleen East Greenwich and Wickford, in addition to a branch at
Furthermore, mutual savings banks are not permitted under
State law to offer many of the services available at commercial banks.
While the proposal does not provide for the assumption by
bust
Company of the deposit liabilities of Savings Bank, it may be
tea"nablY expected that some depositors in Savings Bank will transfer
thej
ccounts to Trust Company, rather than receive them in connection
with tb
--e liquidation of Savings Bank. However, Snvings Bank's
4150 ,
83-ts are equal to only about one-half of one per cent of the aggree4te dePosits of individuals, corporations, and partnerships in comInerei
41 banks in Rhode Island, so that any resulting increase in the
ti,^
uz Trust Company would not be significant.
As previously noted, the only commercial bank with offices
i4 the
Wic
kford-North Kingstown area is Industrial National Bank of
kiede
Island, the State's largest. While effectuation of the transEic.tion
Would provide residents of the area a choice of commercial banks
erviees and thereby stimulate competition for commercial banking
servi
ces in that area, it would not be expected to affect adversely
is Savings Bank in Providence, the mutual savings bank whose branch
14°tild be the
only other banking office in the Wickford-North Kingstown area.
436
-5-
Summary and conclusion. - This proposal, which would supplant
he sole office of a small mutual savings bank with a branch of the
"
'e°nd largest commercial ban1-. in the State, would provide to the cust°rners of the former a convenient alternative source of commercial
-ag services. The transaction would be expected to stimulate competit _
ion between the acquiring bank and the largest commercial bank in
the
State, since branches of the latter are now the only commercial
bani.
lng offices within the relevant area, without adversely affecting
the °IllY other bank in the area, a mutual savings bank.
Accordingly, the Board finds the proposed acquisition of
'assets to be in the public interest.
Pebruary 10, 1964.
.....
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44
''''• illi
BOARD OF GOVERNORS
OF THE
Item No.
4
2/10/64
FEDERAL RESERVE SYSTEM
WASHINGTON
OFFICE OF THE CHAIRMAN
.1 REO.•.
• 4.
.....•
February 13, 1964.
The Honorable Dante B. Fascell, Chairman,
Legal and Monetary Affairs Subcommittee of the
Committee on Government Operations,
Rouse of Representatives,
Washington, D. C. 20515
Dear Mr.
Chairman:
Your letter of February 3, 1964, regarding conflicting
interpretations and possible duplications of supervision between
the Board of Governors and the Comptroller of the Currency, relates
t° a subject that has become of increasing concern to the Board in
recent months. In particular, you ask for comments regarding the
eXtent to which there have been differences in interpretations of
statutes and duplication of regulation between the two agencies,
l old the operations of the agencies have been affected, how the
upervised banks have been affected, the efforts that have been made
!
°
ci prevent such differences and duplications, and the means for preventing disparate actions by the agencies.
A number of differences have arisen between the Comptroller
Of the Currency and the Board of Governors over the last year or so,
but
a brief indication of the nature of some of the major differences
maY suffice.
In September 1963, the Comptroller issued a revision of
his
Investment Securities Regulation which, among other things, purports
to a
uthorize national banks and State member banks to underwrite
Qevenue obligations issued by public authorities and corporations.
; Itl=gations have not been exempted by Congress from the Federal
prohibition against the underwriting of securities by
national banks and State member banks, and Congress has, not authorized
the
Comptroller to grant any such exemptions. The Board has informed
State„
member banks that the only securities exempt from the limita1 ns and restrictions of the statute are those specified therein.
'
(Federal Reserve Bulletin, November 1963, pp. 1505-1510)
The Comptroller has ruled that "Federal funds” transactions
%e not
subject to the limitations prescribed by the national banking
ws on loans made by national banks. The Board of Governors,
43
The Honorable Dante B. Fascell
-2-
however, has held that, for purposes of statutory limitations
ad ministered by it, so-called "sales" and "purchases" of Federal
funds actually constitute loans and borrowings. (Federal Reserve
Bulletin, September 1963, p. 1238)
In an interpretation published in December 1963, the
G,omptroller ruled that notes and debentures that are subordinated to
Itellosit liabilities may be regarded as a part of a national bank's
capital stock and surplus" in applying statutory limitations on
loans by national banks to their customers. Since a note or debenture
Obviously does not constitute "stock" or a part of the "surplus" of a
°ank, as Congress has explicitly recognized, the Board has taken the
rsition that notes and debentures may not be treated as part of a
.k's
an
capital stock or surplus for purposes of limitations contained
1
1311 the Federal Reserve Act that are based upon the amount of a member
,ank i s capital stock and surplus. (Federal Reserve Bulletin,
'January 1964,
9)
p
.
In another interpretation published in December 1963, the
Com
ptroller intimated in nonspecific language that national banks
re
not bound by the definition of the term "executive officer" set
b?rth in the Board's Regulation 0, implementing the statutory prohi_ition against the making of loans to their executive officers by all
banks, both national and State. This Regulation was issued by
!
Ir.e
l Board pursuant to express authorization contained in section 22(g)
tuz the Federal Reserve Act, including specific authority to define the
ci!rm "executive officer"; and, unless and until the Regulation is
cuanged by the Board, the present definition of an "executive officer"
"tained therein is, of course, applicable to all member banks.
Recently, the Comptroller published a proposed regulation
that
would
require national banks to obtain the Comptroller's approval
befo
1, re engaging in any "international operation", including the estabf shment of foreign branches and investment in foreign banking or
ofnancing corporations. Congress has specifically authorized the Board
Governors to permit and regulate the activities of national banks
:`2_ well as State member banks in this field; and the Comptroller's
Posed regulation inevitably would result in duplication of superand the prospect of conflicting interpretations in still another
„ea. A copy of the Board's letter to the Comptroller regarding his
kg-oposed regulation was transmitted to you on January 29, 1964.
1
A major conflict between the Comptroller and the Board has
related
sys
to the question whether member banks of the Federal Reserve
sav uem (national banks and State member banks) may properly accept
ti ings deposits from business corporations. Time certificates and
me deposit, open accounts, are, of course, presently available to
T
itk).
The Honorable
Dante B. Fascell
-3-
such corporations; the question is whether they may also have
savings deposits in member banks. Since this has been one of the most
Publicized of recent conflicts, a more extended discussion of this
matter may serve to exemplify the difficulties that stand in the way
.f preventing and resolving divergent views between the two agencies
Under present circumstances.
In 1935, Congress expressly authorized the Board to define
savings deposits" for purposes of payment of interest on deposits
by
member banks and for purposes of reserve requirements of such
banks.
Pursuant to this authority, the Board, in its Regulations Q
and D, has,
since February 1, 1936, defined savings deposits to exclude
deposits of
business corporations. Nevertheless, in an interpretation
Pllblished in December 1963, the Comptroller expressed the view that
the Board
has no authority to preclude the maintenance of savings
tePosits by any class of depositor, and that, therefore, national
:_)anks may accept such deposits from business corporations. The Board
as
recently reaffirmed its position that, under its present Reguladrns, such deposits may not be classified or treated as savings
deposits
by either national or State member banks. (Federal Reserve
uulletin, January 1964, P. 9)
On January 21, 1964, the Comptroller sent to all national
a letter enclosing a copy of his December 1963 ruling on this
'1
;eis_ tion, a copy of a letter to Senator Robertson, and a memorandum
aut"is Legal Department in support of his position that the Board's
h°rity to define savings deposits does not include authority to
base such definition upon the nature of the depositor. Copies of
thesec
n
documents are enclosed for your information. There is also
in losed a memorandum prepared in the Board's Legal Division commentOh the
documents issued by the Comptroller's Office.
ban,.
The Comptroller's legal memorandum relies largely upon
Board
of
°Pinions prior to 1933 defining savings deposits for purposes
ig r eserve requirements in terms of conditions of withdrawal. It
toliic!res the all-important fact that the definition of savings deposits
1114 on new significance after 1933, when Congress prohibited the payfir
°f interest on demand deposits and it became necessary, for the
evast time, to define savings deposits in a manner that would prevent
I
au4i°n of that prohibition. Any possible question as to the Board's
Act °ritY in this respect was eliminated when Congress, in the Banking
for ,°..! 1935, expressly authorized the Board to define savings deposits
to `ne Purposes of section 19 of the Federal Reserve Act, relating
sucfeserv es of member banks and payment of interest on deposits by
reibanks. The 1935 Act also authorized the Board to issue such
:ations as it might deem necessary to effectuate the purposes of
sectl
1°n 19 and prevent evasions.
The Honorable
Dante B. Fascell
-4-
With respect to enforcement of the Board's definition of
savings deposits, the Comptroller's legal memorandum argues that the
P,rovisions of section 2 of the Federal Reserve Act regarding for,
t eiture of a natio
nal bank's charter and liability of its directors
for
violations of the Federal Reserve Act apply only to national banks
°rganized before 1913. It is difficult to believe that the Comptrolle
r
seriously contends that Congress meant
discr
thus
imina
to
te
in
favor
Of
national banks organized since 1913. In this connection, the
ii(
,t)mptroller's legal memorandum,
on the basis of an unrelated amendent to the
law, minimizes the significance of a 1943 Federal court
d ecison,
expressly holding that the provisions of section 2 of the
Reser
ve Act above mentioned were applicable to a national
leedera
bank l
organized after 1913.
Conflicts between the two agencies have resulted in a
sit
•
uatlon in which State member banks and national banks are being
e qually treate
d in the application of provisions of Federal law
at govern both categories of member banks. Obviously, it was the
"- tention of Congr
ess to avoid just such a situation. It is equally
clearl,
that Congress did not contemplate that national banks could be
,__)s°1v
'ed from compliance with regulations
of the Board of Governors,
"sued under
express statutory authority, that are applicable to all
member banks
.
%
Over the years, until recent times, any differences of
°Pinio
Boa
n that have arisen between the Comptroller's Office and
the
rd of Governors have generally been resolved through consultation
and
close cooperation between the two agencies and their
staffs. The
rld of Governors continues to seek to cooperate as far as possib
le
with
a, the Comptroller's Office, as well as with other supervisor
y
„,'encies, in an effor
t to harmonize divergent views. Recent develop"Lents, however, have frustrated efforts
to achieve such cooperation.
Divergent applications of the same provisions of law to
f
hav"rent groups of banks are obviously unjus
t. In addition, they
Thee Produced a state of confusion that has
become extremely serious.
Board has received letters from
banks indicating their dissatisfact
bet i°n and perplexity. The differences of legal interpretation
en the Comptrolle
r's Office and the Board of Governors nullify
the
tre intent of Congress that different classes of banks shall be
to 'te d alike under applicable provis
ions of Federal law. They tend
agelmPair the efficient operations of the Federal bank supervisor
y
to neies and even threaten to bring the agenci
disre
into
es
pute
and
under
mine respect for law and the processes of Government.
The Honorable Dante B. Fascell
Needless to say, the Board is prepared to participate in
aRY efforts that would hold promise of achieving a reasonable resoluion of the current conflicts without doing violence to the will of
t4ngre58. However, in discharging its statutory responsibilities,
the Board could
not, of course, accede - merely for the sake of
uniformity - to actions of another agency which in the Board's
opinion
are contrary to
law.
Sincerely yours,
(Signed) Wm. McC. Martin, Jr.
Wm. licC. Martin, Jr
442
BOARD OF GOVERNORS OF TUE FEDERAL RESERVE SYSTEM
LEGAL DIVISION
February 12, 1964.
gianylcnts on Documents Issued by the Comptroller of the Currency
Rearding Accepj:ance of Corporate Savings Accounts
by National Banks
On January 21, 1964, the Comptroller of the Currency
addr
the essed a letter to the Presidents of all national banks regarding
t. acceptance of savings accounts from business corporations. The
;:bter
enclosed a copy of the Comptroller's ruling on this subject
a ilished n the Federal Register for December 24, 1963, a copy of
tter from the Comptroller to Senator Robertson dated January 14,
19j
De ') and a copy of a memorandum prepared by the Comptroller's Legal
Partment dated January 21, 1964.
The gist of the four documents is that the Board of Governors
c) the
den()
Federal Reserve Systcm has no legal authority to define savings
dekf.sits in terms of the nature of the depositor or to enforce any such
lnitions in the case of national banks.
The documents are so phrased that they might seem plausible
t° the
apn, casual or uninformed reader. Upon analysis, however, it
ars that they are based largely upon unsupported assertions,
/lij
f01:;(3ut regard for accuracy, logic, or legal considerations. The
ing discussion considers in chronological order the three documerl
's enclosed with th,, Comptroller's letter of January 21, 1964.
COMPTROLLER'S INTERPRETATION OF DECENBER 24, 1963
The Comptroller's initial announcement on this subject was
Publish
ed in the December 24, 1963 issue of the Federal Register.
HQ
sei'led that national banks could accept corporate savings accounts
e'Y on the ground that the Board's authority to define savings
:
de
AX)sits (the first paragraph of section 19 of the Federal Reserve
214 12 U.S.C.
461) "extends only to the terms of the deposit contract
as a description of withdrawal requiremens and interest rate
Or v tations" and that there is nothing in the law that "would preclude,
of .(3111d authorize a regulation which would preclude, the maintenance
uch accounts by any class of depositor."
-9-
The Board's statutory authority to define savings deposits
is not
to the
subject to any limitation. Consequently, contrary
C...emptroller's statement, there is something in the law that authorizes
regulation precluding the maintenance of such deposits by classes of
Board's
Positor that the Board may designate. The contention that the
the
of
terms
"the
to
limited
cluftority to define such deposits is
ocfPosit contract" will be considered later in discussing the memorandum
rate
„ the Comptroller's Legal Department. Obviously, "interest
elmitations" are a separate matter - a consequence rather than an
'
deposit" - and are
s erncat of the definition of the term "savings
Pecifically covered by another provision of law.
7
COMPTROLLER'S LETTER TO SENATOR ROBERTSON
to
The first paragraph of the Comptroller's letter
Senn..
nt
irreleva
the
makes
1964,
14,
st. -Lor Robertson, dated January
than
rather
tion,
corpora
business
W:atement that it is the small
neral Motors Corporation, that is "unfairly and seriously handidefinition of
dePPcd by the Board's discriminatory and unlawful
the depositor."
of
purposes
Thi?°sits by the character and general
conferred
has
s
Congres
that
8,1s s tatement ignores (1) the fact
ller) to define
Comptro
the
not
(and
atutory authority upon the Board
the Board's
of
ve
objecti
the
that
de‘:ings deposits and (2) the fact
deposits
savings
of
use
improper
nition has been to prevent the
of
payment
against
ion
prohibit
ry
statuto
itit.°tder to circumvent the
'crest on demand deposits.
Z
4
a memorandum
The third paragraph of the letter states that
of te_
authue Comptroller's Office "will discuss" not only the Board's
Board's "vague
°ritY to define savings deposits but also the
en'ieats of massive retaliation" and the Board's lack of authority to
savings deposits by
an erce "acceptance of its unlawful definition of
an assessment of penalties
foract ion against the bank's directors or by
of an
ar reserve deficiencies". This statement is an illustration
a gumentative technique that is not susceptible of rational response:
i.e., that the
toaat?gorical assertion that the adversary is wrong,
without citing
anx,rd s definition of savings deposits is "unlawful",
j r easonable basis for the assertion.
implications that
The Comptroller's statement also contains
are /471_0..
nothing that threatens
"mas " Ily unwarranted. The Board has said
mentioned only a
pro sive retaliation" against national banks; it
Reserve Act a
grovision of law that makes violations of the Federal
bank. Nor has the
goaund for forfeiture of the charter of a national
"action" against the
dirrd suggested that it might, or could, take any
violations of
theectors of a national bank for damages resulting from
December 26, 1963,
Act; the Board in its published statement of
-3-
a
IllerelY referred to a provision of law that makes a director of
of
consequence
national bank liable for damages sustained as a
violations of the Act to which he assented.
to
The final paragraph of the Comptroller's letter
ator Robertson emphatically states that the Comptroller alone is
applieable
Ponsible for enforcement of banking laws and regulations
to
exception
national banks and that his examiners will not take
the
of
bnY ae'cions that are in accordance with his Interpretation
and int nking laws. In other words, he will disregard regulations
to
applicable
„ rPretations of the Board under statutory provisions
the
Board
ional banks, even though Congress has placed upon the
provisions.
"?onsibility for issuing regulations to implement such
Sen
r
MEMORANDUM OF COMPTROLLER'S LEGAL DEPARTMENT
first five
Definition in terms of nature of depositor. - The
(out of
Department
Pages of the memorandum of the Ccmptroller's Legal
Board opinions prior
%t(i)tal of 11 pages) are devoted to a review of
pur933 in which the Board defined savings deposits for reserve
'
Pose in
between
opinions
s
1
terms of notice of withdrawal and to Board
savings
that
position
the
took
de 3 ancl 1935 in which the Board
thrift
fide
"bona
for
accumulated
puP°sits should consist of funds
1934
a
cites
memorandum
the
connection,
01)!I)c)ses”. In the latter
in
corporations
of
"deposits
that
stated
"of the Board that
'
Trlolni
thst eases would not consist of funds accumulated for bona fide
.ift purposes; but here again no general rule can be laid down.
*5
* 1ith respect to firms and individuals engaged in business, the
this question.
ire of the business may be important in determining
:
may be a
deposit
on
funds
the
of
amount
In some instances the
fac
their
e,at°r for consideration in determining the propriety of
ssification as savings deposits."
rkimor
Comptroller's
Two important points are ignored by the
andum in discussing these opinions of the Board.
savings
First, the fact that before 1933 the Board defined
den,s- .
the
because
sits solely in terms of withdrawal is understandable
not
was
purposes. It
titIt ition had significance only for reserve
member banks were
that
1933
of
Act
pro i- enactment of the Banking
savings
ted from paying interest on demand deposits. Since
de
legally payable
04P°sits are in practice paid on demand, although not
eatuemand, it became important for the first tied° to limit the
prevent evasions of the
pron°rY of "savings deposits" in order to
ulbition of interest on demand deposits. The Board at first
p
445
-4elight to do this by restricting savings deposits to funds accumulated
rterb°na
fide arift purposes - a restriction based on a subjective
o‘ st that proved difficult to administer but one that would generally
t ludo corporate deposits. The Board's objective, as indicated in
was to preserve the right of small
1934
•
, opinion above mentioned,
Irledv4
4,Jual "savers" to obtain interest on accounts that were in
Pora.ctice paid on demand. In furtherance of this objective, that
!
a lh-2-on concluded that deposits of other banks could not be classified
, savings depocits - a conclusion obviously Lased upon the nature of
depositor.
The second point ignored by the Comptroller's memorandum is
thef
no
that Congress, in the Banking Act of 1935, expressly authorized
for BOar d to define "savings deposits" both for reserve purposes and
Purposas of payment of interest on deposits. There was no suggesvla:n in that Act or in its legislative history that the Board's authority
poi limited to the terms of the deposit contract. This is the key
ratrint in the current controversy. In net effect, the Comptroller's
tbeTndual is based on the untenable ground that the authority given
the :;°ard by the Banking Act of i35 to define savings deposits gave
Loard no more authority than it had before the Act was pcsscd,
.3 authority to define such deposits in terms of withdrawal.
,
Confusion of authorit” to define savius de,)osits with the
Zi7eg °f r'nximum interest rates. - The Comptroller's memorandum
doil'
-0es that a bill introduced in Congress last year to increase
1-e sit insuranc-, coverage contained a provision "proposed at the
.(3tLi st of the Board of Governors" that would have given the Board
clep-;'Y authority to fix maximum interest rates on time and savings
depositor", and
thatsits in accordance with the "nature * * * of the
its authority
to
as
uncertain
was
Board
the
this
A
to %left
indicates that
savings deposits in terms of the nature of the depositor.
In the first place, this provision was not proposed at the
'
l eques,
the 11
of: the Board. Some of the Board's staff, at the request of
slon"udget Bureau, assisted in the drafting of this and other provi84d s °f the bill mentioned; and the Board, in June 1963, advised the
bilrt Bureau that it had no objections to a revised version of the
provi But the Board did not recommend or request inclusion of the
n regarding interest rates on deposits.
Even if the Board had requested authority to fix meximum
"
- Lltes according to the nature of the depositor, this action
104-Z, under
presQ in no way have suggested doubt as to the Board's authority
cl(q10 lit law f- o define savings denos its in terms of the nature of the
e%p-„,
sitor• The two matters arc completely unrelated. Present law
limits the criteria for fixing different maximum rates to
-es, conditions of withd2awal, location, and discount rates;
44
-5the Board has recognized that it may not base different rates on
nature of the depositor. The Board's authority to define savings
'sits is quite a different uatter; that authority is not subject to
:
a Pc
tatutory qualification.
The "prIvilegP" of maintaining savinga deposits. - The
distorted and misleading nature of some of the arguments contained in
e Comptroller's memorandum is illustrated by a statement on page 7
:
e the memorandum that the Board's position as to corporate savings
;:lc?unts "enables the Board to extend the 'privilege of maintaining
covings deposits' to individuals of unlimited means and to nonprofit
forrP°rations, associations, or other organizations possessing vast
cortunes whilP it refuses such 'privilege' to a small one man business
discriminated
Peration," The statement implies that the Board has
-gair
ai ,st small corporations by not according them the "privilege" of
ining savings accounts. Actually, of course, contrary to the
ao-nta
,P roil'
's insinuation, the maintenance of a savings deposit is
law itself, since the law permits
teivileCcfl, but one accorded by the
arQ DaYment of interest- on such deposits even though in practice they
bas.Paid on demand. In other words, the memorandum again ignores the
cie fact that the limitation prescribed by the Board as to the kinds
ot I
the eP°sitors that may have savings deposits is designed to preserve
in sstatutory distinction between demand deposits and savings deposits
l'ar as payment of interest is concerned.
n
Z
lloreovnr, the memorandum does not mention the fact that,
the
before the Comptroller's interpretation of December 24, 1963,
discussion by
rept, .1-(1 had proposed a series of conferences for a
Board of Covernos
the
and
Comptroller,
;
,1
,
e
2
of
entatC5 of the FDIC, the
of "savings
definition
regulatory
desirability of changing the
corporations,
business
eithsits" to make such deposits available to
Qr with or without appropriate limitations. Yet, before these
.rencea were well underway, the Comptroller (the only one of the
thr':
tflatte agenc'es without regulatory authority in this area) took the
freeer in his own hands and advised national banks that they were
to accept savings deposits from business corporations.
shor,,
, EnforcemPnt considerations. - Perhaps the most absurd argument
corlta.
Qet. -“eu in the Comptroller's memorandum is that the provisions of
of the
,11 2 of the Federal Reserve Act, regarding the forfeiture
)4°
frall(
that
of
provisions
the
of
violations
Aet -"isc of a national bank for
consethe
for
banks
national
94enand the liability of directors of
such -,rio1at4 on3, apply only to national banks that were in
e%Is Tes
The cence when the Federal Reserve Act was enacted on December 23, 1913.
%raar gument is based on the fact that, if read literally, the sixth
existence
()t1 eaPh of section 2 would require only national banks in
of
penalty
under
Act,
the
of
Zorf:'t date to comply with provisions
noncompliance.
siture of their charters for
447
-6-
The Comptroller's memorandum concedes that there appear to
be "conflicting dicta pertaining to this matter" in two Federal court
i
decisions, but contends that any such conflict is "clearly resolved"
suPPort of the Comptroller's position by a 1958 amendment to sec"ion 2 of the Federal Reserve Act.
One of the cases cited in the memorandum, polman v. Cross,
ed. 2d 909 (1935), involved a question of the liability of directors
nd officers of a national bank for damages resulting from a violation
4
of
1.0, provision of the Federal Reserve Act (since repealed) that proift.Dited loans or payment of dividends while the bank was deficient in
section 2
:reserves. The defendants contended that the provision of
re
its
after
'
en arding liability of directors became obsolete one year
some
drew
aetment; and the court stated that this contention
hPaedrsuasiveness" from the fact that the paragraph of section 2 involved
di,1 been omitted from the U. S. Code. Nevertheless, the court expressly
not rule upon this contention because it found that the damages
1.:eged had not actually resulted from a violation of the provision of
'
41 in question.
75
F
The other case cited in the Comptroller's memorandum, involving
a
011,:ulliar question, was Michelsen v. Penney., decided in 1943 by an
Inc.tanding United States Court of Appeals. (135 F. (2d) 409).
,
11:at case, the directors of a national bank organized after 1913
wert
held liable for damages resulting from violations of the Federal
secerve Act. The court discussed the effect of the provisions of
fratiell 2 of the Federal Reserve Act regarding forfeiture of the
a rnehises of national banks and the liability of their directors as
rec ult of such violations. It concluded that only. the provision
FocV ing national banks in existence in 1913 to become members of the
oth:al Reserve System expired one year after the date of the Act; in
res-t Words, that the remaining provisions of the paragraph with
forret to compliance with the provisions of the Federal Reserve Act,
of charter for noncompliance, and liability of directors,
e°nteiture
sioninued in effect. The court specifically noted that these provis) although omitted from the U. S. Code at the time of the Holman
cas;
) had since been regularly included in the Code.
vAl.
Despite this clear judicial confirmation of the continued
regarti Y of the provisions of section 2 of the Federal Reserve Act
Aot -'ing the compliance by national banks with the provisions of the
Illerro nd liability of their directors for violations, the Comptroller's
pararandum argues that an amendment of July 7, 1958, to the first
appOraPh of section 2 for the first time made the forfeiture penalty
the ij,eable to failure of national banks organized after 1913 to join
ederal Reserve System, and that the failure of the 1958 amendment
-7to
n19-ntion the provisions regarding compliance with the Federal
sel=ve Act and liability of directors for damages resulting from
:
0°Iilcompliaace indicates that these provisions are still applicable
1-1714
, 1 in the case of national banks organized before 1913. The argument
clearly fallacious, as indicated in the following paragraphs.
The 1953 amendment to the first paragraph of section 2 was
Prono ,
sec, by the Board of Governors in connection with pending Al.askan
and
Hawaiian Statehood bills. The reason for the proposal was that,
er section 19 cf the Federal Reserve Act, national banks located
Ii.Alaska and other Territories or in any place outside the continental
lted States were not required to be members of the 7ederal Reserve
s,
eQnl and that, consequently, unless the law was amended, national
asn"s in the new States of Alaska and Hawaii would not be required,
AceIlere national banks in other States, to become members of the System.
.(, 31,"dingly, the law was amended to require every national bank "in
or" ?e to become a member of the System upon commencing business
bin 90 days after the admission of the State into the Union.
The
rt_amendment was clearly not motivated by any understanding that
raonal banks in the existing States were not required to become
Itar rs of the system. On the contrary, the Board's letter of
the Statehood
411" 13) 1950 to the Congressional Committee considering
banks
national
all
law,
present
in tis, exPlicitly stated that "under
of the
members
be
to
required
are
Staesing
of the Union
Staes
PQd 'e
eral Reserve System."
at the . It seems obvious that Congress was not in any sense concerned
time of the 1950 amendment with the question of compliance by
zati
the
'jai:nal banks with the provisions of the Federal Reserve Act and
was
There
Act.
the
of
violations
4Q n:litY of their directors for
case,
"d for any such concern because, as indicated in the Michelsen
tho;
tanks,
national
all
of
case
the
141ejProvisions are applicable in
organized before or after 1913.
The unsoundness of the Comptroller's argument as apparent
Nst 'IQ realizes that it would simply mean that some national banks
Of
with the Federal Reserve Act and be subject to fcrfeiture
them
tilos eir charters for fail-re to comply, while other national banks m ol e 0rganized since 1913 - would not need to comply with the provi4 of the Act. An intent to draw such an irrational and capricious
(141
sne tion is not to be attributed to Congress.
0
reserve
•
(IQ,
r leie
_As to the Board's authority to assess penalties for
to
failure
bank's
the
of
L.:res of a national bank because
acce
compiP,t the
the
accounts",
savings
corporate
Board's "prohibition of
of
provisions
the
of
review
'
tile ;',1- 011er's memorandum states that a
-ederal Reserve Act does not disclose the existence of any such
44
U4=
.11t11°ritY. Presumably, the memorandum means that there is no provision
the law that specifically mentions penalties for deficient reserves
er,sulting from the acceptance of corporate savings accounts. This is
aInly true, and the Board's published statement on this subject
not suggest that there was any such specific provision. The
4
1
Np simply pointed out two incontrovertible facts: (1) that, if a
lonal bank classified corporate accounts as savings deposits, such
unts would nevertheless be treated by the Board as demand deposits
rc
:reserve purposes, and (2) that, if any reserve deficiencies should
lilt, the bank would be subject to penalties for such deficiencies.
r
The Comptroller's memoraneum ends with the suggestion that
and 13oard
the
might seek to require compliance with its "unauthorized
1;„?nzealistic definition of savings deposits" by resorting to
e;ektu.tr
i
aty and capricious refusal to exercise affirmatively its disas rnary authority in behalf of particular banks in such matters
bee:"vances, discounting, and foreign branches." There has, of course,
n° statement or action of the Board that would lend the slightest
"P°rt to this impugnation of the Board's integrity.
Item No. 5
2/10/64
S-1907
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON 25, D. C.
ADDRBBB
orriciAL
CORRIKBPONDICNOIC
TO THIE BOARD
February 10, 1964.
Dear sir:
This letter, which is designed to incorporate in a single
C
e -'flullication the Board's views concerning outside activities and
taj financial transactions of Federal Reserve Bank officers and
v-oyee _ ,
errlP.L
u supersedes the Board's letters of March 24, 1948 (S-1018,
ex S #9054) and October 7, 1957 0-l639;FRLS #9054.1). The views
otr:ressed in this letter are applicable to outside activities of all
cars and full-time regular employees. Depending on the particular
eumstances, they may or may not be equally applicable to individuals
ej
u:ged on a consultant basis, those employed on a part-time basis, or
voriste employed for temporary periods such as during vacations or for
On Specific projects.
As an over-riding general principle, the Board continues
ta,
Of a ilr the position it has held for many years: officers and employees
in any
po8i
leral Reserve Bank should refrain from placing themselves
as
System
Reserve
n that might embarrass the Bank or the Federal
a
being
question
any
w"°1e in the conduct of its operations or result in
aised as to the independence of the individual's judgment or his ability
Pa
satisfactorily all of the duties of his position with the
In keeping with this concept, outside business affiliations and
t
pL-"ing activities should be entered into only with the approval of a
--eral Reserve Bank.
to
The Board believes that the propriety of participation in
sPecif,
cons. Lc outside activities can be determined effectively only after
Of tld eration by the management of a Federal Reserve Bank. on the basis
therhe circumstances pertinent to the particular situation. It would,
ore, not be feasible for the Board to attempt to comment on all
type
be 8 of activities in which Reserve Bank officers and employees might
viexTlgaged. For the guidance of the Reserve Banks, however, the Board's
s on certain kinds of outside activities follow:
451
-2-
S-1907
1. The Board would ordinarily see no objection to an
a
Officer or employee of a Federal Reserve Bank maintaining
tion
institu
onal
educati
zed
recogni
teaching connection with a
at the university level, particularly if such a connection
would be helpful in enabling him to keep abreast of developments in his field and if it would facilitate communication
ty.
between the Federal Reserve System and the academic communi
to
on
objecti
no
see
Similarly, the Board would ordinarily
of
teaching connections with other reputable institutions
nship
relatio
some
learning, especially if the curriculum bears
of
case
the
in
as
to the functions of a Federal Reserve Bank,
.
banking
of
schools
the American Institute of Banking and other
should
and
ry
Teaching engagements should be clearly seconda
not interfere with the performance of Reserve Bank duties. It
would, of course, be inappropriate for an individual to accept
payment for teaching services rendered on the Reserve Bank's
time or, if out of town, when travelling expenses are paid by
the Bank.
the
2. Participation of an officer or an employee in
tions
publica
Preparation of material for articles or other
U tilizing information accumulated in the conduct of the affairs
of a Reserve Bank should be subject to approval of the Bank. If
the publication is prepared on Bank time, it would be inapproPriate for the individual concerned to accept additional
iCompensation or an honorarium. Officers or employees would not
e Precluded from receiving compensation or an honorarium for a
provided the
Publication prepared on the individual's own time,
Bank is fully informed and approves.
Bank
3. If an officer or employee of a Federal Reserve
reprea
as
ent
u ndertakes a public speaking or similar assignm
nal
additio
no
se ntative of the Bank, it is the Board's view that
ual
individ
the
compensation or honorarium should be accepted by
c oncerned.
4. The Board considers it inappropriate for any officer
cir employee ofta Federal Reserve Bank to engage in speculative
()
whether on a margin
ealinge (as distinguished from investments),
°r. a cash' basis, and whether in securities, commodities, real
be a
estate, exchange, or otherwise. Frequency of trading would
tive,
specula
significant•indicator in judging whether dealings were
purpose
the
Particulivrly, any transactions that appeared to be for
°f taking'advantage of short-term price fluctuations, and the use
Of credit also would be a pertinent consideration.
4.4.3fi!
S-1907
5. It would be inappropriate for a member of the staff
of a Reserve Bank to purchase stock of a bank or an affiliate
thereof (except possibly where the actual relationship of
the affiliate to the bank is remote); officers and employees
occupying responsible positions and holding or acquiring stock
of banks or affiliates should dispose of it as promptly as is
Practicable without causing undue hardship.
. It is understood that all Federal Reserve Banks will continue
to
sub 'cltilre officers and employees occupying responsible positions to
bust Periodic reports to the Board of Directors regarding outside
activities and indebtedness. The examiners of the Board of
Cove
vrnors continue under instruction, in connection with each examination
0;
!Federal Reserve Bank, to review those reports and inform the Board
ti 44Y situations that they feel should be brought to the Board's attenon.
Very truly yours,
/
/
Merritt Sherman.
Secretary.-"
-111
'NE PR
ESIDENTS OF ALL FEDERAL RESERVE BANKS
@FedFRASER