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Minutes of actions taken by the Board of Governors of the Pederal Reserve System on Friday, February 13, 1948. The Board Zet in the Board Room at 10:30 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Eccles, Chairman pro tern Draper Evans Vardaman Clayton Carpenter, Secretary Sherman, Assistant Secretary Morrill, Special Adviser Thurston, Assistant to the Board Smead, Director of the Division of Bank Operations Mr. Vest, General Counsel Mr. Townsend, Associate General Counsel Mr. Mr. Mr. Mr. Mr. There was presented a telegram to Mr. Leach, President of the D_, 'cLeral Reserve Bank of Richmond, reading as follows: "Retel February 11 Board approves effective --uary 14, 1948, minimum buying rate of 1-1/4 ver cent on bankers' acceptances. Otherwise Board aPProves establishment by your Bank, without change, rates of discount and purchase in Bank's existtng schedule, advice of which was contained in your `elegram dated February 11." Approved unanimously. There was presented a telegram to Mr. Gilbert, President of the ped eral Reserve Bank of Dallas, reading as follows: "Betel February 13, Board approves effective Felm14, 1948, minimum buying rate of 1-1/4 :per cent on bankers' acceptances and rate of 2-1/2 11er cent on advances to individuals, partnerships, ; 111 corporations other than member banks under last , "r1/1"agraPh of Section 13. Otherwise Board approves 175 2/13/48 -2- establishment by your Bank, without change, of rates Of discount and purchase in Bank's existing schedule, ce Of Which was contained in your telegram dated Mar;1 ; Approved unanimously. There were presented telegrams to the Federal Reserve Banks OrAn 4. --s'°n, Cleveland, St. Louis, Minneapolis, Kansas City, and San 444c1sco stating that the Board approves the establishment without ch6t4e by the Federal Reserve Banks of Kansas City and San Francisco oll Febr uary 10, by the Federal Reserve Banks of Cleveland and Minon February 11, by the Federal Reserve Banks of St. Louis, 4%8 e's City, and San Francisco on February 12, 1948, and by the ''erleral Reserve Banks of Boston and Minneapolis today of the rates Or cliscount and purchase in their existing schedules. Approved unanimously. Mr. Carpenter stated that the Bureau of the Budget had inNited him by telephone that it was sending over a draft of a bill Drepar ed by the Housing and Home Finance Agency which would provide tor s etting up a corporation for the purpose of establishing a sec°1441'Y Inarket for housing mortgages insured or guaranteed by GovernEigencies, and that the Bureau had requested an informal stateOf the Board's reaction to such a proposal. Mr. Carpenter also %ec/ that the Bureau had informed him that, while it was opposed to a measure in principle, there was a great deal of pressure 176 2/13/48 -3- for le gislation of some kind and if a bill to provide housing aid 'were to be enacted the proposals in this one might be less uncleable than others that might be laid before Congress at this SeSsiorl. During the meeting, the draft of bill was received and "th4Te was a discussion of the proposal in the light of present illflationary conditions, especially with respect to housing, durIthich the members of the Board who were present expressed the that Government action to make more credit available for the 13111‘ellase of houses would be undesirable at this time. It was agreed unanimously that the Secretary should telephone the Bureau of the Budget and informally advise that the Board was unanimously opposed to the setting up of any mechanism by the Government under the present inflationary situation for the purpose of creating a secondary mortgage market. Reference was made to a draft of a letter to the Presidents or 811 Federal Reserve Banks outlining a proposed revision of the ill"I'llctions relating to waiving penalties for deficiencies in reSe Of member banks and requesting comments and suggestions of tlbileserve Banks with respect thereto. The proposed revision 11(11.11c1 Permit a Reserve Bank to waive penalties to the extent that 4 detielenCy is offset by excess reserves during the immediately r°11°/4111g reserve computation period. The waiver as not to be In 2/13/48 -4- l egarded ' -Y the member bank as a right, but a privilege to be granted illfreqUAT1+1 --- only in case the Federal Reserve Bank was satisfied that the member bank was making reasonable efforts to maintain its reserves Mr. Smead stated that a number of country member banks had ex1Tessed the feeling, over a period of a year or more, that because of the 8 Pread of the five-day week they had had difficulties in maintain''.(1111red reserves owing to unexpected changes in reserves or deP°sits on the last business day of the reserve computation period vhich Irequently ended on a Friday, Saturday, or Sunday, that pro%sal, -1..° for dealing with this problem had been transmitted to the Reserv e Bank Presidents for comment with a letter from the Board on 41411 28/ 1947, that the Reserve Banks had raised questions with resPEct to the desirability of those proposals, and that the letter Illaieh it was now proposed to send was for the purpose of transmit- titg the new suggestion to the banks for their consideration. Mr. SIlle114 4180 stated that one of the member banks, the Wachovia Bank c"rIlst Company of Winston-Salem, North Carolina, felt that the ITeselot reserve requirements were inequitable, since it was classed 48 4 reserve city bank and was required to compute its reserve re- ements on a weekly basis even though only one of its offices 1°cated in a reserve city whereas other banks, not located in a. serv semie city, were required to compute their reserves only 178 Vi3/48 -5- rtioiathiy, that this bank was sometimes deficient in its reserves because of failure to receive anticipated credit on Friday for cash letters sent direct to other Federal Reserve Banks and which were cielaYecl in the mails, that it had proposed possible changes in proeedlire in order to overcome this situation, and that the proposed reiris4 would meet in part at least the request of the Wachovia In this connection, Mr. Smead also referred to a draft of rePlY t0 a letter from Mr. Young, President of the Federal Reserve Beaik Or Chicago, dated January 22, 1948, which transmitted a prozade by some of the Chicago banks, that banks in reserve and reserve cities be given the option of selecting a different e computation period every week so as to make it easier for beaak 8 to adjust their reserve positions and avoid large shifts of Mr. Smead said that some of the New York banks had disellesea . informally with the Federal Reserve Bank of New York a varleti.o, °f this proposal, that he did not feel either of these pro1 ) 041,1 8 should be adopted at this time, and that the draft of reply . to mr. Y°Ung's letter commented upon these proposals and suggested tliat Prssia • Y°ung might wish to discuss them when the Conference of elite meets in Washington later this month. Chairman Eccles stated that he would be opposed to a modi- ticati °II in the Board's general regulations for the purpose of 179 2/13/48 -6- tial° g care of isolated instances of hardship or inequity, that if the /,7 ^achovia Bank and Trust Company or any other member bank was 811rfering from an inequity the matter should be studied with a view to eliminating the inequity, in some other way, and that this was riot n„ -- appropriate time to make a change which would have the efrect of easing reserve requirements generally when additional aut11°Ilty over reserves was needed and being requested as a means of combating the inflationary expansion of bank credit. In the discussion that followed the members of the Board "indicated that they would not favor a modification at this iprese title of the kind proposed in instructions relating to penalties tor d ericient reserves, and it was suggested that the draft of letter t0 Mr. Young be revised to state that, for the reasons dis- 'the Board did not now favor the change outlined in his lete1418ed ter Of January 22, 1948. Upon motion by Mr. Clayton, it was agreed unanimously that no change in existing instructions with respect to waiving penalties for deficiencies in reserve requirements should be made at this time. In taking this action it was understood that the staff would look into the question of inequities that might result from present instructions with respect to computation of reserve requirements by member banks and submit to the Board for its consideration a proposal which would eliminate such inequities as may be 2/13/48 -7found to exist. It was also understood that the draft of letter to Mr. Young, in response to his letter of January 22, would be revised and resubmitted to the Board for approval. In response to an inquiry from Mt. Vardaman, Chairman Eccles stated that the commitment that the Federal Reserve Banks would loan G°17erblment securities at par made at the outbreak of war in Septerabp„, -- 1939 and again at the outbreak of war in the Pacific in Decelalber 1941 had never been rescinded and that the policy should be considered as Still in effect. With respect to the 1938 agreement 824)4 the Federal supervisory agencies on examination procedure, ellelirMen Eccles stated that the Board's examiners had listed seellrities in the manner provided in that agreement and only in that Zealtier, but that the Comptroller of the Currency and the Federal 113sit Insurance l'411.1e of Corporation had continued to show the market securities as well as the amortized value provided for 111 the a greement. He said that he had recently discussed this 44tIer 141th Under Secretary of the Treasury Wiggins, that he had t°1(1 *. Wiggins that the Comptroller of the Currency and the Federea t Posit Insurance Corporation were not following the agreellt ith the result that the advantages of the agreement were be14 lost, that if the supervisory authorities had agreed that r4e'ritet fi --oactuations in prices of Government and other high grade 181 2/13/48 -8 secalrities would be disregarded in determining the condition of a hal4E at the time of examination, it was not apparent what useful I:411'1308e was served by listing market prices in the examination reand that such listings were unnecessarily causing concern Olathe Part of bank managements as to what the attitude of the - exaflhti rs would be at the next examination on the question of showor charging off depreciation in securities. Chairman Eccles went on to say that Mr. Wiggins replied he had ' o known of the practice of the Comptroller of the Currency 11c1 the -,, ederal Deposit Insurance Corporation and agreed that it siluld be I'lere discontinued, at least so far as Government securities concerned. Mr. Clayton said that members of the staff of the Federal 1)ePosit Insurance Corporation had indicated that they were preparing a letter Proposing changes in the 1938 agreement with respect to 1.°1113 11 securities. The members of the Board indicated they would ttct A _ f".4 vor such a move. Mr. Clayton also said that this morning the Vice Presidents Charge of the examination departments of the Federal Reserve 444 '1410 were meeting in Washington, discussed a possible rein the joint statement issued by the Federal supervisory e8 in 1938 with respect to examination procedure and that 182 2)113/48 it t0 -9- was their unanimous view that the statement should be adhered In flient every respect in its present form. He made the further state- that the whole question was to be discussed at the next informal nieeti4 to be attended by the Comptroller of the Currency, the Chair1141:4 of the Federal Deposit Insurance Corporation, and himself. Mr. Vardaman raised the question whether the agenda for the etj g with the Federal Advisory Council on February 17 should in- elude EL topic relating to the adequacy of bank capital. The question was discussed and it was agreed unanimously that the Board was not prepared to submit to the Council any comments on the subject at this time, but that Chairman Eccles should say to the Council at its meeting with the Board next Tuesday that the Board expected to suggest that the question be placed on the agenda for consideration at the May meeting of the Council. Mr. Vardaman said that he had read the draft of letter that 44 been prepared, pursuant to the discussion at the meeting on Jan- 16 191+8, in reply to the letter received from Acting Chairman Cealtiris of the Federal Reserve Bank of New York criticizing the StEtte Illerit of responsibilities of the directors of the Federal ReBerve 8a4ks, distributed with the Board's letter of December 22, 1947, alad that he felt it would be desirable to send the reply. Mr. Carpenter reported that a letter had been received thi °Illing from Chairman Brainard of the Federal Reserve Bank 183 2/13/48 -10- of Cleveland which raised several questions concerning the statement. Chairman Eccles said that the statement of responsibilities hadbeen listed as a topic for discussion by the Presidents at their r°rthcoming conference, and that he would suggest that a reply to the letter from Mr. Calkins be not sent until after the Presidents e°11tererice and it was determined whether the Presidents agreed on 44Y sitlon or comments with respect to the statement. Chairman Eccles' suggestion was approved unanimously. At this point Messrs. Smead, Vest, and Townsend withdrew allci tile action stated with respect to each of the matters hereinet forth was taken by the Board: Minutes of actions taken by the Board of Governors of the 1 I eciel.41 Reserve System on February 12, 1948, were approved unani11101181y. Memorandum dated February 10, 1948, from Mr. Smead, DirectOr Or the Division of Bank Operations, recommending that the ap13°111t14ellt of Miss Carrie Turner, a clerk-typist in that Division, be 0, 144ged from temporary to permanent, effective February 11, ' 1948 'Iiith no change in her present basic salary of $2,168.28. Approved unanimously. Memorandum dated February 11, 1948, from Mr. Smead, DirectOr Of the Division of Bank Operations, recommending that Miss Mary 184 2/13/48 -11- M. Nrkan, a clerk-stenographer in the Division of Security Loans, be transferred to the Division of Bank Operations as an analyst 414 that her basic salary be increased from $2,619.72 to $3,397.20 Per annum, both effective February 22, 1948. The memorandum also Stated that the transfer was agreeable to Mr. Parry. Approved unanimously. Memorandum dated February 10, 1948, from Mr. Smead, Director w the Division of Bank Operations, recommending the appointte4-t of -- William Joseph Powers as an analyst in that Division, on a tem„ rarY basis not to exceed three months, with basic salary " - rate of $2,895.60 per annum, effective as of the date upon 14111.0, he enters upon the performance of his duties after having ' Passed the usual physical examination. The memorandum also stated tht vecause of the temporary nature of Mr. Powers' employment, it 1418 40t contemplated that he would become a member of the Federal Rese I've r etirement system. Approved unanimously. Letter to the Honorable Maple T. Harl, Chairman, Federal e.°3sit I nsurance Corporation, reading as follows: , "Please pardon our delay in acknowledging your le let of January 8, 1948, to Governor Clayton, with C. You enclosed a copy of the article entitled !Illt Capital: The Problem Restated', by Messrs. .44411an Smith and Raymond E. Hengren of your staff. 185 2/13/48 -12- "The article is a most interesting one and the Board feels that the questions raised by it are of particular imPortance at this time in view of the inflationary developments in the country's banking system. "The authors of the article advocate the use by 811Pervisory authorities of a capital to total assets tio as a screening device for determining which nks may be in need of additional capital. A number or co nsiderations are set forth in support of the proPosai. With this proposition, the Board finds itself IPPilY in disagreement since it would prefer the !, 11 ''.610 of capital to risk assets. "The Board recognizes fully that if we could assume a period of little change in the structure of bank assets, the use of the capital funds to total assets ratio would be satisfactory and, as pointed °lit in the article, it has some advantage in its relative simplicity. Unfortunately, however, the history a,,banking seems to be a succession of ups and downs of wide fluctuations in the composition of bank sets- At present, banks generally are increasing tueir risk assets, but the ratio of capital funds to 4°tal assets does not reveal this trend. It does not tj-ghlight the shift from riskless to risk assets. srers are already prone to be complacent toward this ift. Thus the Annual Report of the National City New York for 1947 stated: 'The growth in these loans, however, has been offset by a continued ecline in loans on securities and by a reduction in }1e bank's security investments, so that our total of pllis and investments shows only a modest increase.' c°41°wing this argument to its logical conclusion, the c°nversion of the entire investment account of the c°11ntrY's banking system into risk loans would need ..."1-1se little concern, as the total of loans and in,v4istments would remain the same. By the same token, ,,e capital funds to total assets ratio would like:4"se remain the same. "Granting that each of the two suggested ratios ha tb s advantages over the other, it seems to the Board hat, under present conditions, the arguments are all trl favor of using the ratio which will call attention m°,dangerous trends rather than the one which will ''414e the dangers less apparent. In a period of V 2 j 186 2/13/48 -13- '1'Dinflation, the capital to total asset ratio for the a11M-ng system may actually improve as, in fact, it , 'las done for the two-year period ending December 31, 1947 • The improvement in the total asset ratio during tfle period just referred to could have induced a false .! e nse of satisfaction to bank supervisors if they had .:fesn using this ratio as the principal yardstick. The board of Governors, however, stated in its 1946 Annual RsPort: 'In view of the decline in holdings of Government securities and increase in loans since the end of the war, the capital accounts of some individual banks are now disproportionately low relative to their risk assets. It is important, therefore, that bank managements keep continuously under observation the composition of the assets of their institutions and, as the degree of risk in such assets increases, take such steps to Strengthen the capital account by the retention of a larger share of earnings or the sale of additional stock or both as their individual situations may require.' It is encouraging to note that the Board and the Ileclera1 Deposit Insurance Corporation are in substantial orsment as to the need of additional bank capital with00 expressing a preference for any particular ratio. The rPoration in its Annual Report for the same year stated: One of the chief reasons for the existence of banks is to supply the credit needed in the economy. To do this, banks must have capital accounts sufficiently large to warrant assumption of the risks involved. Banks have been adding to their capital from retained earnings, but the growth has been much too slow in the light of the credit needs of the present time and the foreseeable needs of the future. New capital stock should be sold to the public to hasten the accumulation of capital commensurate with the added risks which banks are assuming in meeting the loan needs of business and individuals.' 1_87 2/13/48 -14- "The matter of the adequacy of bank capital is of Particular importance in connection with the current antiin flationary policies of the Federal banking agencies. It ' li°111d be highly desirable if these agencies could agree on standards to be used. This would provide consistency in . /11blic discussion of the banking problem and in application ..F" specific bank situations. It would seem advisable that e matter be fully discussed at informal meetings of the !licies and perhaps in meetings of the technical staffs 4.. 4.4 an effort to obtain agreement on the standard to be used.tt 1 r Approved unanimously. APPrOved: Chairman pro tern.
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