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Minutes for February 13, 1957 To: Members of the Board From: Office of the Secretary 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 pursmtnt 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, if you were present at the meeting, please initial in column A below to indicate that you approve the minutes. If you were not present, please initial in column B below to indicate that you have seen the minutes. A Chm. Martin Gov, Szymczak Gov. Vardaman Gov. Mills Gov. Robertson Gov. Balderston Goy. Shepardson X 336 Minutes of actions taken by the Board of Governors of the Federa]. the Reserve System on Wednesday, February 13, 1957. The Board met in Board Room at 10:00 a.m. PRESENT: Mr.. Mr. Mr. Mr. Mr. Balderston, Vice Chairman Szymczak Vardaman Mills Robertson Carpenter, Secretary Kenyon, Assistant Secretary Riefler, Assistant to the Chairman Vest, General Counsel Young, Director, Division of Research and Statistics Mr. Sloan, Director, Division of Examinations Mr. Masters, Associate Director, Division of Examinations Mr. Shay, Assistant General Counsel Mr. Mr. Mr. Mr. Mr. There was presented for consideration a draft of letter, which 441 been circulated to the members of the Board, to Mr. Braun, Assistant Secretarir : Federal Reserve Bank of New York, reading as follows . Thank you for your letter of January 28, 1957, Senator Iirl8ing that in response to a request from lAZ. ' J. Mahoney, Temporary President, The Senate, -L s Walter State f of New York, the Board of Directors has extended °r Mr. Thomas 0. Waage, his leave of absence without rY until April 8, 1957, in order that he may continue assist the New York State joint Legislative Committee to Revise the Banking Law. The Board of Governors interposes no Objection to n of leave for Mr. Waage, as described in extension r .:Tgi ;;u the:i1c r-. o Approved unanimously. Prior to this meeting there had been circulated to the members °I% the Board a draft of letter to Mr. Donald L. Rogers, Counsel to the :337 2/13/57 -2Committee on Banking and Currency of the United States Senate, reading aS f011OWS: With your letter to Chairman Martin of January 22, 1957, you enclosed a letter of January 71 19571 to Senator Robertson from Mr. Robert G. Hemingway, President of the Commercial Security Bank) Ogden, Utah. Mr. Hemingway's letter refers to certain practices illustrated by the newspaper advertisement of "First SecuritY" enclosed with his letter. The advertisement related hat a rate of 3 per cent on savings would be paid by the _irst Security Bank of Utah) National Association, Ogden, 131t. h; the First Security Bank of Idaho, National Association, w°1sel Idaho; and the First Security Bank of Rock Springs, (c)ming; while earnings at a 3-1/2 per cent rate would be 3. , L_Ilstributed by the First Security Savings & Loan Association, a.3.t Lake City, Utah; and the First Security Savings & Loan ..41ssociation, Pocatello, Idaho. These institutions are in group headed by the First Security Corporation, Salt Lake City, Utah, a bank holding company. ; In this matter, Mr. Hemingway referred to the connection with Bank Holding Company Act of 1956. Presumably) he icias in mind section 4 of the Act which, with certain exrePtions, prohibits a bank holding company after two years om the date of the Act from retaining ownership or control any voting shares of any nonbanking company and from caging in any nonbanking business. This prohibition, if erwise applicable, would not take effect, however, until al"Y 9/ 1958. Whether or not this prohibition would then be ,PPlicable to this situation is a question which could be 7..r?.swered only on the basis of all the facts then existing wlth respect to the matter. j .Section 4 of the Act, with certain exceptions, also .,1??ohibits a bank holding company after the date of the Act .101:,om acquiring ownership or control of any voting shares 4 anY nonbanking company. The applicability of this P_1:ohibition also depends on the facts; but it would be vYplative of the statute for a bank holding company to ,plre or to have acquired after May 9, 1956, voting esT "'d'res of a company which is not a bank. :338 2/13/57 -3- Also, it is to be noted that the prohibitions of section 4 referred to above are not applicable "to shares anY company all the activities of which are of a financial, fiduciary, or insurance nature and which the Board after due notice and hearing, and on the basis of the record made at such hearing, by order has determined to be so closely related to the business of banking or of managing or control-2-11g banks as to be a proper incident thereto and as to make it unnecessary for the prohibitions of this section to apply n order to carry out the purposes of this Act". However, the Board has not been requested by the First Security Corporation to make any such determination. . Attention is invited to the fact that two of the banks in the First Security Corporation group are national banks ,and therefore, are under the primary supervision of the Comptroller of the Currency. Moreover, the bank at Rock Springs, Wyoming, is not a member of the Federal Reserve System, but is understood to be insured by the Federal Desit Insurance Corporation. Also, it appears from Mr. mlngwaY's letter that some aspects of this matter have ebn, previously brought to the attention of the Federal bavings and Loan Insurance Corporation. r .It may be of interest in this connection to note that ;rtion 409 of Title VI of the Janlary 7, 1957 Committee of Senator Robertson's Financial Institutions Bill a?`"d, among other things, make it unlawful for any company airectlY or indirectly to acquire the control of, or to .equire with power to vote more than 10 per cent of the st „.°ck of, more than one savings and loan association whose 1'A-counts are insured by the Federal Savings and Loan Insur.,_nce Corporation. Section 409 also seems designed to pre',rent insurance by the Federal Savings and Loan Insurance 1. '7.rPoration of a savings and loan association which is reetlY or indirectly controlled by, or more than 10 per c, of the stock of which is directly or indirectly held With a+1?' Power to vote by, any company which has the same reil ,ionship to another savings and loan association which is .' Insured, It is hoped that the foregoing may be of some assistwith respect to the matter discussed by Mr. Hemingway; and, IP as requested, Mr. Hemingway's letter to Senator Robert, and its enclosures, are returned herewith. „,_ Z Please do not hesitate to call upon us further if you reel that we may be of assistance. :329 2/13/57 -4Governor Robertson inquired whether it had not been the inten- ti°n to say in the letter that an officer of First Security Corporation had assured representatives of the Board that the advertising practice referred. to in the draft of letter would be stopped. In response, Mr. Shay said that in an informal conversation the President of First Security Corporation indicated to him that ar- r Etnguients regarding the advertising practice and certain other practices had been vorked out which were satisfactory to the bank and savings and loaa these QuPervisory authorities primarily concerned. Mr. Vest added to coments by saying that no reference to these statements had been illelilded in the draft of letter because the conversation was of a general ria;t11re and the practices referred to in the letter were ones over which the Bo ard had no jurisdiction. There followed a discussion of whether, in the circumstances, the letter should include any mention of the statements made by the cliticer of First Security Corporation and it was decided, for the reasons gi\rel by Messrs. Vest and Shay, that it would be inadvisable to make any sUch re ference in the letter. At the instance of Governor Mills, there followed a discussion °rIprovisions On of the Bank Holding Company Act of 1956 pertinent to the of both banks and savings and loans associations in a holding ec44138"11YIt was brought out, among other things, that at the preserlt tim --"e there ----wus no action for the Board to take unless First Security e°113 or -°r4tio1 should apply for a determination pursuant to section 4(c)(6) the Act. After May 1, 1958, two years from the date of enactment of 340 2/13/57 -5- the Act, First Security Corporation might be found to be in violation of the law if it continued to control both banks and savings and loans associations, but this would be a matter within the province of the DePartment of Justice. Governor Mills then suggested that it might be desirable to let First Security Corporation know that the advertising practice in Tasstion had been brought to the attention of the Board through a member et the Congress, and also concerning the nature of the Board's comments. letter be sent to Accordingly, the suggestion was made that a Pirst Security Corporation giving the sub stance of the Board's reply to Mr. Rogers. In a further statement, Governor Mills said it was of some ecsucern to him that while the Securities Exchange Act upheld the prim4 of -A,..Lvorcement between commercial banking and the underwriting of ties, existing law permitted relationships between commercial ' 4. 16 and another field of finance that could contain as many problems th underwriting. e -Mmingling of commercial banking and securities In connection with these comments by Governor Mills, reference 141 .8 TrinA Of the e to the provisions of the Bank Holding Company Act and Title VI proposed Financial Institutions Act of 1957, referred to in the draft of letter to Mr. Rogers, as offering the prospect that the present situation would be remedied. Thereupon, the letter to Mr. Rogers was approved unanimously in the form set forth above, with the maerstanding that the substance of the Board's reply would be transmitted to First Security Corporation 2/13/57 -6in a separate letter and that copies of both letters would be sent to the Federal Reserve Bank of San Francisco. Reference then was made to a draft of telegram to Mr. Diercks, Vies President of the Federal Reserve Bank of Chicago, which would authorize the Reserve Bank to make available to the United States Attorn eY for the Eastern District of Michigan information contained in examination reports of The City Bank and Trust Company, Jackson, Michigan, relating to a purported check-kiting operation, with the Under standing that no information would be furnished from the conficietltial section of such reports. The telegram, copies of which had been sent to the members of the Board, would also state that the authorization was given with the understanding that the information 1°1.11-d be used for the exclusive consideration of the United States Attorney's Office) only in developing leads in connection with the check-kiting operation, and not for any further purpose such as eviclence in -- any proceeding. At the suggestion of Governor Vardaman, it was agreed that there c.1, -uould be deleted from the telegram as a precautionary measure all reference to the member bank whose examination reports were coneerned and to the specific United States District Attorney. After Mr. Carpenter had stated that, with two additions to the whin}, --- Mr. Vest would suggest, the proposed authorization would be in acco A ru with the policy in dealing with requests of this kind 142 2/13/57 -7- 411ch was established by the Board in 1947, Mr. Vest suggested addi' tions to the effect that no reference should be made to the source of information taken from the examination reports and that the reports Should not be permitted to leave the offices of the Reserve Bank. Thereupon, unanimous approval was given to a telegram to Vice President Diercks in the following form: Board authorizes Federal Reserve Bank of Chicago to make available to the United States Attorney information contained in the examination reports of the Member Bank referred to in your letter of February 7 relating solely to the check kiting operation mentioned but not including anY information in confidential section of such reports. This authorization is given with understanding that such information will be used for the exclusive consideration of.the United States Attorney's Office and only in devel°Ping leads in connection with action regarding check kiting operation referred to in your letter, that no reference will be made to the source of the information, and that it is not proposed to use the information for anY further purpose such as evidence in any proceeding. The examination report should not be permitted to leave the offices of your Bank. Mr. Shay then withdrew from the meeting and Messrs. Cherry, Leeislative Counsel, and Molony, Special Assistant to the Board, elltered the room. Pursuant to the understanding at the meeting on February 8, 1957 'there had been sent to the members of the Board, with a memorandum from Mr Vest dated February 11, a revised draft of proposed letter to The jj °norable J. W. Fulbright, Chairman of the Senate Banking and Cur- retin `Y Committee, regarding bills S. 719 and S. 720, both relating to the Pr°vision of financing for small business. The revised draft took 343 2/13/57 -B- account the discussion at the meeting on February 8 and also the W ttement made by Chairman Martin before the Congressional Joint Economic Committee on February 5, 1957. The principal discussion of the revised draft related to the ID°rtion thereof concerning the question of a possible deficiency in the facilities for providing short-term and intermediate credit for staala business. After expressing doubt regarding any such deficiency, the draft would question the desirability of the enactment of S. 720, would authorize the Small Business Administration to insure gll'alified lending institutions with respect to loans made to small btlsiness enterprises. Governor Vardaman took the position that although existing re'ellities might be adequate, the proposed report on S. 720 emphasized this Point unduly and did not make sufficient reference to the possibility of 14hat he termed a maldistribution of loanable funds that was creating diffi cultY for some small business enterprises. With regard to Governor Vardaman's comments, it was brought out that in -- a period of credit restraint certain marginal borrowers are bowla to be disappointed, that there was no statistical evidence of wideinability on the part of small businesses to obtain their share of ,. a "allable short-term and intermediate credit, and that the situation /1.th -esPect to the marginal borrower was not apt to be eased simply by 6 to the number of credit facilities. 2/13/57 -9It was agreed, however, that the draft should be modified in with Governor Vardaman's suggestion so as to point out that in ellY system of credit a period of heavy demand for funds will result in some potential borrowers being unable to obtain access to credit. Most of the remaining discussion centered around a paragraph °f the draft which would cite the primary responsibilities of the Federal Reserve System and indicate that such functions would be hampered if the System should become involved in any extensive program for 811Per1iising new types of institutions engaged in the financing of 13118131es6 enterprise, as would be envisaged by S. 719. 14 this Certain changes paragraph in the interest of amplification and emphasis were rZreeci. upon. At the conclusion of the discussion, it was understood that Mr. Molony would revise the letter to incorporate the changes agreed upon at this meeting and it was understood that the letter would be sent in its revised form. Secretary's Note: Pursuant to this action, the following letter was sent over the signature of Chairman Martin on February 19, 1957: This is in response to your Committee's two letters 1. 1. January 23, 1957, requesting the opinion of the Board Ilth respect to the bills S. 719 and S. 720. Since both ?f these bills relate to the provision of financing for small business, they are being treated together. S. 720 would authorize the Administrator of the Small B uslness Administration to insure qualified lending instituti°4s with respect to loans made to small business enterP trises up to an aggregate amount of $250,000,000, subject ac) , c 1-acrease by the President, after July 1, 1958, by an dltional "i,;500,000,000. The amount of insured loans to 345 2/13/57 -10- anY one borrower would be limited to 250,000; and the insurance could not exceed the lesser of 90 per cent of the unpaid balance of any loan or the amount of an "insurance reserve" to the credit of the lending institution. No insured loan could have a maturity of more than 5 Years and 32 days. S. 719 would provide for the formation of national investment companies, either by the Federal Reserve Banks or by groups of not less than five private persons, each 4 5,000,000. The such company to have a minimum capital of : to the subject be organization of such companies would operations their approval of the Board of Governors and would be subject to regulation by the Board. The companies would be authorized to make loans to, and purchase common and preferred stock of, eligible business enterprises; and for this purpose each company would be authorized to borrow money by the issuance of bonds and other obligations up to the amount of its capital and surplus. Basically, the Board believes that any proposals for Government action to provide additional credit facilities or mechanisms to business should be premised on a determination that there is an existing or prospective lack of such credit facilities on the part of small business enterprises not being furnished by commercial banks or other Private lending institutions. In a period of restraint, Some would-be borrowers who are unable to obtain credit may feel aggrieved and may actually be aggrieved. This, however, would seem unavoidable under any system of credit, °lice credit becomes scarce in relation to total demand. •liPart from that matter, there is, on the basis of existing -11f0rmation, some question whether there is any deficiency in the economy's facilities and mechanisms for providing !hort-term and intermediate credit for small businesses. uonsequently, the Board questions the desirability of the enactment of S. 720. If there is any gap today in institutional or mechanical means for providing the necessary financing for business nterprises, it would appear to relate primarily to long! erm debt and equity capital. For this reason, if consid4.fat10n is to be given to legislation in this field at his time, the Board feels that it should be along the general lines of S. 719 providing for the organization of Private national investment companies. 346 2/13/57 -11- In the event favorable consideration should be given by the Congress to the enactment of any legislation of this kind, it is the considered opinion of the Board that responsibility for the supervision and regulation of such investment companies should not be lodged in the Board of Governors but rather should be vested in some other agency of the Government more primarily concerned with the problems involved in supervising capital financing. The Federal Reserve System is charged by Congress with responsibility for influencing the total volume of money and credit available, with a view to fostering stable economic growth. However, it is not in a position to allocate loanable funds among different borrowers in the market, such allocation under our free enterprise system being the proper function of the commercial banks and other lending institutions. . The Federal Reserve System also is charged with responsibility for exercising supervision over its member banks, Primarily with a view to fostering a sound banking structure. AllY responsibility vested in the System over the operations of the proposed national investment companies could conceivably become inconsistent with the System's responsibility for supervising member banks who might, on occasion, hold the obligations of such companies. Nor can the matter be said to rest there. If the proposed investment companies are to fulfill constructively the desires indicated by this bill, it is clear that they will need to have intimate relationships with the commercial banking Ystem: to have member banks buy their stocks, introduce customers ir need of long-term equity financing, and service loans made by ,e investment companies. Under these circumstances, it would °C sounder in the public interest if the chartering, supervision, and examination functions of the two types of institutions were entrusted to entirely different organs of the Federal Government. If the organization and operation of national investment Tiompanies is not placed under the supervision of the Federal e -Jserve System, the Board would not object to legislation along ue.lines of S. 719, authorizing the establishment of such cornPanes to provide long-term financing. It is noted that S. 719 contains provisions which would ePeal the present limited business loan authority of the Federal Reserve Banks under Section 13b of the Federal Reserve and provide for the payment to the Treasury of amounts Act. 2taling approximately 27,500,000 which have heretofore been Paid,to the Reserve Banks by the Treasury in connection with ?erations under that section. The authority of the Reserve Banks under this section was granted in the 1930's under 2/13/57 -12- emergency conditions and has not been extensively used in recent years. In keeping with the views heretofore expressed as to the inappropriateness of the System Participating in the financing of business enterprises, the Board would favor the repeal of this authority and the payment to the Treasury by the Reserve Banks of the amounts above mentioned, as provided in S. 719. Mr. Carpenter reported receipt of a letter dated February 5, 1957, from the Comptroller of the Currency advising that he planned to issue a ca11 this spring for reports of condition from all national bal*s and that he was so informing the President of the National Assoelati°11 of Supervisors of State Banks, with the request that all State bellk supervisors likewise be informed. Mr. Carpenter stated that in s'eccaidance with the usual procedure) a telegram reading as follows was sent to the Presidents of all Federal Reserve Banks on February 11: Board contemplates making a spring call for condition l'ePorts on State member banks. You may so advise State Banking Departments for their confidential information. Understand Comptroller's Office will advise State Banking Departments of selected call date in usual manner before call is announced. The action taken in sending the telegram was ratified by unanimous vote. Governor Robertson said that at the end of 1956 the padding of )1°131-ts for statement Purposes by member banks in the Eleventh Federal ,Te District was greater than ever before, amounting to about 4 in the aggregate. ' f'4.,600 He expressed the opinion that if this practice °Iitt4Iled it could be the basis of public criticism affecting not only bmits blat the supervisory authorities. Consequently, he said, he intended t0 t4ke the matter up with the Office of the Comptroller of the Currency. ittS 2/13/57 -13- lie also had under consideration presenting to the Board a draft of letter to the five banks concerned, since he felt that the supervisory au thorities must take a strong position. While the banks in the Eleventh kstrict appeared to be the only ones substantially inflating their fig14'es as to deposits, he noted that in the New York District banks borrwed heavily a few days before a call in order to show no borrowing on the call date. The other members of the Board indicated agreement with the views expressed by Governor Robertson. Governor Vardaman called attention to a practice he understood 4'4.81Ge1llg followed by banks in a chain banking system in the State of 11-011-(1a which involved remitting by checks drawn on banks of the chain 1°eatea in some other city, thus providing use of the funds represented 15f tile checks for the delayed collection period. For example, it was 41811nderstanding that chain member banks were remitting to their custere with checks on Jacksonville and Mimand banks. He expressed con, -'about the practice, but he did not know how widespread it might be hether it was illegal in any way. Following an explanation by Governor Mills of the procedures irritegv ecl in practices of the kind referred to by Governor Vardaman) °11 Robertson suggested that it would be advisable for the Diviatoll °I' Examinations to ask the Federal Reserve Bank of Atlanta to ovid,„ a memorandum on the subject for the Board's further consideration. There was unanimous agreement with this suggestion. 2/13/57 -14Governor Robertson reported that, pursuant to the understanding at the meeting of the Board yesterday afternoon, he called both the Comptroller of the Currency and the Chairman of the Federal Deposit Insurance Corporation to advise them of the request by the Senate ng and Currency Committee (received following the Board meeting) kr technical assistance from the Board's staff in connection with the uauittee's work on the proposed Financial Institutions Act of 1957. Re said that neither party raised any question although Chairman Cook c'''t the Federal Deposit Insurance Corporation made the comment that that ligelicY intended to restrict its activities in relation to the Committee's attldY to provisions of the proposed legislation affecting its own activi'4 and that he assumed the Board would wish to follow a similar course. The meeting then adjourned.
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