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Minutes for To: February 23, 1961 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 vith 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. Szymczak Gov. Mills Gov. Robertson Gov. Balderston Gov. Shepardson Gov. King N 6t)k) Minutes of the Board of Governors of the Federal Reserve System on Thilrsday, February 23, 1961. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Mr. Martin, Chairman Balderston, Vice Chairman Szymczak Mills Robertson Shepardson King Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Discount rates. Reserve The Board met in the Board Room at 10:00 a.m. Sherman, Secretary Kenyon, Assistant Secretary Hackley, General Counsel Farrell, Director, Division of Bank Operations Solomon, Director, Division of Examinations Johnson, Director, Division of Personnel Administration Harris, Coordinator, Office of Defense Planning Masters, Associate Director, Division of Examinations Smith, Assistant Director, Division of Examinations Rudy, Special Assistant, Legal Division Potter, Legal Assistant The establishment without change by the Federal Banks of Boston and Atlanta on February 20, 1961, of the rates on cli8e°11nts and advances in their existing schedules was approved unanimously, 141th the understanding that appropriate advice would be sent to those Banks. Items circulated to the Board. bee, The following items, which had circulated to the members of the Board and copies of which are attaelled to these minutes under the respective item numbers indicated, Ver. ..______'aPProved unanimously: 2/23/61 -2Item No. Letter to Hightstown Trust Company, Hightstown, New Jersey, approving the establishment of a branch at the intersection of Routes 33 and 526, RobbinsVille, Washington Township. 1 L_etter to the Comptroller of the Currency recommending falrox'sbly with respect to an application to organize aational bank at Wausau, Wisconsin. 2 Letter to the Comptroller of the Currency recommending 1_111ravorably with respect to an application to organize national bank at Jacksonville, Florida. 3 Letters to Mr. John J. McCloy, New York, New York, and William A. Mitchell, President, The Central Trust c°111ParlY, Cincinnati, Ohio, relating to the Advisory lttee on Commercial Bank Preparedness. 4 and 5 With respect to Item No. 3, Governor King commented that if branch bazilti .rIg was permitted in the State of Florida and this application had been the establishment of a branch rather than the organization of a new it seemed quite probable that the application would have been Et113rolled. Accordingly, although he concurred in the unfavorable recom. illericle'tion to the Comptroller of the Currency, he was not sure whether a clisaPProval of the application would represent real justice in the eyes or the-, Parties concerned. Mr. Harris then withdrew and Mr. Thompson, Supervisory Review 6/111ifler, Division of Examinations, entered the room. Application of First Virginia Corporation. it There had been ,buted copies of two memoranda from the Division of Examinations, tIeteci February 15 and 16, 1961, respectively, and a memorandum from the 6( 2/23/61 tegal Division dated February 21, 1961, relating to the application of First Virginia Corporation, Arlington, Virginia, for approval of the e•egAzisition of stock of the FFIlls Church Bank, Falls Church, Virginia. The C vmmissioner of Banking of Virginia had interposed no Objection, and b°th the Richmond Reserve Bank and the Division of Examinations recommended 1143roval, At the request of the Board, Mr. Thompson reviewed the salient teetures of the application, his comments being based on the memoranda N14 the Division of Examinations. Governor Mills expressed the view that two factors deserved close serlItinY. The first related to the nature of the contractual undertaking betkeen First Virginia Corporation and the Falls Church Bank, which 13r°1rided among other things for the continued employment of the two 1)ritleiPal officers of the bstik, their lifetime retention as consultants in the event of retirement or disability, and the payment of stipulated 14°11thi -Y amounts to their widows. lere Thus, although the other shareholders being offered the same price for their shares as the two principal ' ers, the latter were receiving an extra consideration by virtue of the 8 Pecial arrangement, and it was not clear from the available information 4etther this arrangement had been made known to the other shareholders. Qoe —"or Mills indicated that he had grave reservations about such a trazi aaetion, However, he was not sure from a legal standpoint to what exte slAch a feature should be taken into account in passing upon an 415114eati0n under the Bank Holding Company Act. 2/23/61 -4Governor Mills also pointed out that First Virginia Corporation hai outstanding two classes of stock, one of which carried voting rights ' 124 Yas held closely in the hands of the management. St The other class of :, which was the vehicle for introducing new capital into the (pqanization, carried no voting rights. frowned upon by financial analysts. He commented that this practice He thought it was regarded cluestionably by the Securities and Exchange Commission, and he understood the New York Stock Exchange had restrictions with regard to the listing cr n onvoting stock. In reply, Mr. Hackley pointed out that First Virginia Corporation hadthe same classes of stock outstanding when a previous application by that company was acted upon by the Board. On the earlier occasion, some c°11sination was given to this matter by the Legal Division, but the 131/ri81ort had not reconsidered the arrangement in connection with the application. As to the first point mentioned by Governor Mills, wa„ uis initial reaction that unless the arrangement with the two 111111c1Pal officers had some direct effect on the financial condition, Z —tement, or prospects of the applicant holding company or the bank 14voi ved, it might not be a relevant consideration. Mr. Solomon commented in similar terms, expressing some doubt to Whether a feature of this kind was the sort of thing intended to be l'eached by the provisions of the Bank Holding Company Act. He noted the ' le are many practices on the part of bank holding companies that the At aces. not attempt to regulate. 2/23/61 -5After further discussion of the questions raised by Governor Mills, reference was made to the comments in the staff memoranda relating to the other holding company operating in the same area as First Virginia a°rPoration. Due to an exemption in the Bank Holding Company Act, that ecelPanY was not subject to the provisions of the Act. The applicant illated that the other holding company also had made overtures to the ?alls Church Bank and in that connection had made statements to the effect that it might take some period of time for First Virginia Corporation to *taill approval of an application from the Board of Governors. First 1111%girlia had indicated in submitting its application that it would like t° be in a position to consummate the proposed acquisition of shares of the Palls Church Bank by the end of February. Upon request, Mr. Hackley then summarized the point of view essed in the Legal Division's memorandum, indicating that in this ' e3cIll ca'Ele there appeared to be some evidence of benefits flowing from the l'IscIP°8ed transaction which would more than offset the relatively slight 1141°11At of competition that would be eliminated. It was the view of the l'e641 Division that approval by the Board would not be considered bit rarY or unreasonable upon judicial review. Governor King stated that he had not had an opportunity to review the matter fully, and in the circumstances consideration was given to -r action on the application should be deferred. However, in response to a stlegestion by Governor Mills, Governor King indicated that he would 668 2/23/61 -6- be agXeeable to abstaining from participation in the decision. Accordingly, it was agreed to proceed on that basis. Governor Mills stated that he would favor approval of the application, but with reservations because he felt that this would represent countenancing a transaction (that is, the agreement between First Virginia Corporation and the principal officers of the bank involved) that was of cillestionable propriety. If approval were given, it would be with the knowledge that the Board had approved a transaction concerning which it 8.131)eared that there had not been full disclosure. Governor Robertson stated that he had reservations similar to til°se expressed by Governor Mills. However, in previous cases under the 13 11°1ding Company Act the Board had not considered factors of this and he questioned whether they should enter into the decision in this ease. Looking to the future, he suggested that a study be made by the Legal Division and the Division of Examinations concerning both of the problems mentioned by Governor Mills in order that the Board might aete 111-1.ne whether it should give consideration to such matters. If the 80 4 then made an affirmative determination, he felt that all bank Qlding companies should be put on notice. Governors Shepardson, Szymczak, and Balderston and Chairman Martin eated that they would favor approval of the application. In addition, they /1°1-11 1 favor a study such as outlined by Governor Robertson. 2/23/61 -7Accordingly, the application of First Virginia Corporation was eaVroved, Governor King abstaining, and the staff was requested to draft f(xtithe Board's consideration an order and supporting statement that would catInarout this decision. It was understood that the Legal Division and the nivision of Examinations would undertake a study along the lines -- 6ested by Governor Robertson. Mr. Fauver, Assistant to the Board, entered the roam during the ‘egoing discussion. t01 At its conclusion Messrs. Rudy, Thompson, and ?Otter withdrew and Mt. Connell, Controller, entered the roam. Changes in examining procedures (Item No. 6). There had been distribtrted copies of a memorandum from the Division of Examinations dated ‘1113-17 2, 1961, outlining new methods and techniques proposed to be ebi 41/eloped for use by the Board's field examining staff in conducting eslainations of Federal Reserve Banks. ttEtelled as Item No. A copy of the memorandum is 6. At the Board's request, Mt. Solomon discussed in some detail the and background of the proposed examining procedures and contrasted the "PProach embodied therein to the procedures currently followed by the °ard's examining staff. He also spoke of certain indications by other 15 rso, "s to whom he had spoken recently, including an official of the '".Y Department, which revealed a favorable attitude toward the Qoric ePt of auditing reflected in the suggested procedures. 2/23/61 -8Mr. Solomon commented that the Division of Examinations had Considered it desirable to present the matter to the Board at this stage ill order to obtain an expression of the Board's views before proceeding /5-th the work that would be required before any procedures along the lines suggested could be introduced on a trial basis. In this connection, he brought out that a meeting of the Conference of General Auditors of the Federal Reserve Banks was scheduled for the latter part of April 44ithat, if the Board's reaction to the revised procedures was favorable, it 14°u101 seem advisable to discuss the subject at that time. Governor Robertson expressed the view that the memorandum of the 1)1\risi011 of Examinations presented a desirable program, one that should liebeen put into effect before this time. Governor Mills said that he did not pretend to have a full grasp or the mechanics of the approach recommended by the Division of Examinations. }101.re,, ' er, the spirit of the Price Waterhouse recommendations was that there "-LuL be a change in direction of the examinations of the Federal Reserve tazult 8) with more reliance placed on verification procedures followed by the A uditing Departments of the respective Banks to avoid a duplication orr ‘q4ct1cm3, and this had always made sense to him. As he understood the% *ecommendations, it was intended that there would be spot analyses, in cleDth ) of the functioning of the various departments of the Federal Ilset*ve Banks and this also made sense to him. Of course, there would have t,0 be constant observation of the new procedures by the Federal "re Banks, the Board, and the Division of Examinations. At this D°1alt ) however, the only question he would raise had to do with whether Lib i.+0,4 ti I .1. 2/23/61 -9- the field examining staff was likely to become involved in what might be celled "experting" the work of the several departments of the Reserve Banks. This vas a function of the Division of Bank Operations, and he felt it 1143ortant that lines of demarcation be worked out carefully. Mr. Solomon commented that the point raised by Governor Mills ha been considered by the Division of Examinations and discussed with the Division of Bank Operations. It was recognized that there should be 1.1° blurring of the lines of responsibility. However, the Division of 4841inations would be pleased if its work should prove to be of assistance to the Division of Bank Operations. Governor Robertson commented on the type of personnel that would be 'eqUired to operate effectively along the lines envisaged by the proposed 111'°eecillres. It was possible, he pointed out, that the need for top-flight 13ers°une1 might increase the cost of the examining function. Although the QUe nt proposal did not provide for regionalizing the examining force in themziner that had been suggested by Price Waterhouse, it was his opinion that his development would take place eventually. Among other things, laldividUals of the caliber needed to conduct the proposed type of %Llnation might be difficult to obtain if extensive travel over the Qoj trY as a whole was required. Mr. Farrell commented with respect to the consideration given to the pr °posed approach from the standpoint of the work of the Division of talik °Perations and expressed the opinion that a satisfactory division of 2/23/61 -10- ' l eaponsibilities could be worked out along lines that would work to the na1tua1 benefit of all concerned. Governor Shepardson expressed the view that the recommended NPProach was definitely worthwhile, and expressions by Governors King ardSzymczak were favorable. Governor Balderston said that as a general observation he was in favor of the recommendations. If the new procedures were put into effect, he hoped that some surprise verifications would be retained in the program, 814 he understood that this was envisaged. Governor Balderston also -1546ssted that pressure be continued to cause the directors of the ?ecleral Reserve Banks to keep the auditing staffs of the Banks from being 141111enced unduly by the operating officers. He noted that there were " 1 some Banks where it was felt that operating officers should be Pr'esent at meetings at which the General Auditor reported to the Auditing a°13411ittee of the Board of Directors, and to him such a procedure was ere nsible. O Beyond that, moreover, there was the instinctive desire the auditors to advance themselves within the Reserve Bank organization, 111 10— ""-ch connection an opinion might exist that the manner in which they 14el'e evaluated by the operating management of the Bank was an important te•etor. The discussion concluded with a statement by Chairman Martin to the effect that the Division of Examinations was authorized to take steps to tni , - ement the recommendations contained in the memorandum of February 2, 1961. 2/23/61 -11Messrs. Fauver, Farrell, Connell, and Smith then withdrew. Policy concerned with granting trust powers to national banks. There had been prepared and distributed, pursuant to an earlier request the Board, a memorandum from Mr. Masters dated February 6, 1961, reviewing the Policy and underlying considerations concerned with the authority of the to grant to national banks the right to act in fiduciary capacities. The memorandum reviewed the background of law and regulation, the basis and aMication of the criteria set forth in section 2 of Regulation F, Trust Pc4rers of National Banks, and other considerations related to the policy (111esti°11• arid. These considerations included the effect of bank supervision examination. Other sections of the memorandum dealt with the questions illvcgved in the "part-time" trust operation and in applications of small bazik s for trust authority, and a final section and appendices related to the clenial of trust power applications. The tenor of the conclusions in the memorandum was that the e°11eiderations recited in section 2 of Regulation F must be applied e°11ectively, as an over-all subjective test, to all of the facts and eirr, tzmstances presented by a particular application. ' It was suggested that Primary attention to, and emphasis on, the condition of the applicant bktik 'the adequacy of its capital, and the character and ability of its fliari ,gtlemt would most reasonably assure the result sought by the statute; 1e13r) the proper exercise of the trust powers granted. The memorandum 4180 Pointed out that confidence in the safe and sound exercise of the 2/23161 -12- tril sk, authority must rely heavily on the effectiveness of the bank superfunction, for there could otherwise be no assurance that favorable 'conditions existing at the time an application was granted would continue illthe future. It was noted that an evaluation approach based on careful 111511raisa1 of bank management and bank condition had characterized staff 1)ractice for many years, and the view was expressed that this would be the wisest course to follow in the future. At the Board's request, Mr. Masters presented a summary statement °11 the subject, his comments being based on the memorandum that had been st ributed. Governor Mills said that he had no question. ill He felt that the mation presented in the memorandum and Mr. Masters' discussion thereof liePresented an admirable review course, and that present practices were 4dequate. Governor Robertson expressed a similar view. He then raised the clilestion whether the Board's letter to the Federal Reserve Banks dated 14a.l'cil 14/ 1957, regarding the processing of applications for trust powers ctl axed to require review or supplementation, and also whether it would ar desirable to send copies of Mr. Masters' memorandum to the Reserve ta4k_ for their information. Mr. Masters replied that the letter to the Reserve Banks was of l'ele•tiv.e-Y recent date, the Reserve Banks were known to have the subject kat - of that letter closely in mind in processing applications, and the 2/23/61 -13- °I.Irrent memorandum did not suggest any substantial change in the principles 8 " forth in the 1957 letter. He saw no Objection to sending copies of the memorandum to the Reserve Banks if the Board was so inclined. After Governors Shepardson, King, and Szymczak had indicated that they were satisfied with the presentation contained in the memorandum, Governor Balderston commented to the effect that although the qualifications °11 a'tank applying for trust powers might be appraised carefully in reaching 8 8.Cleei iOn, 14 there was no guarantee that satisfactory conditions revealed the time of the application would continue to prevail, and there was no 'to terminate the trust authority after it had been granted. 13ciwel This ell/I:haeized the reliance that must be placed on bank supervision through the orfice of the Comptroller of the Currency, which led him to raise the (111"tion whether it would be advisable to send copies of Mr. Masters' memortric111121 to the Comptroller for distribution within that organization. It was pointed out, in discussion of this point, that the functions or the, ,-omptroller do not relate to the granting of trust powers. Also, ther e was no indication that the supervision afforded by the Comptroller's °trice was not careful or competent. In the circumstances, it was the cons etleus that the memorandum need not be sent to the Comptroller. At the conclusion of the discussion, it was understood that the Pies set forth in the memorandum from Mr. Masters were acceptable to he Board as guides in considering applications from national banks ro„ attlaority to exercise trust powers. It was also understood that 2/23/61 -14- e°131-es of the memorandum would be sent to the Federal Reserve Banks for their information. Messrs. Hackley„ Solomon, and Masters then withdrew. Pre-employment investigations. Bon—, There had been circulated to the a memorandum from the Division of Personnel Administration dated Febr118-17 7, 1961, recommending that, as a permanent policy, a pre-employfull field security investigation be made of all applicants from °II-144de the Board's organization selected to fill sensitive positions 41)°Nre Grade FR-5, with the understanding that) should it appear that an °I4standing applicant would be lost if his employment were deferred until the omPletion of the investigation) the requirement could be waived upon c°4ellrrence of the member of the Board having responsibility for internal "Irs of a managerial nature. The memorandum noted on April 17, 1958) the Board approved for a trip) -4- Period of one year a procedure under which pre-employment full field ltivest•lgations were to be made of applicants selected to fill sensitive ons above Grade FR-5. The procedure was continued for an additional .eE1.1' in 1959 and again in 1960) but it was now felt that experience warranted l'ecommfmtation for a permanent policy. Iii response to a question by Governor Robertson, Mr. Johnson Ve ified that the procedure in effect since 1958 had not in any instance 1)rel, 'ented the Board from obtaining the services of a desirable applicant. g-.1,10, C)I I 2/23/61 -15Governor Robertson commented that it was his understanding that the recommended procedure would not be permitted to result in the loss of a. qUalified to addition to the Board's staff, and there was no indication the contrary. Mr. Johnson pointed out that access to classified raaterial would not be authorized after employment until receipt of the Investigation report and issuance of the prescribed authorization. The recommendation contained in the memorandum was then approved 11118a limously. .4pointments at Federal Reserve Bank of Minneapolis (Item No. 7). 14 a letter dated February 14, 1961, Chairman Bean of the Federal Reserve Of Minneapolis advised that the Bank's directors had appointed 'ic'eleriek L. Deming as President and A. W. Mills as First Vice President, e 1 for a term of five years beginning March 1, 1961, subject to the " °va1 of the Board of Governors, with salary at the rates of 4535,000 ' 411 €111(1 1"25,000 per annum, respectively, for the period March 1, 1961, through 'ex' 31, 1961. Mr. Bean enclosed a letter from Mr. Mills dated --c47 13, 1961, which indicated that the latter intended to retire from '1:ve service with the Reserve Bank on November 30, 1964, the end of the 8411 til‘ntmonth after he reached age 65. There had been circulated to the 1cl a draft of letter to Chairman Bean indicating approval of the ' ' 41 : 40intments and salary rates. No objection being indicated, the proposed letter to Chairman Bean vaa 4Pproved unanimously. A copy is attached as Item No. 7. The meeting then adjourned. 2/23/61 -16Secretary's Notes: Pursuant to recommendations contained in memoranda from appropriate individuals concerned, Governor Balderston, acting in the absence of Governor Shepardson, approved on behalf of the Board on February 17, 1961, increases in the basic annual salaries of the following persons on the Board's staff, effective February 19, 1961: Division Basic annual salary To From Research and Statistics krt garet V. Hastings, Economist /14change in title from Research Assistant) $ 5,850 $ 6,435 5,685 4,145 5,850 4,250 12,990 13,250 6,545 3,290 3,185 6,710 3,395 3,290 2,038 2,090 Bank Operations p.C'e l orge G. Noory, Analyst —1e4 C. Cunningham, Statistical Clerk Examinations Tho bnias L Hunter, Jr., Supervisory Review 4:4caW-n;r Administrative Services 1, 74t z, Sanders, General Assistant tlsi.4*e M. Evans, Cafeteria Helper ' e E. Anderson, Charwoman Personnel Administration ?lc()rerice S. Doane, Clerk (Librarian) (h e position) Pursuant to recommendations contained in memoranda from appropriate individuals concerned, Governor Shepardson approved on behalf of the Board on February 21 and 23, 1961, respectively, the following items relating to the Board's staff: 2/23/61. Saj ---t.11-12SE2P2,2 . Richard S. Landry, Assistant to the Secretary, Office of the Secretary, 31.t krorn + T‘J,VOU to $81340 per annum, effective March 5, 1961. 4 1104 ..-. mement M. Hall as Statistical Clerk, Division of Research and tistics, with basic annual salary at the rate of *1865, effective the ate of entrance upon duty. CIA CarOlYn r Secre arY 6 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON 25. D. C. Item No. 1 2/23/61 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD February 23, 1961 Board of Directors, H ightstown Trust Company, Hi ghtstown, New Jersey. Gentlemen: Pursuant to your request submitted through the Federal Reserve Bank of Philadelphia, the Board of Governors of the Federal Reserve System approves the establishment of !branch at the intersection of Routes 33 and 526, bbinevill e, Washington Township, Mercer County, New er8eY, by Hightstown Trust Company, Hightstown, New Jersey. Thi aPPrOVal is given provided the branch is established —"nin one year from the date of this letter. It is noted stock will be increased to $200,000 to comply with New " ew Jersey statutory requirement. r Very truly yours, (Signed) Elizabeth L. Carmichael Elizabeth L. Carmichael, Assistant Secretary. BOARD OF GOVERNORS OF THE .* FEDERAL RESERVE SYS1EM WASHINGTON 25. D. C. Item No. 2 2 /23/61 ADDRESS OFFICIAL CEIRRESPONDENCE TO THE BOARD 04444,,t' February 23, 1961 el°raptroller of the Currency, resh44811rY DePartment, 144---LtIgtcn 25, D. C. Attention Mr. W. 14. Taylor, Deputy Comptroller of the Currency. 1)etir lir. Comptroller: dEtt" Reference is made to a letter received from your office 4 /14q ecember 8, 1960, enclosing copies of an application to organize liato °nal bank at Wausau, Wisconsin, and requesting a recommendation vilether or not the application should be approved. The report of investigation of the application made by an Ntuli(ir for the Federal Reserve Bank of Chicago indicates that the 4tk;eg8 have agreed to provide a minimum capital structure for the c6.P1Z; v400,000 instead of $250,000 shown in the application. This qayi-L structure appears to be adequate. The report discloses gener°DNjvcrable findings with respect to the prospects for profitable l°11e, the proposed management, and the need for additional banking tf,4cilit : -ies in the area. Accordingly, the Board of Governors recommends eArk,h ' consideration of the application. tqly The Board's Division of Examinations will be glad to discuss (1 48Peet "aire. 8 of this case with representatives of your office if you so Very truly yours, (Signed) Elizabeth L. Carmichael Elizabeth L. Carmichael, Assistant Secretary. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON 25, D. C. Item No. 3 2/23/61 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD February 23, 1961 '311)troller of the Currency, :eZI'Y Department, 14-4.olgton 25, D. C. beeiz , mr. A ttention Mr. W. M. Taylor, Deputy Comptroller of the Currency. CoMPtroller: 11 60. n,,neference is made to a letter from your office dated October 6, 4,0t;0 osint copies of an application to organize a national bank at : tlq 1110) Florida, and requesting a recommendation as to whether or aPPlication should be approved. 44Pplicat.4 Information contained in a report of investigation of the VIdica;''°n made by an examiner for the Federal Reserve Bank of Atlanta 91,z56'es that the proponents plan to provide a capital structure of '142° for the proposed bank and that $1,000,000 may be invested in ;411k or-pe of the present banking quarters of the Florida National s;!?.ks°nville. In the event the proposed large investment in CO; aci- 8 is made the indicated capital structure would not appear ' N4,1:q1late. However, it was stated that the organizers would b 0 increasing the capital structure to an amount acceptable t': i the a.;',' --Pervisory authorities. The prospects for future earnings of to .roPoR A bank and the arrangements for management appear satisfac'l 111) ofl Proposed bank, which would be a part of the Florida National ' Ethks would be located within two blocks of the new location c, da National Bank of Jacksonville and may result in an 04 Flori 'pr'eover'aPetitive advantage over other banks in the immediate area. . on tbIll111.' there does not appear to be a basic need for the continuation 1 Of the proposed location, and it seems improbable that the of -tallti 3,;le" banking services there will materially inconvenience any number of individuals or firms. Accordingly, the Board - recommends disapproval of the application. Th eat4sioeots e Boardts Division of Examinations will be glad to discuss N. of this case with representatives of your office if you SO t! 8%G% Very truly yours, (Signed) Elizabeth L. Carmichael Elizabeth L. Carmichael, Assistant Secretary. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON Item No. 4 2/23/61 OFFICE OF THE CHAIRMAN February 23, 1961. 11*/* John J. /. Milbank,McCloy, Tweed, Hope 1,;4 Hadley, Broad Street, "taw lerk 5, New York. 1)e4r Jack: relieved The Board has regretfully acceded to your reauest to be nees. from the Advisory Committee on Commercial Bank PreparedThe reasons prompting your request are fully understood. When the Committee was established, it had two major °blectiv oll defes: first, to provide commercial banks with practical guidance the 7 . 13e preparedness, and second, to promote effective action on 11411-Ldanoe given. The first objective has been accomplished. be d nthe second objective is a continuing one and much remains to mere? -e, the Board has noted that approximately 67 per cent of comtenel lbanks with deposits of ',0.00 million or more now have prepared,:r?grams, and that participation among all banks increased 12 durina the last six months' reporting period. Of special voll,„lcance is the fact that this has been accomplished on a purely -"'arY basis. Please accept the Board's appreciation for the contributions •irico„,?.° ' 1 as Chairman and the members of your Committee have made in ' - aCing defense preparedness among commercial 'al b an ,,. Sincerely yours, (Signed) Wm. McC. Martin, Wm. McC. Martin, Jr. BOARD OF GOVERNORS OF THE Item No. FEDERAL RESERVE SYSTEM 5 2/23/61 WASHINGTON OFFICE OF THE CHAIRMAN February 23, 1961. 11r. William A. Mitchell, President, The Central Trust Company, Ci ncinnati 1, Ohio. ipear Mr. McCloy has asked to be relieved as Chairman of the Advi, -orY Committee on Commercial Bank Preparedness due to his retir wit ement from an active banking position and his new assignment re h the Government. The Board has regretfully acceded to his bvte_st and expressed its appreciation for the contribution made MeCloy as Chairman and by other members of the Committee. You will recall when the Advisory Committee was established It ha.A tiv u two major objectives. It has accomplished one of its objecbY providing guidance to commercial banks and has made consider e progress on the other objective--that of promoting effective tizi )n by banks. It would seem that this Committee should be conacilc ae lied--at least until a special effort has been made to get as nearly or Possible 100 per cent participation by banks having t100 million re deposits. There are less than 300 banks in this category and p10 4informed that approximately 67 per cent of them have a defense til am. I feel that the Committee can be most helpful by encouraging emaining 33 per cent to participate, and that the results will • v/s ve as an inspiration to the various banking organizations and super°rY authorities in their continued maintenance of the program. Chai„ No d'man .t ubt New: • a rk be It would be appreciated if you would be willing to serve as of the Advisory Committee for the limited task above described. You would like to have representation on the Committee from the area. Your suggestion as to a prominent New York banker who invited to serve on the Committee would be welcome. Sincerely yours, (Signed) Bill Wm. McC. Martin, Jr. Item No. 6 2/23/61 February 2) 1961 To. ' Board of Governors Division of raminaticns Subject: Possible Changes in Procedures for Examining Federal Reserve Banks. CONFIDENTIAL (F.R.) Purpose of Memorandum by theThe purpose of this memorandum is to outline, for consideration by t,_ Board, proposed new methods and techniques to be developed for use 4trikZ Board's field staff in conducting examinations of Federal Reserve ' 1 4.altground It may be recalled that in reporting the results of its 1958 tiarivev IlaterL°f the procedures applied by the field examining staff, Price too & Co. expressed the opinion that such procedures represent audet:eat a duplication of the work of the Reserve Banks' internal alldi ng staffs, and fail to give sufficient weight to the internal repo'lrig function and to the Reserve Banks' internal controls. The 44d rt suggested that the more routine audit procedures be curtailed greater emphasis be given to surveys of the operations and ' tires of the Reserve Banks and their auditing departments. A. w This examination concept closely parallels one outlined by aYne, Acting Director, Division of Examinations, in his memoby to the Board dated April 6, 1951, and provisionally approved the Rro!.Board onliay 3, 1951. It also accords with what appears to be rung trend of thought in the accounting profession. N)c'rtFollowing their 1959 engagement, Price Waterhouse &Co.'s (14reo dealt for the most part with their analysis of specific proceth ; and techniques incorporated in the examination program, but at lie time made it clear that they continued to hold the opinion 'erlia;;°171s basic changes in the examination approach could profitably %N111' We have not as yet received their report following a survey 'llat,c:?cl in the latter part of 1960, but it may be fairly assumed ' 4-ther expressly or impliedly, this report will reflect a simiview. T o tho Although the Division of Examinations regarded some aspects J4 ; "' ter1 More wide-ranging suggestions made in the 1958 report of Price fj°11ss & Co. (e.g., the regional decentralization of the examining ;lear,; as impracticable, untimely, or undesirable for various reasons, UPOn reflection, impressed with the possibilities presented by "114ki- veY type of examination that seems to be fundamental in the !) 1 /1..TIllg outlined above. Accordingly, if the Board does not object, Kratz' Proceed with the development of an examination program incorqte rlg this different concept, with a view of putting it into ; at least on a trial basis -- about mid-year. It is thought th-ecessary preliminary studies will have been completed by then tlkie at least a trial application of the new procedures may be 446:) r1 an orderly manner and with sound reason for expecting 4 INUO.0 N -4- result. Board of Governors 2 tesent Question Even after a trial application of the proposed new procedures, would to check back with the Board before permanently shiftOver to the new approach. The present question, therefore, is tlier the Board would object to having the Division of Examinations 4 velop the proposed new procedures and apply them in one or more test runs." we Z Pro- examination approach Briefly stated, the examination we have in mind would be a revin_ cati l of methods and procedures supplemented by whatever test verifidet Qns may seem indicated. This would mean that the present rather 1.11,!Aled audit verifications would in many instances be drastically tailed or entirely omitted. some or It is contemplated that the review examination would embrace all of the following procedures: 1. A study of the Reserve Banks' policies and procedures as prescribed for a particular operation or function. 2. A determination that there are incorporated in the operating procedures, to the extent practicable, checks and balances that would promptly bring to light in the course of the normal work flow any errors or omissions, either accidental or deliberate. 3. A determination, by observation of the operations, that the prescribed policies and procedures are being followed. 4. A test examination of the recordation of transactions both before and after the commencement of the examination. 5. Test verifications of account balances to the extent and in the manner deemed necessary for the accomplishment of the intended objectives. (The selection of the areas to be tested and the nature and extent of the tests applied would be tailored to fit the situation revealed by the examiners' study of the safeguards built into the operating procedures and other internal control provisions designed to assure the integrity of the operations.) T0. Board of Governors _ 3 6. A continuation of the present practice of making a detailed and intensive study of the coverage provided by the internal audit function. However, this might be broken into segments, each examiner in charge of an assignment being responsible for analyzing the audit attention given the function under his review, with special reference to any shortcomings revealed by the periodic audits and the remedial measures taken. a. The present practice of observing auditing departments while engaged in the performance of their audit duties would be continued, and probably extended, with the objective of bringing about a further strengthening and improvement of the audit procedures whenever appropriate. arrair Through these methods, the examiners will be probing the anoulds of the Bank in depth, and the results of their verifications kirik Provide satisfactory assurances that the affairs of the Reserve ratel are being properly conducted and that the books of account accuAropeYi reflect the assets and liabilities on a day-to-day basis. If done, it is believed that these examination procedures will 164,10;e.a more thorough knowledge and a sounder appraisal of a Reserve - activities than results from the program now in effect. It is contemplated that complete flexibility and freedom of thi.a i will be reserved to the Chief Federal Reserve Examiner. By any meant that he will not be committed to a specific routine for 4 eol en function; in fact, if it seems warranted, he may carry out ete verification of the accounts and holdings in a given depart' P4 Ntli or he may on occasion revert to our present verification type of /ation for the whole Bank. Because of this flexibility, the 4sert1, Bank's personnel will be unable to anticipate what procedures cterit- used or what direction the examination will take, and to that the examination should have more effective results. t ,0N.131 Effects on Costs and Personnel 4 The main objective of the proposed changes would be further t fhening and improvement of the examinations of the Reserve Banks. ,44 rA -ects on costs or personnel would be merely incidental to that °13jective. Nevertheless the new procedures might in time result in some h-n in total manpower needs -- probably first in the area of bor-eir) and perhaps later in the number of men employed on the N11 -ctim To: Board of Governors - 4- tie4A). A force for relatively routine duties. However, since rather comT'e audits of some individual functions might continue to be made electively ,from time to time in order to insure variation and sur01 ') any reduction in the field force probably would occur graduiitY rather than abruptly. Over the long run, the new approach probatv/ e would require more men of relative high calibre, and this might n result in an increase in total salary costs. t 414tion to Work of Division of Bank Operations It is not believed that the proposed program will result in Oven of the field work of the Division of Bank Operations. N47 18 because the investigations of the examiners will be pursued glie11, 11Y with the objective of determining the measures taken to safethe assets and assure the integrity of the operations, whereas terests of the Bank Operations' representatives are primarily 'ne areas of costs and operational efficiency, arisr Ile'at' to Internal Audit Programs If procedures of the kind described are adopted and put into "fact to r it may be appropriate for the Reserve Banks' General Auditors the minimum frequencies of audits heretofore established by we; 1 Cone cnference of General Auditors. If the Board has no objection, Gene°uld have the matter placed on the agenda of the Conference of tilrjal Auditors to be held on April 26-28, 1961, to provide oppor: 3y0r a full discussion of the effect that the reduction of eillph kly i4e18 on audit verifications in the Board's examining procedures lave on the internal audit programs. C°11r" 41;4.. Although, as stated previously, the Board was in general 7eht With a similar examination approach when proposed by 14ark,„41Y ,lle in 1951, the examination procedures were not thereafter keei"-LY revised. Moreover, it is believed that the present profurther than Mr. Wayne contemplated in the curtailment bythe verification procedures that have been traditionally followed Neoe Board's examiners. It is recognized, also, that there may be to ru2e which would cause the Board to feel that it might be unwise (111ct:r a major change at this time in the kind of examination con?f the Board's staff. the , It will be helpful, therefore, to have an expression from tilt 'card on the subject before a great deal of time is consumed on P4Paratory studies that will be entailed. BOARD OF GOVERNORS Item No. OF THE FEDERAL RESERVE SYSTEM 2/23/61 WASHINGTON OFFICE OF THE CHAIRMAN February 23, 1961 CONFIDENTIAL (FR), M. Atherton Bean, Chairman of the Board', Federal Reserve Bank of Minneapolis, Minneapolis 2, Minnesota. Dear Mr. Bean: The Board of Governors has approved the appointment Of Mr. Frederick L. Deming as President and Mr. A. W. Mills as First Vice President of the Federal Reserve Bank of Minneapolis, each for a term of five years beginning March 1, 1961, in accord— ance with the action taken by the Board of Directors as reported in your letter of February 14, 1961. The Board of Governors has also approved the payment of salaries to Messrs. Deming and Mills at the rates of $35,000 and $25,000 per annum, respectively, for the period March 1, 1961, through December 31, 1961. Sincerely yours, (Signed) Wm. McC. Martin, Jr. McC. Martin, Jr0
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