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Minutes for JanuarY 14, 1.17. -55 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 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, 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. Chm. Martin Gov. Szymczak Gov. Vardaman 1/ Gov. Mills Gov. Robertson Gov. Balderston x Ce43 1 Gov. Shepardson 1/ In accordance with Governor Shepardson's memorandum of March 8, 1957, these minutes are not being sent to Governor Vardaman for initial. ti5 Minutes of the Board of Governors of the Federal Reserve System on Tuesday, January 14, 1958. The Board met in the Board Room at 10:00 41•1116 PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Martin, Chairman Balderston, Vice Chairman Szymczak Mills Robertson Shepardson Mr. Carpenter, Secretary Mr. Kenyon, Assistant Secretary Mr. Riefler, Assistant to the Chairman Mr. Thomas, Economic Adviser to the Board Mr. Young, Director, Division of Research and Statistics Mr. Marget, Director, Division of International Finance Mr. Hackley, General Counsel Mr. Masters, Director, Division of Examinations Mr. Molony, Special Assistant to the Board Mr. Shay, Legislative Counsel Mr. Furth, Associate Adviser, Division of International Finance Mr. Sammons, Associate Adviser, Division of International Finance Mr. Solomon, Assistant General Counsel Mr. Hostrup, Assistant Director, Division of Examinations Mr. Nelson, Assistant Director, Division of Examinations Presentation for Banking and Currency Committees. Mr. Shay having l'ePorted that the Senate Banking and Currency Committee vould like to haIre a visual-auditory economic presentation by the Board's research staff 14 +u " near future and it appearing that the Board's staff could have such Pri, --entation ready by the twenty-third or twenty-fourth of this month, 14'% Sh 4Y va8 requested to work out with the Committee a date which would 1/14/58 be -2- agreeable. In addition, it was understood that Chairman Martin would actrise Chairman Spence of the House Banking and Currency Committee of tile presentation to be given to the Senate Committee and offer to provide the same program for the House Committee if it so desired. Mr. Shay then withdrew from the meeting. Application of Bank of Encino to establish branch (Item No. 1). There had been circulated to the members of the Board a file containing a favorable recommendation from the Division of Examinations with respect to an application by Bank of Encino, Los Angeles (Encino), California, to establish a branch in Thousand Oaks, a community in Ventura County. In commenting on the application, Governor Robertson pointed out t114t a similar application submitted by a large national bank in Los 411geles vas on file with the Comptroller of the Currency but that the 114 'lloation of the smiler State bank had been filed earlier and therefore entitled Attel" to preference pursuant to the interagency understanding. commenting that the Bank of Encino, control of which had been "(1411"ed by Mr. Walter Cosgriff of Salt Lake City, seemed to be in r4111.y good condition except for some weakness in its capital position 414 that the State authorities had insisted on the injection of new e41ta1 in the amount of $750,000 prior to establishment of the branch t4 Tb —431.1ftild Oaks, Governor Robertson expressed some doubt whether the bEttlk vould be willing to add that much capital. His opinion was that the Board should stand firm on the amount of additional capital which -3the State had requested if the matter should come into question. He 4180 commented that the Comptroller of the Currency at some time probably /4)11111 approve the competing application filed by the larger national bank. Thereupon, unanimous approval was given to the letter to the Bank ct Encino of which a copy is attached hereto as Item No. 1, for transmittal thr°4gh the Federal Reserve Bank of San Francisco. At this point Mr. Hexter, Assistant General Counsel, entered the room,. Proposed absorption of The Citizens Bank, Attica, New York (Item In the light of the comments and views expressed at the meeting on Jala uary 6, 1958, by Mr. Sherwin Haxton and another director of The Citizens Itallk, Attica, New York, concerning the proposed absorption of that bank by Marine Trust Company of Western New York, Buffalo, New Yorkl further ec)nsideration was given to the decision of the Board on December 27, 1957, t° deny the application. Governor Shepardson, who had originally voted in favor of granting the application, said that as a matter of general principle he would ordi- 114114 be opposed to a transaction of this kind because such an absorption /r°Itld result in a further accumulation of banking power in the hands of a 141Igs bank holding company organization. In the circumstances surrounding this Particular application, however, he continued to feel that there 1144 Justification for approving the transaction. Both the file on the matter and Mr. Haxton's presentation indicated that The Citizens Bank 1/14/58 liaG Possibly on the verge of going out of business if the owners did n°t have an opportunity to sell the institution, since the controlling " "kholders seemed definitely to desire to dispose of their shares in the institution. While the bank apparently had a somevhat more favorable earning record than the competing branch of Marine Trust Company, it had °Perated with limited personnel and a by scale of salaries, and at Present there did not appear to be personnel available to carry on effectively if the principal shareholders withdrew. The town itself was a small agricultural community with little or no prospect of substantial incluetrial growth and the current shift of population away from agricult-141‘e 'would seem to indicate stagnancy or a decline in the population of the bankss trading area. These circumstances seemed to him to justify 4PPrciving the proposed absorption in spite of his general feeling about acqtlisitions of this kind. Governor Balderston said that he thought Mt, Haxton had explained hie Personal situation quite well, but that his comments did not give the b_ -Quard a basis to support the acquisition of his bank by the Marine Mtd '44.1rld °r the he organization. Had Mr. Haxton been arguing on behalf of acquisition bank by a competing Buffalo organization, Governor Balderston said, -L-Lght have come to a different conclusion, but he felt that approval 11 the Board of the current proposal would merely lead to the elimination ''rbe-nking competition in Attica. the aPplication. Therefore, he would not favor approving 1/14/58 After Governor Szymczak stated that he also favored denial of the application, Chairman Martin said that he would support the majority IrieV in this case although in terms of the public interest he doubted NrsrY much whether this was the type of situation where harm would result fl'cliz the proposed absorption. Unless one took the position that the Peservation of smPll unit banks was more important than the element of service to the community, he felt that a good case could be made in re 'vor of the absorption of this bank by the Marine Midland organization, f°r that organization could do a job of public service superior to that sllailable through a small independent bank. However, the Congress in lIassing the Bank Holding Company Act had indicated a desire to lean over b"kyard to protect the unit bank and he felt that the Board must take this into consideration. Personally, he said, he was not completely c°111rinced of the soundness of such an approach. Governor Robertson responded that Marine Midland would not be 131'eeluded in any way from furthering the public interest in the community, r01 'it had all of the facilities at its disposal to provide for the needs or the area and would not be held back in any way through denial of the eillsrent application. He went on to say that competition generally works to the benefit of the public as a whole and that, in this instance, 1141‘tiee would have an opportunity to go to the small independent bank it be Marine Trust Company branch was not meeting the needs of the hl ' Q es To put it another way, he did not think that there would be any 1/14/58 -6- gain from the standpoint of the public interest by letting the Marine Midland organization operate without competition in the town of Attica. /tith regard to the points raised by Governor Shepardson, he recalled tIlat Mr. Embt, one of the directors of The Citizens Bank who appeared before the Board, indicated that he intended to continue his affiliation th the banking business, and Mr. Embt, as he pointed out, was one of the principal stockholders. Also, as far as the people running the beak were concerned, nothing unfavorable to them had been developed in Icanlinations of the institution. In summary, where a small bank was c°z4Peting in a community with a branch of a large institution, he felt that it was generally in the public interest not to permit the large bellk to take over the smaller one. Mr. Masters commented that although the proposed absorption It*ttedly would eliminate banking competition in the town of Attica, there would still be a substantial number of independent banks III the surrounding area serving a total population of less than 100,000. 111 -sPonse to a question by Governor Robertson, he verified, however, tIlat the nearest banking office outside of Attica would be located about 10 1411e8 from that community. Governor Mills expressed agreement with the majority of the Board tiAt the application should be denied, but said that in attempting to Itilairze this case it seemed to him that the problem was much broader Illacope than might at first appear. He vent on to say that if it 121 1/14/58 -7- %lere possible to devise some kind of ground rules to guide institutions like Marine Midland and also independent banks which might be considering Itlel'ger offers, he felt that this would represent a long-range service tc the banking community, particularly because the Board, in denying an e4/Plication of this kind, would be interposing a Governmental authority against the voluntary disposition of private property. Governor Mills then read the following statement containing his eneral reflections on this subject: Recognition of the quasi-public characteristics of commercial banking goes back for a great many years and is highlighted by the public regulation to which commercial banking is subjected. The fact that entrance into the commercial banking field is limited by the chartering rights vested in Federal and State bank supervisory agencies evidences the public sentiment that exists for commercial bank regulation and which is soundly based in view of the semimonopolistic nature of commercial banking and the fact that those engaged in it are granted the right to employ for their advantage funds entrusted to them by the general public. Under the scheme of commercial bank operation, this means that those who are permitted to operate commercial banks as financial corporations are granted the unusual earning power of operating for profit on a far larger Proportion of depositor funds than the funds represented by invested capital. This feature of commercial banking emphasizes the justification for its public regulation and equally features the qualities of trusteeship that are Properly expected of bankers. The quasi-public character of commercial banking is Clearly outlined against the conditions recited above, with the exception of one final condition which exists but has not as yet become fully recognized. This last condition is that having been authorized to embark on the operation of commercial bank, its owners -- and especially in view of the privileges granted them by public charter -- do not have 1/14/58 -8- the same rights to dispose of their property as is the case of the owners of other types of corporations that are not vested with a public interest. Such being the case, it is within the province of the bank supervisory authorities to prohibit the sale of a bank if that action is deemed to infringe the public interest with regard to such factors as undesirable prospective ownership of a bank or the sale of a bank which would have the effect of extinguishing competition in a community sizable enough to justify the operation of two or more commercial banks. After finishing the statement, Governor Mills said that the line Of reasoning contained therein had led him to the conclusion that if the 180ard could develop some guidelines and make them known to the banking e°111munity, this might tend to eliminate the embarrassment arising out "4 situation such as denial of the proposed absorption of the bank tri Attica. Governor Shepardson then supplemented his previous comments by 8aYillg that to him it would be possible to agree with what Governor 1411-ls had said and still make an exception in a case such as the one 11°14 before the Board. In a community with a population of only 3,000, he questioned whether the operation of two banks could be justified, and 41 this connection he brought out that one of the offices was a branch Of 4 large banking system which could absorb losses from the local °13el'ation if necessary. The independent bank currently was making some 131'"it, but only at the expense of an inadequate scale of compensation its staff; if the basis of compensation was equal to that of the tth— `74 'organization, it seemed questionable whether the independent bank 1.10111 A be operating profitably. As he had said before, in principle he 1_23 1/14/58 -9- tavored curbing the expansion of the large banking organizations, but he felt definitely that an exception could be made in this case. One reason was that this was primarily an agricultural area and the shift in agricultural enterprises to larger units was calling more and more tc)r credit facilities which a small bank cannot provide. While it Inight be suggested that such a situation could be taken care of through 1)84 ' ticipations, the recent agricultural loan survey shoved little evidence t the use of participations. Rather, it seemed to indicate that the 444111 banks tended to limit themselves to the credits which they could hallclle, and in this particular district there was only a very small 13ercettage of participated loans. Chairman Martin said that he thought Governor Mills had made a e°4tr1buti0n through his statement but that he 'would be inclined to nlake an exception in this particular case if he were to follow the line °t reasoning suggested in it. Therefore, he vas inclined to feel that it luight, be futile to release a general statement on the subject to the banking Of ' Lie community. He then reiterated that he could support denial current application only on the basis that the Congress had saed a desire to preserve the maximum number of unit banks. Whether thila l'as a sound policy, he did not know. The difficulty with the whole ttl "Ion, he said, was that, at least in his opinion, it might be the 1114lie which ultimately would suffer. Thereupon, it was voted to sustain the previous decision of the cl t0 deny the application of The Marine Trust Company of Western 1/14/58 -10- ilevYork, Governor Shepardson dissenting from the decision for the reasons he had stated at this meeting and in previous discussion of the application. to this action, there was sent to the Federal Reserve Bank of Nelf York the letter which was approved by the Board on December 27, 1957, but vas not actually mailed because of the developments which occurred lailheelAent to that meeting. A copy of the letter is attached as Item No. 2. Mr. Nelson then withdrew from the meeting. Purchase of _bankers' acceptances for foreign account (Item No. 3). 14 a letter dated January 100 1958, the Federal Reserve Bank of New York 4(111ested an increase from $100 million to $150 million in the aggregate t11341411-4 of bankers' acceptances which it is authorized to purchase and '1441101tee at any one time for the account of foreign central banks, IllelUding the Bank for International Settlements. The request arose out "the fact that within the past few days substantial purchase orders had bp-eh - received from the Swedish central bank, thus increasing to $99.8 111140n the amount of acceptances carrying the New York Bank's guarantee. aPPssred that the increased volume of orders was attributable primarily to the disparity between the yields on Treasury bills and bankers' aeeePtances. There had been distributed to the members of the Board copies of r4011indum from Mr. Marget dated January 13, 19580 discussing the ation and recommending favorable action on the request. The memorandum 4.18° hoted that since the date of the letter the New York Bank had received Sc.:17). -11Alrther orders which it would be unable to execute unless the limit was Illieed immediately. In this connection, question was raised whether the Board might also wish to consider, as suggested in the New York Bankta letter, abolishing the maximum limitation altogether, subject to the Iltderstanding that the Division of International Finance would continue t° reloort to the Board regularly on developments in the acceptance market. Following comments on the matter by Mr. Marget, during 'which he eferred to the consideration 'which had been given by the Board to this euhiect during 1956, Governor Robertson said that he favored approving the I'equested increase in authorization, that the $150 million limitation 4ellted more than ample to meet the existing situation, and that he IlvAlld favor continuing to maintain a limitation for the present. This led to a discussion of the reasons for maintaining a maximum itation during which the view was expressed that there seemed to be '42"gent reason for eliminating it at this time if there was any feeling .41 the contrary on the part of members of the Board. Accordingly, unanimous approval vas given to the letter to the 4d"al Reserve Bank of New York of 'which a copy is attached as Item No. 3. Messrs. Marget, Furth, and Sammons then withdrew from the meeting 441 Messrs. O'Connell, Assistant General Counsel, and Davis, Assistant C°1418ell entered the room. General Contract Corporation matter. General Contract Corporation, holding company of St. Louis, Missouri, had filed with the Board l'eC4eat8 for determinations that 21 of its nonbanking subsidiaries 'were 126 -12Or such a nature as to be exempt under section 4(c)(6) of the Bank 41ding Company Act from the divestment requirements of that Act. As l'ecIllired by the statute, a formal hearing was held on these requests, and the Hearing Examiner's Report and Recommended Decision was filed /d-th the Board in September 1957. The request as to one of the subsid- tall "vas withdrawn during the course of the hearing after the Board Pressed the opinion that the subsidiary was exempt under other 151 ' °visions of the Act. With respect to 21 of the remaining 23 subsidles, the Hearing Examiner recommended in effect that determinations threrse to the bank holding company be made, and General Contract 00 11)oration did not file exceptions to the Hearing Examiner's conclusions rith respect to those subsidiaries. In the case of two remaining small 3.06,31 companies, the Examiner concluded that although they were functionally itite grated and operated much as though they were departments of two of the ' 15Plicant's subsidiary banks, they should not be regarded as a 4Pr °-cr incident" to the business of the banks because, as he saw it, the 'Y types of transactions that made the companies "closely related" t° the banks were unlawful under section 6 of the Bank Holding Company Act, These transactions consisted of the sale by the loan companies t° the subsidiary banks, without recourse, of notes representing personal icica Made by the loan companies. Such sales were made at a discount, that is for an amount less than the face amount of the notes. The lif4tttng Examiner concluded that the purchase by the subsidiary banks i2' 1/14/58 -13- Of this personal loan paper at a discount, but without recourse, involved a violation of section 6(a)(4) of the Act, which makes it unlawful for a sUbsidiary bank to make any "loan, discount or extension of credit" t° its bank holding company or to any subsidiary of the holding company. 413Plieant filed exceptions in these two cases and, at its invitation, three other bank holding companies (First Bank Stock Corporation, Marine and Corporation, and Northwest Bancorporation) submitted amicus curiae briefs on the "discount" question. In memoranda dated January 91 1958, which had been distributed to the members of the Board, Messrs. Hackley„ Solomon, and Hexter presented their view on the applications of General Contract Corporation, and in Par ticular their views as to whether the word "discount," as used in 'section 6 of the Act, should be interpreted to include a purchase of P4Per at a discount but without recourse to the seller. As indicated he memoranda, a difference of opinion had developed with the Legal 840n, Messrs. O'Connell and Davis agreeing with Mr. Solomon's view that the transactions in question should be held to be discounts within the illeaning of section 6 of the statute, while Messrs. Hackley, Hexter, 'IldR°1Ph had reached an opposite conclusion. the If it should be decided Board that the transactions did not violate the statute, the kerta) ere of the legal staff then would agree with the conclusion of the Itettr4'11g Examiner that the two loan companies qualified for exemption ittk der section 4(c)(6). 1/14/58 -14At the request of the Board, Mr. Hackley reviewed the factual " -tuition, developments to date in connection with the case, and the 113°t "on which there was a difference of opinion within the Legal Di vision. He then summarized the reasons for his own opinion, following 141141 he discussed one point not developed in any of the memoranda; that 18, that the sections of the Bank Holding Company Act should be construed "harmoniously as possible. If transactions such as involved in this cftea were held to be discounts in violation of section 6(a)(4), then it 1444 difficult for him to see how there was any real significance left section 4(c)(6), since the close subsidiary bank-loan company 43-ationship in this case appeared to be the type of situation which the Congress had in mind in providing for exemptions pursuant to section 4(°(6)• This, he felt, lent some support to the thought that, 111 ' espective of how discounts might be defined under other statutes, thelle transactions should not be regarded as discounts for the purposes or the Act. Mr. Hackley also pointed out that the "discount" question was 1\111claniental one, the determination of -which would constitute a precedent 14 other cases and would affect transactions between subsidiary banks °rig, '"e same holding compAny in addition to transactions between bank ‘13440nbank subsidiaries. He then referred to a letter addressed to C44 1111an Martin under date of January 10, 1958, by the President of Pits Bank Stock Corporation which expressed the belief that a reading 1/14/58 -15- and study of the applications filed by that Corporation for determinations under section 4(c)(6) with respect to two nonbank subsidiaries might be ar assistance to the Board in determining the issues presented by the 4PPlieations of General Contract Corporation and also Otto Bremer Company. The letter, copies of which had been distributed to the members of the Board, requested, therefore, that the Board review the First Bank Stock 415Plications before making decisions on the earlier applications. Mr. Hackley said that he was not sure whether this suggestion hm. a great deal of merit because an amicus curiae brief had been filed hY First Bank Stock in the General Contract case and han become a part or the record of the proceeding. Nevertheless, in view of the letter the Board might wish to postpone making its determination in the General Contract case until its staff had analyzed and reported to the Board the tacts and circumstances in the First Bank Stock case. Messrs. Solomon and Hexter then commented in support of their respective conclusions on the discount question, the statement of each being based on the memorandum which he had submitted. Following these statements, the Chairman inquired concerning the clegree of urgency involved in the General Contract matter and Mr. Hackley Plied that he did not think there was any real urgency except for the tact that the case had been going on for some time. He had assumed that the Parties involved in the First Bank Stock case would be glad to have the Board's decision on the General Contract applications for their 130 1/14/58 -16- guidance. However, since it appeared to be the feeling of First Bank Stock that a study of its applications might have some influence on the Board's thinking in the General Contract case, the Board might wish to defer a decision pending such a study. In response to a question, Mr. Solomon estimated that it would teite about a week to prepare for the Board a memorandum on the First Bank Stock applications. Only one of them, he noted, involved the discount question. A discussion ensued regarding the advisability of following a Procedure such as the letter from First Bank Stock Corporation suggested. While no strong feelings were expressed by the members of the Board, Governor Robertson suggested that it might be unwise to make public a aecision by the Board to review the First Bank Stock applications at tili8 time, since such a procedure might be taken to indicate premature ecalsideration of that Corporation's applications and preconceived notions On the part of the Board. It was pointed out by Chairman Martin that in 8t4dYing the applications before completion of the hearing the Board /1°Uld be doing what had been formally requested by First Bank Stock 0°11porati0n, and it was therefore his view that this might contribute to a better record from the public relations standpoint. In this e°44ection, Mr. Hackley commented that the Board was required by law to make its decision in the General Contract case solely on the basis °I* the record made at the hearing. By the same token, he said, it would be Possible for the Board to study the applications of First Bank Stock 1/14/58 -17- Corporation and yet not prejudge that case, because those applications Wild likewise have to be decided on the basis of the hearing record. Governor Mills then made a statement having applicability to '00th the General Contract and First Bank Stock cases in which he proposed I4king a broad perspective, going beyond the bare facts, and as far as P"sible proceeding according to a rule of reason. After saying that both of the organizations were reputable and veil managed to the best °this knowledge, he vent on to say that the Board should consider the 131'aotica1 results if it were to make decisions vhich would compel di"olution of the relationships between a holding company and its 8111)84.. 'ulary finance companies. It seemed to him quite possible that in Bilch event the most that would be accomplished would be to reestablish the 8114e type of operation under some different guise, perhaps through rQerging of the finance company activities with those of the subsidiary bezt,_ or through some other method vhich would leave the general direction " 4 control of the operations virtually unchanged. If there as a good 11°1111dati0n for that type of reasoning, he said, the Board might well 841k itself whether anything of substance would be accomplished by a \relY rigid interpretation of the law or whether the public interest be better served by interpreting the law more flexibly in 4c.e°1'clance with the line of thought expressed by Mr. Hexter. As he 44 ",the root of the problem was not in the character of the ilktionships but actually vent back to the ownership of the commercial 1,e bank involved. It was obviously the intent of the Congress, he said, as indicated by the legislative history of the Bank Holding Company Act, to prevent any sort of undertaking that would affect the operations "a commercial bank to the disadvantage of its depositors, and the c"raction of that kind of problem seemed essentially to rely upon adeoNate control of bank chartering and the proper kind of bank superAnother means of correction seemed to him to rest in a tightening of the Act in such a manner that the definition of a bank holding company would comprehend any company which owned control of a ailigle bank. Also, if possible, there might be a revision of the Act that in some manner would prevent the ownership of banks from falling Into the had, of unrelated financial organizations such as insurance o/Vezies, which sometimes use banks as check collection agencies. 414nraltrY, In it seemed to him that it would be desirable for the Board to e attention to broad considerations of this nature in deciding a 40.tte such as the General Contract case. Governor Balderston inquired of Governor Mills whether he would 1)tera -r to see functions of the kind performed by the two loan companies t4 th ot a e General Contract case carried on by the consumer loan department sttbsidiary bank or under an arrangement whereby an unlimited number r -4-Qance company offices could make loans and then discount the paper th. °ne or more of the holding company's subsidiary banks. 133 1/14/58 -19Governor Mills responded that he could not see any great distinction 1141888 a holding company operated finance company offices in communities vhere it was not represented by a subsidiary bank. This, he said, was a eituation which probably should be controlled because it would lead in ettect to branch operations in a particular field of finance. For this teasony he felt that a bank holding company should be required to confine it8 finance company operations to communities in which it was represented 1/ a subsidiary bank. Within this framework, the holding company could de whether, for various reasons, it was more convenient to have eeNtrate companies (a bank and a loan company) or to combine the activities. Along these lines, Mr. Hackley said that the legal staff had '4"488ed whether favorable section 4(c)(6) determinations might suggest th "holding companies could go out and establish finance companies thr°1aghout the country. €1'eat hazard. It was concluded, however, that this was not a In the General Contract case, the loan companies were "ttlealY located on the premises of subsidiary banks, and there would be different factual situation if a holding company established finance ecum -va41es all over the country. Under such circumstances, the Board 4 naight conclude that, even though the transactions between a subsidiary -41d the loan companies were not prohibited by section 6, the loan -"les nevertheless would not be a "proper incident" to the banking 1)11814A In the General Contract case it was not necessary to meet theege that the subsidiary banks were doing something through the loaal companies that they could not do themselves. 1/14/58 -20This concluded the discussion and it was understood that further consideration of the General Contract Corporation case would await the receipt of a memorandum from the Legal Division summarizing the applications which bRd been submitted by First Bank Stock Corporation. During the foregoing discussion Mr. Thomas withdrew from the eeting. At its conclusion Messrs. Thurston, Assistant to the Board, j°111143m, Director, Division of Personnel Administration, Kelleher, Director, Division of Administrative Services, and Daniels, Assistant Controller, entered the room along with Miss Burr, Associate Adviser, sion of Research and Statistics. Status of Republic National Bank as a bank holding company IIITILHal_211. In a memorandum dated January 10, 1958, copies of which 4641 been sent to the members of the Board, Mr. Davis discussed the citlestion whether Republic National Bank of Dallas, Dallas, Texas, should be regarded as a bank holding company within the meaning of the Bank 11°1cliag Company Act. In view of the circumstances involved, the view 1148 expressed that Republic was a bank holding company under clause (3) °t section 2(a) of the Act. This would be in accord with the opinion of ec4Insel for the Federal Reserve Bank of Dallas, while Counsel for Republic 44 taken the position that the bank would not qualify as a bank holding eqMDany under any of the definitions set forth in section 2(a) of the Act. A draft of letter to the Reserve Bank which might be used if the 1/OA concurred in the view expressed by Mr. Davis was submitted with the raetnorandum. 135 1/14/58 -21At the request of the Board, Mr. Davis reviewed the factual situation and described similarities between the circumstances involved here and in the case of the Fort Worth National Bank, Fort Worth, Texas, thieh the Board held to be a bank holding company on June 17, 1957. He said it was the unanimous view of those members of the Board's legal staff who had considered the matter that the same conclusion aPPeared to be warranted with respect to Republic National Bank of Dallas. In fact, there seemed to be even more basis in the Republic e4se for the Board to hold that the intermed iate investment companies Ithich actually held the majority of the shares of each of eight banks Ilere merely corporate "shells." Any other conclusion as to the status "RePublic, he suggested, would lead to an almost absurd result, 119*81e13r, that a company would be a bank holding company if trustees held bank shares directly for the benefit of its shareholders but not It t/lAstees indirectly held and controlled such bank stock through an I4termediate wholly-owned corporation. Mr. Davis also said that the 1111 d6 for holding Republic to be a bank holding company under section 2(a)(11 of the Act would not appear to be as strong as in the Fort ease and that therefore it seemed desirable for the Board to base 48 decision, if it agreed with the legal staff, on the provisions of 4eetion 2(a)(3), which state that a company is a bank holding company tr -) Per cent or more of the voting shares of each of two or more 1)1141,1t 8 is held by trustees for the benefit of the shareholders of 1/14/58 -22- 811ch company. He also said that in order to allow Republic a reasonable time within which to register, it would seem appropriate for the Board to grant a period of 90 days for the filing of a registration statement. In a supplemental comment, Mr. Hackley said that in suggesting technical amendments to the Bank Holding Company Act, the Board might ‘ant to suggest changing the language of section 2(a)(3) to make it clear that the clause was applicable to shares held or controlled by trustees either directly or indirectly. In response to a question, he 84id that a published opinion on the Republic National Bank matter was Ilet contemplated because it involved only an interpretation of the 441/age of the statute and not a decision by the Board concerning an 410Pli08.tion under the Act. Thereupon, unanimous approval was given to a letter to the ?ederal Reserve Bank of Dallas in the form attached as Item No.,. 4. Messrs. Hexter, O'Connell, Hostrup, and Davis then withdrew from the meeting. !ilpillicail4ty .of Regulation U (Item No. 5). There had been dis- 1174111- --ed to the members of the Board copies of a memorandum from Mr. IflO dated January 10, 1958, regarding a question which had been 44.8 by a member bank with the Federal Reserve Bank of St. Louis as to ma ether Regulation U would be applicable to a certain bank loan the Illssz)cceds of which would be used to margin a short sale of a registere d Nek • In this particular case, the loan would be secured by unregistered 137 1/14/58 -23- st0ek which was exchangeable under a merger agreement into the number of shares to be sold short. The memorandum recommended concurring in the 013inion of the Reserve Bank that the particular loan was exempt from the Regulation and not expressing any opinion on the broader question of vilether a bank loan to provide margin for a short sale of registered st"k is subject to the Regulation. In commenting, Mr. Solomon pointed out that this was one of the cilleations arising out of the fact that Regulation U is less specific in rilailY Places than Regulation T. r He then described how the circumstances the loan mentioned by the St. Louis Reserve Bank made this transaction 4°Itellhat different from an ordinary short sale. For this reason, while the gliestion of the applicability of Regulation U to loans to provide "n for a short sale might be debatable, he considered it appropriate 41 to Ifise the Reserve Bank that a loan such as described was not covered ' br the Regulation. Such a position, he pointed out, would be in harmony " 1 the provisions of section 3(d)(3) of Regulation T under which a brok er is not required to obtain the usual margin on a short sale when tlie are held in an account securities exchangeable or convertible 1".11111 a reasonable time into securities sold short. In a brief discussion which followed, Governor Mills suggested -qltorial change in the proposed letter to the St. Louis Reserve 1141 to eliminate from the concluding paragraph reference to the fact 1/14/58 -24- that the Board was not expressing any opinion at this time on the broader question of an ordinary bank loan to margin an ordinary short Sale. There being agreement with this suggestion, unanimous approv al " 14 given to a letter to the Federal Reserve Bank of St. Louis in the attached as Item No. . 5. Meetings with reussentatives of the Investment Bankers Associ ation Chairman Martin referred to the periodic meetings of the Board /41th the committee of the Invest ment Bankers Association which confers 141tb the Treasury on Government financing proble ms and said that he 1184 discussed with the new chairman of that group a Change in procedure 11der which, rather than meeting with the members of the Board, the gr '°1110 would meet with member s of the Board's research staff for an ec " °rnic presentation. Since it appeared that such an arrangement 11°11-1d be agreeable to the committee, plans had been made for a program Qr he kind described on Monday, January 27. Chairman Martin said that he wished to ascertain whether the N),s _e d arrangement met with the approval of the other members of the Board, and he added that any Board member who desired could of Se join the meeting to listen to the economic presentation or engage sa iscussion with the visito rs to the extent that he wished. 1:19 1/14/58 .25.. Following a discussion of reasons favoring the change in Procedure, it was agreed unanimously that the plan should be put into effect on an experimental basis beginning with the visit of the committee of investment bankers on January 27. Distribution of Federal Reserve Bulletin. Following discussion vithin the staff over a period of time with regard to the policy which should be followed in making copies of the Federal Reserve Bulletin eIreilable to branches of member banks, Governor Shepardson recommended a memorandum dated December 26, 1957, Which had been circulated to the members of the Board, discontinuing the policy established in 1939 °t Bending the Bulletin free to each domestic branch of a member bank, the bUsiness of which was sufficiently important in the opinion of the 44eral Reserve Bank concerned to justify making a copy available to the 43anaging officer, with a limit of 50 copies for any one bank. In lieu Of this procedure, he recommended a policy of making a charge of b ' er Year for subscriptions to the Bulletin sent to a member bank or "Ik4lr of its branches, in addition to the one free copy sent to the head "flee/ with the understanding that the new policy would become effective 44 4°°n as the necessary arrangements could be made. In reviewing the background of the matter, Governor Shepardson 'grit out that a suggestion had originated early last year at the Peti eral Reserve Bank of San Francisco that any domestic branch of a 441ber bank be sent a complimentary copy of the Bulletin each month 141) 1/14/58 -26- 1pon request of the parent bank, thus discontinuing the limitation of 50 free copies for each member bank. This suggestion, he said, pointed Up the lack of logic in the current policy but it also gave rise to questions concerning cost and the lack of comparable treatment as between banks with a large number of branches and banks which, although easo large, do not operate branches. Accordingly, the compromise pro- P°sal had been offered and he concurred in it. Although he did not regani the question of cost as a highly significant factor, it occurred to him that the recommended procedure would place the distribution of the Bulletin on a more logical basis by substituting a preferred rate for an artificial formula. Mr. Thurston said that, as Governor Shepardson had indicated, the present policy was illogical. It was a question, therefore, of hcAT far the Board wished to go in subsidizing the distribution of the 13U1letin to those who would be interested in it. Personally, he would be agreeable to trying the procedure recommended by Governor Shepardson unless there were strong arguments against it which he did not imnedi4te1Y perceive. A discussion ensued during which agreement was expressed by the Members of the Board that the primary objective should be to make the B ulletin available on a reasonable basis to persons having a legitimate Use for it. While some feeling was expressed that this objective might be achieved best by liberal distribution to member banks on a compliMentary basis, the prevailing view was to the effect that offering the 141 1/14/58 -27- Bulletin at a substantially reduced rate would perhaps effect a more equitable distribution. It was also felt that such a policy might actually stimulate more interest in the Bulletin than liberal free distribution. Accordingly, unanimous agreement was expressed with the recommendation contained in Governor Shepardson's memorandum, with the understanding that the policy could be reexamined at any time if developments indicated the desirability of revising it. The meeting then adjourned. Secretary's Notes: Governor Shepardson today approved on behalf of the Board the following items: , Memorandum dated January 10, 1958, from Mr. Masters, Director, uivision of Examinations, recommending acceptance of the resignation Of William S. Wait, Review Examiner in that Division, effective uanuary 31, 1958. Memorandum from the Division of Examinations dated January 13, 1958, ' l ecommending an arrangement for making currency available for training 'Poses at each session during 1958 of the School for Assistant miners of the Inter-Agency Bank Examination School. A copy of the ineraorandum is attached as Item No. 6. It having been ascertained pursuant to action taken by the Board on January 8, 1958, that Mr. Victor S. Johnson, Chairman and President of Aladdin Industries, Nashville, Tennessee, would accept appointment, if tendered, as a director of the Nashville Branch, Federal Reserve Bank of Atlanta, for the unexpired portion of the term ending December 31, 1958, a telegram notifying Mr. Johnson of his appoi was sent on January 13, 1958. / 41(11, -461/646104V,t4—A-ALA. cretary BOARD OF GOVERNORS ettitto,, OF THE Item No. 1 1,14/58 FEDERAL RESERVE SYSTEM $t * a WASHINGTON 25, D. C. '‘ ADDRESS OFFICIAL CORWESPONOENCE tit ICI:. TO THE 00ARt, January 140 1958 Board of Directors, Bank of Encino, 17031 Ventura Boulevard, Encino, California. Gentlemen: Pursuant to your request submitted through the Federal Reserve Bank of 3an Francisco, the Board of Governors approves the establishment of a branch in Thousand Oaks, Ventura County, California, by Bank of Encino, Los Angeles (Encino), California, provided the branch is established within six months from the date of this letter and that formal approval of the Superintendent of Banks of the State Of California is effective at the time the branch is established. It is understood that prior to establishment of the branch, capital funds of the bank will be increased by not less than $750,000 through the sale of additional capital stock and that approval of the State authorities will be Obtained if fixed assets are to exceed 50 per cent of capital and surplus. Very truly yours, (signed) Merritt Sherman Merritt Sherman, Assistant Secretary. BOARD OF GOVERNORS 41, •,)) OF THE )01X0p,o0 71* t Item No. 2 1/14/58 FEDERAL RESERVE SYSTEM A* 'o WASHINGTON 25, D. C. ADDRESS OFFICIAL CORRESPONOENCE TO THE BOARD 44fitt& Ntati January 14, 1958. Mr 'H. H. Kimball, Vice President, Federal Reserve Bank of New York, New York 45, New York. rjear Mr. Kimball: Reference is made to your letters of October 31, 1957, a'not December 12, 1957, regarding the application of The Marine Company of Western New York, Buffalo, New York, for (1) 448 Board of Governors' consent to its absorbing, by merger, The ?itizens Bank, Attica, New York, and (2) permission by the Board 40 establish a second branch in Attica. As brought out in your letters, the banking facilities u Attica now consist of The Citizens Bank and a branch of The : .arine Trust Company of Western New York (the applicant). Con' 01equent1y, the proposed merger would result in the absorption of ine of these competitors by the other, leaving only one banking :Iletitution represented in the town. In view of the circumstances, re Board of Governors has denied the application on the ground ;:hat the proposed merger would unduly diminish banking competition the town of Attica and its vicinity. Please advise the Trust Co mPanY accordingly. Very truly yours, (Signed) S. R. Carpenter S. R. Carpenter, Secretary. BOARD OF GOVERNORS 04000 44 ett; 4 • 0 \ 0 • OF THE •,24 • Item No. 3 FEDERAL RESERVE SYSTEM 0 11 1/14/58 WASHINGTON 25. D. C. Z1-11 ' ADDRESS OFFICIAL CORRESPOND( NCE TO THE BOARD January 14, 1958. Mr. Alfred Hayes, President, Federal Reserve Bank of New York, New York 45, New York. Dear Mr. Hayes: In response to the request of your Bank submitted in Mr. Exter's letter of January 10, 1958, the Board ap— Proves an increase to $150 million of the maximum amount of bankers' acceptances that may be purchased with your Bank's guarantee of payment and held by your Bank at any one time for the account of foreign central banks, including the Bank for International Settlements. Sincerely yours, (Signed) S. R. Carpenter S. R. Carpenter, Secretary. 14 F., BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Item No. 1/14/58 WASHINGTON 25, D. C. ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD January 14, 1958 Mr. L. G. Pondrom, Vice President, Federal Reserve Bank of Dallas, Ilallas 2, Texas. ' pear Mr. Pondrom: This refers to your letter of September 11, 1957, and Mr. Irons! letter of August 21, 1957, to Mr. Sherman, with their closures, regarding the status of Republic National Bank of Dallas, r , allas, Texas, as a bank holding company under the Bank Holding ‘Jorn PanY Act. On the basis of the information submitted with the foregoing let ers, it is understood that the factual situation is substantially as follows: There are nine investment companies organized under the law TP each of which companies, except one, is the registered owner ,xas, -of .„ 81-1 -)1 Per cent of the outstanding shares of a bank; that all of the °fares of the investment companies are held in trust, for the benefit t sh areholders of Republic National Bank, by three trustees under st indentures which are in all material respects the same; that ch each case the three trustees are the Chairman of the Board, a ,4rman of the Executive Committee and Chief Executive Officer, P are resident of Republic National Bank; that these three individuals eae also the Chairman of the loard, President and Vice President of coch of the investment companies; and that each of the investment asmPanies has an identical slate of officers, both as to title and o individual, and each of the officers is either a director or onlicer of Republic National Bank. It is also understood that the 8t0Y assets of the investment companies, in addition to the bank th ck indicated, are a relatively nominal amount of cash and, in fll!,case of four of the invest ent companies, a small amount of 4118 invested in State of Texas revenue bond!';.* COlTipUnder clause (3) of section 2(a) of the Bank Holding mot, anY Act, a company is a bank holding company if 2.5, per cent or true of the voting shares of each of two or more banks is held by "ees for the benefit of the shareholders of such company. While *Technical error. Should have read "turnpike bonds". ct February 24, 1958. See minutes L. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 11r. L. G. Pondrom -2- the trustees in the present case do not directly hold the shares of the eight banks, they hold all the stock of the investment companies that directly own stock of the eight banks, and the eight companies are engaged in no activities other than the holding of the bank stock. In the circumstances of this case, it is the Board's opinion that F5 per cent or more of the stock of each of the eight banks is "held" oY trustees for the benefit of the shareholders of Republic National Bank. Any other conclusion would contravene the intent of the statute, w?uld lead to an almost absurd result, and might open the door to widespread evasion of the purposes of thelaw. It is the Board's c°nclusion, therefore, that Republic National Bank is a bank holding comPany within the meaning of the Act and must comply with its pr ovisions. In order to allow the Bank a reasonable time within which to prepare its registration statement, the Board grants (pursuant to .Pection 5(a) of the Act) a period of 90 days from the date of receipt a DY Republic National Bank of your forwarding letter for the filing of registration statement by the Bank as required by the Act. It will be appreciated if you will advise Republic National Bank of the Board's views and action, as stated in this letter. Very truly yours, (Signed) S. R. Carpenter S. R. Carpenter, Fenretary. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Item No0 1/14/58 WASHINGTON 25, D. C. ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD January 14, 1958 *. George E. Kroner, Vice President, Pcderal Reserve Bank of St. Louis, St. Louis 2, Missouri. Dear Mr. Kroner: This refers to your letter of December 20, 1957, presenting a Louisville, Kelt,, question raised by First National Bank, Y, as to whether a certain loan would be subject to a-g4lation U. The proceeds of the loan would be used to margin b_short sale of a registered stock, and the loan would be secured Y 'unregistered stock which is exchangeable (under a merger agreeinto the number of shares to be sold short. Regulation U applies to a loan which is secured by any stocl. 1, 4 and is "for the purpose of purchasing or carrying any stock i:eistered on a national securities exchange." Since the present 1)214 vould be secured by stock, the question is whether it should considered to be "for the purpose of purchasing or carrying' Y r egistered stock. In view of section 3(b)(1) of the regulation, the loan not be considered to be for the purpose of "carrying" a Tis",lstered stock under the present provisions of the regulation. section provides that: 'vow A "No loan, however it may be secured, need be treated as a loan for the purpose of 'carrying' a stock registered a national securities exchange unless the loan is [to :Purchase or carry certain 'redeemable securities'] or the Purpose of the loan is to enable the borrower to reduce or retire indebtedness which was originally incurred to purchase such a stock, or, if he be a broker or a dealer, to carry such stock for customers." The question whether the loan should be considered to be for the 8110211rPose of "purchasing" a registered stock is more difficult. , A sale ordinarily involves the 'borrowing" of the stock to be de' l ed, on the sale and also involves the later purchase of the stock 5 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. George E. Kroner -2- . t ,43 be "returned". It appears, however, in the present case that the i. 4can will be secured by unregistered securities exchangeable into registered securities sold short, and that such an exchange would Illovide the registered stock to close out the transaction, rendering Lhe later purchase unnecessary. In this connection it maybe noted that under the more detailed of section 3(d)(3) of Regulation T, a broker is not le Vired to obtain the usual margin on a short sale "when there are reit' in the account securities exchangeable or convertible within a jeasoruible time, without restriction other than the payment of money, 'Ina such securities sold short ....' c In the circumstances, the Board agrees with the view of Urself and your counsel that the particular loan here involved would Ilot be subject to the present provisions of Regulation U. Very truly yours, (Signed) S. R. Carpenter S. R. Carpenter, Secretary. 149 BOARD OF GOVERNORS or THr FEDERAL RESERVE SYSTEM Correspondence d 0 Governors vision of Examinations Date Item NO. 6 1/14/58 January 13, 1958. ion Subject: Inter-Agency Bank Examinat trainfor cash of n Provisio School -ing purposes. n with Pursuant to arrangements initiated by Governor Robertso been has ll ler of the Currency and the FDIC, it 4 1ce of the Comptrol ' .,?e,ed1 be will that four sessions of the School for Assistant Examiners '4-"Inucted in 1958 as follows: 1/ the rtr. Nineteenth Session Twentieth Session Twenty-first Session Twenty-second Session Beginning Beginning Beginning Beginning January 20 May 19 (tentative) September 2 (tentative) November 10 (tentative) As authorized for previous sessions, currency in the amount ae„vProximately $91000 will be required to provide currency to repreti' tellers' Hcash" in the "Inter-Agency Bank" and for other instruc4-un Purpose5.. a Of , er Accordingly, it is recommended that the Office of the Controll the of aut be session each during scho horized to make available for training ,f'or Assistant Examiners in 1958 sums not to exceed :44;91000 in curia ."3r tPaper and metallic) with the understanding that while the currency Res'n use it will be under the responsibility of Charles H. Bartz, Federal lie Examiner, or, in his absence, IL Patricia cShane„ Training Assisj tane at t, and that when not in use for the purposes specified, and in any event °fah* end of each day, it will be returned to the Fiscal Section of the ee of the Controller. Respectfully subrdtted, Glenn M. Goodman, Assistant Director, Division of Examinations. -.eession of the senior school has been scheduled to commence April 14 '1?.th the second session starting about October 13 but no currency 14111 be required for training purposes.
@FedFRASER