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10 Minutes of actions taken by the Board of Governors of the Federal Reserve System on Tuesday, January 5, 1954. The Board met in the Board Room at PRESENT: 9:45 a.m. Mr. Mr. Mr. Mr. Mr. Martin, Chairman Szymczak Evans Mills Robertson Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Carpenter, Secretary Sherman, Assistant Secretary Kenyon, Assistant Secretary Thurston, Assistant to the Board Leonard, Director, Division of Bank Operations Vest, General Counsel Sloan, Director, Division of Examinations Horbett, Assistant Director, Division of Bank Operations Hackley„ Assistant General Counsel Messrs. Erickson, President, Schlaikjer, Vice President and General Counsel, and Latham, Vice President, Federal Reserve Bank of Boston. Pursuant to the understanding at the meeting on December 21, 1953, Messrs. Erickson, Schlaikjer, and Latham had been invited to discuss with the Board the question whether guaranty funds in the savings departments of State member banks in the First Federal Reserve District should be considered a part of the banks' surplus for the purposes, among others, of computing loan and investment limitations and subscriptions to Federal Reserve Bank stock. The Federal Reserve Bank of Boston had ad- vised its State member banks in Massachusetts, Rhode Island, and New Hampshire by letter dated July 1, 1953, that the guaranty funds would -2be considered in the same category as surplus for these purposes and had thereafter issued additional Federal Reserve Bank stock on that basis. Following a brief introductory statement by President Erickson, Mr. Schlaikjer reviewed the consideration given by the Boston Bank to the matter over a period of years. His statement covered substantially the same ground as a memorandum on the subject which he submitted to President Erickson under date of December 29, 1953. Copies of that memorandum, with attachments, were distributed to the members of the Board at this meeting and a copy has been placed in the Board's files. Upon the completion of Mr. Schlaikjer's remarks, Mr. Vest inquired to what extent the Reserve Bank thought it possible or likely that similar questions might come up in the First Federal Reserve District or elsewhere involving other bank accounts of like nature; in other words, the potential magnitude of the problem. Mr. Schlaikjer responded to the effect that the lams of only three States (Massachusetts, Rhode Island, and New Hampshire) were involved, and that for practical purposes it appeared that the problem was limited to the treatment of guaranty funds maintained by State member banks in those three States. Mr. Latham added that he knew of no other account main- tained by member banks which would raise a similar question. 12 1/5/54 -3In response to an inquiry by Governor Robertson as to whether the guaranty funds might not be built up above the required five per cent of savings deposits, Mr. Schlaikjer said that while that would be permissible, it was unlikely that the commercial banks would follow such a practice because of their competitive relationship to mutual savings banks. He pointed out that under Massachusetts State law the guaranty fund of a mutual savings bank is limited to 7-1/2 per cent of deposits. Mr. Latham said that member bankers in Massachusetts with whom he had spoken indicated that they would favor repeal of the State statutes relating to guaranty funds, but he added that it was doubtful whether such legislation could be passed in view of banking traditions in the State. Mr. Hackley noted that guaranty funds of State banks in Massachusetts must be built up to the legal minimum out of net profits of the savings department and he inquired whether additions to the fund would have to be made in the same manner. he thought not. Mr. Schlaikjer replied that Mr. Hackley also noted that Massachusetts State law pro- vides for the establishment of trust department guaranty funds on a permissive basis, and he raised the question whether such funds would be regarded as surplus for the purposes under discussion. Following a comment by Mr. Schlaikjer that he could not answer the question without referring to the law, Mr. Latham added that there were no such trust department guaranty funds in existence. 13 1/5/54 -4In response to a question by Mr. Leonard, Mr. Schlaikjer said that guaranty funds of commercial banks in Massachusetts are not regarded as surplus under State law so far as loan and investment limitations are concerned, but that he thought they should be for the purposes of Federal lams relating to loan and investment limitations. With regard to questions raised by Governor Robertson, Mr. Schlaikjer agreed that the definition of the words "capital" and "surplus" as used in the statutes and the application of those definitions to the situation under discussion involved questions of law as well as accounting. He felt that due regard should be given to past administrative practice in arriving at a decision on a question such as that with respect to the treatment of guaranty funds, and that the Boston Bank had given adequate consideration to that point. He also said that the files of the Boston Bank contained no reference to consideration by the Board of Governors in 1937 of the question whether guaranty funds should be regarded as surplus for the purpose of issuing Federal Reserve Bank stock. In a discussion of the last point, it was brought out that the question was raised at the time by a Federal Reserve Examiner in connection with an examination of the Reserve Bank, and that inasmuch as the Board concluded that the Boston Bank was following the correct practice in not issuing stock against guaranty funds, the matter was not taken up With the Reserve Bank. It was noted that in the course of its recent consideration of the matter the Boston Bank obtained certain information from the other 14 -5- 1/5/54 Reserve Banks, and question VAS raised as to why the matter had not been taken up with the Board of Governors. Mr. Schlaikjer said there had been informal conversations between representatives of the Boston Bank and representatives of the Board's Division of Examinations on the general subject of guaranty funds, and that it was the Bank's understanding that the Board's staff felt the question was peculiar to the Boston Reserve District and preferred to have the matter settled locally. There was a further discussion of the differentiations which might be made between guaranty funds and other accounts such as undivided Profits and reserves for contingencies and other purposes. Mr. Schlaikjer expressed willingness to develop this phase of the matter in more detail, but it was indicated that that probably would not be necessary. Governor Robertson expressed the view that the question was principally one of interpretation of the terms "capital" and "surplus" as used in the statutes and said that, -while there might be good reasons for deviating from the practices followed over the years in interpreting the statutes, he felt that any such action should be preceded by carefully documented studies. Chairman Martin concluded the discussion by indicating that the Board would give further attention to the matter and advise the Reserve Bank of its conclusions. Messrs. Erickson, Schlaikjer, Latham, Vest, Sloan, Horbett, and Hackiey then withdrew from the meeting. —6— 1/5/54 Mr. Carpenter reported that Mr. Young, President of the Federal Reserve Bank of Chicago, had advised informally that the Bank was considering increasing the number of directors on the board of the Detroit Branch from five to seven incident to the enlargement of the branch territory effective January 1, 1954, and had inquired whether the Board of Governors would have any objection to the necessary change in the by-laws of the Detroit Branch. He noted in this connection that under the Board's regulations relating to branches of Federal Reserve Banks the board of directors of each branch shall consist either of seven or five members, as determined by the Federal Reserve Bank, subject to the approval of the Board of Governors. Following a statement by Mr. Carpenter regarding cases in the past where Reserve Banks had decided for various reasons to increase or decrease the number of branch directors, it was agreed unanimoasly that there would be no objection to the proposed action of the Federal Reserve Bank of Chicago and that President Young should be so advised informally. Under date of December 23, .1953, the Division of Personnel Administration had sent to the members of the Board data on three persons who had been suggested to Chairman Martin as prospective directors of the Charlotte Branch, Federal Reserve Bank of Richmond. Following consideration of persons suggested, it was voted mously to request Mr. Woodward, man of the Federal Reserve Bank the unaniChairof 16 -7- 1/5/54 Richmond, to ascertain and advise the Board whether Mr. Halbert M. Jones, President and Treasurer, Waverly Mills, Laurinburg, North Carolina, would accept appointment, if tendered, as a director of the Charlotte Branch for the unexpired portion of the term ending December 312 1956. Mr. Leonard then withdrew from the meeting. There was presented a request from Mr. Leonard for authority to travel to Salt Lake City, Utah; Seattle, Washington; Portland, Oregon; San Francisco, California; and Los Angeles, California, during the period January 10-17, 1954, to discuss at Salt Lake City and at San Francisco the proposed building program of the Salt Lake City Branch and to visit the other three branches of the Federal Reserve Bank of San Francisco. Approved unanimously. The meeting then adjourned. During the day the following additic/ nai actions were taken by the Board with all of the members except Governor Vardaman present: Minutes of actions taken by the Board of Governors of the Federal Reserve System on January 4, 1954, were approved unanimously. Memorandum dated January 4, 1954, from Mr. Bethea, Director, Division of Administrative Services, recommending that the resignation of Edward D. Rogers, Operator (Mimeograph) in that Division be accepted effective January 15, 1954. Approved unanimously. 40 ( 41IPt" I 1 / .4ecretary