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Minutes for June 11, 1964
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, 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.
Chm. Martin
Gov. Mills
Gov. Robertson
Gov. Balderston
Gov. Shepardson
Gov. Mitchell
Gov. Daane
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Minutes of the Board of Governors of the Federal Reserve
System on Thursday, June 11, 1964.
The Board met in the Board Room
at 10:00 a.mPRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Mills
Robertson 2/
Shepardson—
Mitchell
Sherman, Secretary
Bakke, Assistant Secretary
Hackley„ General Counsel
Brill, Director, Division of Research
and Statistics
Mr. Farrell, Director, Division of Bank
Operations
Mr. Solomon, Director, Division of Examinations
Mr. Hexter, Assistant General Counsel
Mr. O'Connell, Assistant General Counsel
Mr. Shay, Assistant General Counsel
Mr. Hooff, Assistant General Counsel
Mr. Holland, Associate Director, Division
of Research and Statistics
Mr. Daniels, Assistant Director, Division
of Bank Operations
Mr. Leavitt, Assistant Director, Division
of Examinations
Mr. Sprecher, Assistant Director, Division
of Personnel Administration
Mrs. Semia, Technical Assistant, Office of
the Secretary
Mr. Potter, Senior Attorney, Legal Division
Mr. Young, Senior Attorney, Legal Division
Mr. Sanders, Attorney, Legal Division
Mr. Collier, Assistant to the Director,
Division of Bank Operations
Mr. McClintock, Supervisory Review Examiner,
Division of Examinations
Mr.
Mr.
Mr.
Mr.
Circulated items.
The following items, copies of which are
attached
to these minutes under the respective item numbers indicated,
were approved unanimously:
Joined meeting at point indicated in minutes.
Withdrew from meeting at point indicated in minutes.
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-2Item No.
Letter to State Street Bank and Trust Company, Boston,
Massachusetts, approving the establishment of a branch
near Longwood Avenue and Brookline Avenue.
1
Letter to Southern Bank and Trust Company, Richmond,
Virginia, approving the establishment of a branch on
East Belt Boulevard, Chesterfield County.
2
Letter to Central Savings Bank and Trust Company, Monroe,
Louisiana, approving the establishment of a branch in
West Monroe.
3
Letter to First State Bank, Loraine, Texas, waiving
the requirement of six months' notice of withdrawal
4
from membership in the Federal Reserve System.
Letter to the Presidents of all Federal Reserve Banks
regarding hospitalization, surgical, and major medical
coverage for active and retired employees. (The letter
.
,
E18 aPproved included certain editorial changes in the
uraft that had been distributed.)
5
Application of Meadow Brook National Bank (Item No. 6). There
1184 been circulated a memorandum dated June 1, 1964, from the Division
Of Bank Operations, regarding the application of The Meadow Brook
National Bank, Jamaica, New York, to carry reduced reserves.
Under
the terms of Regulation D, Reserves of Member Banks, the bank was reto carry reserve city bank reserves because it had a branch in
4 reserve city (New York City), even though its bead office was not in
4
reserve city. The Federal Reserve Bank of New York, in a letter of
1s4/1 18, 1964, recommended that the application be approved, on the
roland that the applicant was primarily a retail banking institution
obt ining the
major portion of its loans and deposits from suburban
are
s; that its interbank demand deposits were only 5 per cent of its
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total demand deposits; that its annual turnover rate of demand deposits
waS well below that of the large New York City banks; and that its
activities in the markets for Federal funds, Treasury bills, and bankers'
acceptances were only nominal when compared with such activities of the
large city banks.
Although the Reserve Bank recognized that Meadow
Brook's over-all size (demand deposits of $316 million) was an adverse
circumstance, it concluded that the other considerations cited were
sufficient to justify approval.
The Division of Bank Operations, how-
ever, believed that there were not sufficient grounds for approving the
application.
Size had been also the only circumstance adverse to the
application of Franklin National Bank, Franklin Square, New York, for
Permission to carry reduced reserves, which the Board had recently
clenied.
A draft of letter to Meadow Brook National that would reflect
the Division's recommendation of denial was attached to the memorandum.
In summary comments, Mr. Farrell indicated that the Division's
PrInciPal reason for disagreement with the conclusion reached by the
New York Reserve Bank was that, in addition to Franklin National and
the applicant bank, there were four other member banks that carried
I'eserve city- bank reserves because they had branches in reserve cities,
though their head offices were not in reserve cities (one of these
r°11r banks also had applied for permission to maintain reduced reserves
4nd had been denied by the Board).
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-4After discussion, the letter to The Meadow Brook National Bank
expressing denial of its application was approved unanimously.
A copy
Of the letter is attached as Item No. 6.
Messrs. Daniels, Collier, and McClintock then withdrew from
the meeting.
Undivided profits (Item No. 7).
There had been distributed a
emorandum dated June 10, 1964, from Mr. Hackley, regarding a proposed
interpretation that would state, for reasons indicated, the Board's
°Pinion that undivided profits do not constitute "capital," "capital
stock," or "surplus" for the purposes of provisions of the Federal
Reserve Act.
Pursuant to the understanding at the meeting on May 21,
1964, the proposed interpretation had been sent to the designated
representatives of the Treasury Department, the Comptroller of the
Currency, and the Federal Deposit Insurance Corporation
for comment,
under the so-called "Dillon procedure." The Corporation, in a letter
°r June 9, 1964, stated its concurrence in the Board's position.
A
letter of June 5 signed by the Administrative Assistant to the Comptroller
°I' the Currency, after citing the Comptroller's conflicting ruling in
the Manual for National Banks, expressed agreement with the Board's
8tatement that, for purposes of lending limits, the question was
one
teT determination under State laws as to State banks and under the National
1144k Act as to national banks, and offered no comment regarding the pro13°sed interpretation of various sections of the Federal Reserve Act as
theY applied to State member banks.
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During comments based on the memorandum, Mr. Hackley stated
that, since no reasons had been presented by the other agencies for
Changing or modifying the conclusions approved by the Board at its
MaY 21 meeting, the interpretation would be issued in the usual manner
if the Board had no objection.
After a discussion during which a change in wording suggested
by Governor Robertson was agreed upon, the interpretation was approved
unanimously for transmission to the Federal Reserve Banks and for publication in the Federal Register and in the next issue of the Federal Reserve
A copy of the interpretation, in the form in which it was
PUblished in the Federal Register, is attached as Item No. 7.
Mr. Goodman, Assistant Director, Division of Examinations, then
joined the meeting.
Regulation A (Item No. 8).
There had been distributed a memo-
dated June 4, 1964, from Mr. Hackley, regarding a revision of
Regulation A, tentatively entitled Advances by Federal Reserve Banks,
that might be adopted in the event of enactment of pending legislation,
ProPosed by the Board, to liberalize provisions of present law regarding
collateral for Federal Reserve Bank advances.
In a letter of August 22,
1963) the Board had asked the Federal Reserve Banks for comments on a
Iirst draft of a revised Regulation A; the matter was also considered
4t meetings of loan officers of the Reserve Banks.
Attached to the
Memorandum was a summary and analysis of comments of the Reserve Banks
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and of their loan officers, from which it appeared that there were
5 principal issues for determination by the Board at this time:
(1) Should a revision of Regulation A in the event of enactment of the pending legislation include specific guides or standards
as to the nature and amount of collateral?
The Reserve Banks strongly
°PPosed the inclusion of any such specific standards in the Regulation
itself, preferring that such standards appear in general policy statements to be issued by the Board or in the operating circulars of the
Reserve Banks, which might be modified from time to time in the light
Of experience.
Attached to the memorandum was a draft of letter re-
standards with respect to collateral that might be sent to the
Reserve Banks at the time of adoption of the revised Regulation A
should the Board be disposed to concur in the view of the Reserve Banks
On this point.
(2) Should a single rate be fixed for all advances, regardless
tYPe or maturity of collateral, or should differential rates be
established?
In general, the Reserve Banks preferred a single rate,
rather than a higher rate for advances secured by paper with a maturity
est more than 18 months, for example, or a lower rate for advances secured
bY G
overnment obligations.
(3) Should the present Foreword to Regulation A, setting forth
elleral principles governing borrowings from the Reserve Banks, be made
44 integral part of the Regulation?
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oPposed making the so-called "general principles" a part of the Regulation, there seemed to be no sound reason why that should not be done.
On the contrary, such a change would seem desirable if eligibility
requirements were repealed and reliance were to be placed primarily
on the soundness of loans and the appropriateness of member bank
borrowings.
(4) In light of the proposed repeal of all statutory maturity
requirements, should the Regulation be more specific in limiting advances
to periods of 15 days, except where a borrowing bank gave good reason
for longer maturities?
It was believed that advances for periods of
More than 15 days should be permitted only
a member bank
demon-
strated a
need for such longer maturities in conformity with the "general
Principles"; but recognition might be given to the possibility of
renewals consistent with such general principles.
(5) Should the present negotiability requirement be eliminated
Trom
the Regulation?
If security was endorsed or assigned in a manner
that would effectively protect the lending Reserve Bank, there seemed
to be
no need for a requirement of negotiability.
That requirement
raight be eliminated even if the pending legislation should not be
"acted_
Attached to the memorandum were a proposed revision of the
first draft of Regulation A, prepared in light of the comments received
-m the Reserve Banks, and memoranda indicating the substantive and
tel.+
—1141 changes included in the revision.
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-8At the Board's invitation, Mr. Hackley made summary comments,
after which Governor Robertson asked for further light on the view
expressed by both the Legal Division and several of the Federal Reserve
Banks that the requirement of negotiability might be dropped from the
Regulation.
Since at one time someone had believed negotiability
essential, Governor Robertson thought it should not be eliminated now
l'rithout good reasons.
He asked what types of non-negotiable paper
might be accepted as collateral, and how such paper would be liquidated
by a Reserve Bank, if necessary.
Staff responses mentioned, as examples of possible non-negotiable
collateral, real estate paper, some term loan agreements as conventionally
drawn, and paper now acceptable for advances under section 10(b) of the
Federal Reserve Act.
It was also pointed out that non-negotiability of
collateral would have very little significance in terms of liquidation of the advance, since the chief recourse was the note of the bor'
l°14Ing member bank, with the collateral purely a secondary aspect of
the transaction.
Mr. Hackley added that the staff felt the emphasis of the Reserve
4
'
44 should not bear so heavily upon the objective of protecting themselves against loss, possibly thus dulling awareness of their role in
fording credit facilities to member banks.
Of course, it
WS
expected
that the Reserve Banks would take reasonable precautions, but negotiability
°r collateral was not viewed as essential in this connection.
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-9Governor Mills expressed the opinion that the Reserve Banks
were taking a somewhat adolescent approach in their desire to discard
the negotiability requirement.
Title to collateral should be taken,
if for no other reason than to insure that the Reserve Bank, as the
lender, assumed the dominant position.
As he saw it, there was an
element of danger in the thought Mr. Hackley had expressed that the
Reserve Banks should place their central bank function first and their
Position as lender second.
A Reserve Bank was in fact a lender and,
viewed in the long term, should perform that function in its true
context and not as a Lady Bountiful.
Mr. Hexter reiterated the thought that negotiability ordinarily
14ea not extremely important, so far as collecting a loan was concerned,
since it was usually no harder to enforce a non-negotiable instrument
than a negotiable one.
He added that the only virtue of negotiability
Ilas that it served to cut off certain equitable defenses that could
crtherwise be raised to defeat collection, but since these defenses were
seldom raised, and there was, in any event, the primary recourse of the
bc3rrowing bank's note, negotiability of collateral was not really importellt.
Although negotiability did serve to facilitate the flow of
tille.ncial instruments, there seemed to be not much to lose by eliminating
the requirement and something to be gained by adding flexibility to
the Regulation.
Governor Mills agreed that there was always a note connected
Igith the transaction, but he expressed the view that it was necessary
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to go beyond the note to give the lender collater
al protection.
He
thought that perfectibility of collateral was the point.
Governor Mitchell concurred with Governor Mills' point as to
Perfectibility and observed that up to the present time it had been
Possible to obtain Government securities as collateral, whereas in the
future a member bank might not have Governments to offer but would have
to use other types of instruments from its portfolio, which must be
something the Reserve Bank would
be able to sell if necessary to recover
04 its advance.
Mr. Hackley said that he had not intended to imply that the
Reserve Banks should not protect themselves, and he noted that
the Board
had- made exemptions from the negotiability requirement in the past.
Governor Robertson asked whether, if there was no pending proP°8a1 to amend the law, the Legal Division would still recommend that
the Regulation be amended to eliminate the negotiability requirem
ent;
in other words,
would it be of sufficient importance for action indePendent of other proposed changes?
Mr. Hackley responded that he believed he would recommend such
Ileti°11, in view of the responses of the Reserve Banks and the fact that
14 Proposing the legislation the Board
had indicated an intent to eliminate
Illinecessary requirem
ents.
Governor Robertson then asked the reason for retaining in the
151'°Posed revision of Regulation A a provision that in general a Reserve
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B3.nk should limit the amount of collateral it requires to the minimum
consistent with policy.
Governor Mills reviewed the background in which some Reserve
Banks, during one period of Federal Reserve history, had tended to be
over-severe in the amount of collateral they required.
The theory
behind the suggested provision to which Governor Robertson had referred
was that, without being soft-hearted, the Reserve Banks should be admonished not to take more collateral than was necessary to protect their
Position as lender.
Governor Robertson acknowledged the historical background but
expressed the view that the admonition might better be in the suggested
letter of general instructions to the Reserve Banks rather than in the
Regulation.
It seemed to him that by having the provision in the
Regulation, a member bank might feel that tender of minimum collateral
'
Ilas a matter of right in its dealings with the Reserve Bank.
However,
he observed that since the provision was part of the present Regulation
in °Illy slightly different form, this might be a valid argument for not
tliking it out at the present time.
Mr. Farrell remarked that another background circumstance, in
44dition to those mentioned by Governor Mills, was the criticism heard
ill Years past of variations from one Reserve Bank to another in admin-
latration of the discount windows.
It could be argued that, both to
14.10mote uniformity and to discourage excessive collateral demands, the
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pr0vision ought to be in the Regulation, rather than being put in the
letter and thus left more to discretion.
Governor Shepardson expressed
accord with this view.
Governor Robertson suggested that the same ends would be better
served by having the provision in the letter, which had the force of
Board instructions to the Banks.
In response to a comment by Mr. Farrell
that the burden of enforcement would then be upon the examining process,
Governor Robertson said that, as he saw it, this was where it should be.
Governor Mitchell commented that to him the issue was one that
vould not arise unless a Reserve Bank encountered trouble in connection
with an advance, and in such an event it would be important to have the
Provision in the Regulation.
Governor Mills suggested that the provision be left in the proPosed revision of the Regulation for the time being and that the point
be revived for discussion when Messrs. Hackley and Holland met again
th the Reserve Bank loan officers.
Mr. Farrell observed that the discount officers of the Reserve
ilallks had displayed an attitude of wanting a blank check to handle
e tensions of credit to member banks as they saw fit.
Oh
He also commented
the desirability of requiring that a member bank provide information
to itistify any renewal of an advance beyond the normal 15 days contemplated by the Regulation, as well as on the relatively lenient attitude
that had been displayed in some Federal Reserve Districts toward continuous
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borrowing on the part of certain member banks.
He suggested that the
Proposed letter to the Reserve Banks emphasize that standards for
borrowing had not changed and that tendencies to continuous borrowing
on the part of member banks should be given prompt attention.
Chairman Martin joined the meeting at this point.
Governor Mitchell remarked that the pending legislation recommended by the Board was written in terms that reserved to the Board
complete administrative authority to fix standards for discounting;
he would not be surprised to see a departure from that philosophy in
the ultimate legislation, if enacted.
As to the instances of continuous
borrowing mentioned by Mr. Farrell, Governor Mitchell believed that
Under the present Regulation A seasonal credits were being extended on
the same basis as 15-day credits.
He thought this was essentially
III'ong and that a distinction should be made between money market borIi°1
'
11ng for the purpose of adjusting reserve position and seasonal
borrowing, the latter justifying at least partial recourse to Federal
Reserve discount windows.
Underlying this distinction were deep implica-
ticts of monetary policy and public relations, and in his view it would
be preferable to recognize two different discount policies in the Regulati°11, one for reserve adjustment and the other for seasonal borrowing.
8easonal borrowing, which would be done mostly by small banks, might
be a1lowed for maturities of three to six months, perhaps at an increased
1.4te.
Money market borrowing might also be allowed, but only on a 15-day
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basis.
Allowing seasonal borrowing would make many friends for the
SYstem among banks that needed such facilities, and so long as the
service kept to the nature of a central bank function, it would not
contravene monetary policy.
Governor Mitchell believed that more
thought should be given to the Regulation from this standpoint.
Governor Shepardson commented that repetitive borrowing over
a period of time might be justifiable, for example, to carry sound
ranching operations over a drouth period.
On the other hand, he under-
stood that many cattle feeders had lost money and were continuing to
feed against a declining market, which would seem to call for an
adiustment by the cattle business rather than extensions of Federal
Reserve credit to enable continuance of a basically unsound situation.
Re considered it important to know the explanation of instances of
eontinuous borrowing:
in some circumstances it was justifiable, and
in others it was not.
He thought that any instances of continuous
borrowing should be given attention in examination reports.
Governor Mills expressed the view that the proposed Regulation
allowed a sufficient area of discretion to discount officers; he had
doubts that
all of the Reserve Banks would always use that discretion
1
wise-LY, but that was a matter to be picked up through the examination
PrOCess.
Mr. Holland observed that it was difficult to write a regulation,
Or even an operating letter, so finely as to control all aspects of
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operation.
A set of guiding principles that would be checked by examiners
ought to be workable.
As now drawn, the proposed Regulation would permit
either seasonal or adjustment borrowing.
What was needed was a better
understanding of the range of discretion intended for the Reserve Banks,
and a means of getting an early indication when member banks were
running into problems.
The setting of 15-day borrowing as the norm
Igas frequently criticized and had cost a great deal of public relations
and good will from member banks that could not understand why such a
rule was imposed when it was well known that their paper ran for more
th4n 15 days.
During further discussion, Governor Robertson suggested that
the provision in section 201.3 of the proposed Regulation that would
allow advances for more than 15 days upon "a satisfactory showing of
need for a longer maturity that would not be inconsistent with the
general principles" set forth in section 201.1 be revised to a positive
basis, thus indicating that both longer term advances and renewals might
he granted when consistent with those principles.
Governor Mitchell said that he would like to go a little
further and indicate that advances for
for
seasonal needs.
6
months would be available
It was his understanding that many banks - small
°Iles in particular - that needed advances for such a period did not
-" approach the Federal Reserve discount officers, because the Regulat10
Provided that the normal term for advances was 15 days.
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standpoint of public relations, it would be an advantage to System
membership if the Regulation recognized a right to borrow for
6 months
Also, extension of justified seasonal credits would put the reserves
Yhere they were needed, and the provision could be managed in such a
waY that it would not be abused by large banks.
Rather than have 15-day
creiits extended when it was known that renewals would be necessary,
there should be an explicit determination by the lending officer of
the probable length of the borrowing. With the purpose of the borrowing,
seasonal or for adjustment, established at the beginning, the issue
Yould not arise whether the borrowing was continuous or not.
The need
for longer credits was one reason why he was somewhat in favor of
differential rates.
He would like to see provision for two or three
maturities, which he believed would be helpful in policing the Regulation.
Governor Robertson stated that he would be a little fearful of
8Pecifying that advances might be made for
result in such term becoming the standard.
6 months, since this might
However, perhaps something
Could be added to take care of the kind of emergency that arose from
croP failures.
Governor Shepardson observed that limiting 6-month maturities
to unusual situations would not meet the need.
an advance for
In many cases, the need
6 months did not arise from unusual circumstances,
but rather was attributable to the nature of the business of the bor014ing member bank.
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-17Governor Mills expressed the view that until there was a basis
Of experience under the Regulation, it would be wise to leave discretion
to the Reserve Banks.
The banks having consistent need for
6
months'
credit were concentrated in a few Federal Reserve Districts, and it
would seem preferable to depend on the discount officers in those districts to use appropriate judgment based on their experience and familiarity with regional business, rather than to invite applications for
longer terms of credit that could quickly become interpreted as a
standard rather than an exception.
It would seem desirable that any
exception not be made to fit the unusual but to fit the great multitude
Of circumstances, and then allow enough leeway for discretion to extend
the exception to the unusual.
After further discussion, Mr. Hackley suggested that the second
sentence of section 201.1(d) of the revised draft of the Regulation
Illight be changed to read somewhat along the following lines: "Federal
Reserve credit is also available for longer periods if the borrowing
bank
makes a satisfactory showing that longer-term credit is necessary
843 a result of national, regional, or local difficulties or because of
circumstances involving only the borrowing bank."
There was general
agreement with this suggestion.
Governor Mills expressed regret that the proposed Regulation
clid not contain specifications to assist the Reserve Banks in encour4Ing liquidity on the part of member banks, which he believed could
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have been done by indicating what maturities would be eligible for
advances on a preferential basis.
It had disturbed him that the Reserve
sank lending officers had taken the position that liquidity should not
be their concern, but that of bank examiners.
He regarded it as faulty
thinking for one operating department of a Reserve Bank to contend that
any aspect of sound banking was solely the concern of another department.
Mr. Holland expressed agreement with Governor Mills but observed
that the view that member bank liquidity was primarily the concern of
the examining function was also held by some Reserve Bank Presidents.
In a second meeting of Board representatives with Reserve Bank discount
°fricers„ the thinking of the latter had been in the direction of opere'ting under guidelines in the Regulation, subject to review and report
by the
examiners.
Mr. Holland then described efforts being made by
the Reserve Banks looking toward training Discount Department personnel
t° appraise various types of collateral.
Governor Robertson urged that there be continuous working
e-rrangements to insure coordination and cooperation between Federal
Reserve examiners and discount officers.
At the conclusion of the discussion it was understood that a
l'evised draft of Regulation A, incorporating changes based on views
ex'Pressed at this meeting, would be sent to the Reserve Banks for
cc/ire/lent.
A copy of the letter transmitting the revised draft to the
l'ederal Reserve Banks, dated June 15, 1964, is attached as Item No.
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-19During the preceding discussion Mr. Noyes, Adviser to the Board,
entered the room, and at its conclusion Messrs. Holland and Potter withdrew.
Legislative program.
dated June
There had been distributed a memorandum
8, 1964, from the Legal Division presenting, pursuant to
the Board's request on May 11, 1964, a preliminary outline of a possible legislative program.
subjects for consideration:
The memorandum suggested the following
advances by Federal Reserve Banks; amend-
ments to the Bank Holding Company Act; reserve requirements; interest
on deposits; gold reserves of Federal Reserve Banks; foreign currency
operations; investments by member banks in foreign banks; underwriting
(3f revenue bonds; loans to executive officers; amendments to the
Securities Exchange Act; proposals to meet the coin shortage problem;
subpoena and enforcement authority; delegation of authority in regard
to bank supervisory functions; and reorganization of Federal bank
sUPervision.
In discussion, Governor Mills expressed an inclination to reduce
the list to a minimum of the more urgent needs initially, and to return
to
consideration of the remaining subjects later.
He noted that proposals
that had been made for a graduated system of reserve requirements conteMPlated coverage of demand deposits only; with the total of commercial
ballk time deposits now roughly equal to the total of demand deposits,
he
questioned that limitation.
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Governor Robertson suggested deleting from the list the proposals
relating to investments by member banks in foreign banks and to delegation of supervisory authority.
Also, he believed that proposals to
alleviate the coin shortage should be left to the Treasury Department.
He was in favor of more liberal limitations than had been proposed for
loans to executive officers for purchase of their residences.
He had a
question, but no strong feelings, regarding proposals dealing with
trading in bank securities.
Governor Shepardson stressed the importance of arriving at Board
Positions on a number of the subjects listed, which had been discussed
by the
Board from time to time without arriving at official postures.
Governor Mitchell expressed the view that it was particularly
iniPortant to go forward promptly on proposals regarding reserve requirements and gold reserves, and he would regard the subjects of next
iniPortance to be the underwriting of revenue bonds and delegation of
811Pe1 visory operations.
As to reserve requirements, he stated that he
1/48 not so concerned about dealing with time accounts, which he regarded
another issue, as he was with developing constructive measures relating
to demand deposits and reserve classifications.
Chairman Martin commented that, while gold reserve requirements
44a
delegation of supervisory functions were perhaps not of as much
Ill'enoY as some of the other topics, it would be well to be prepared
With draft legislation on these subjects.
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-21Mr. Hackley observed that the Board had already submitted
Proposals relating to advances by member banks and to amendments to
the Bank Holding Company Act.
After further discussion, it was understood that the Legal
Division would proceed to draft legislation concerning the topics discussed according to the priorities indicated.
Messrs. Brill, Farrell, Solomon, Hexter, O'Connell, Shay, Hooff,
Goodman, Leavitt, Young, and Sanders then withdrew from the meeting.
Retirement System -
80 per cent limitation (Item No. 9). On
April 7, 1964, the Board considered various proposals regarding liberalization of the Bank Plan of the Retirement System of the Federal
Reserve Banks that had been approved by the Conference of Presidents.
In a letter of April 10 relating to these proposals, the Board had
indicated to Mr. Hayes, Chairman of the Conference, that it would be
14illing to approve a plan for increasing the normal pension formula to
1 per
cent of the first $4,800 of final average salary plus 1-3/4 per
cant of such salary above
$4,800 for each year of creditable service,
Ill'ovided a limitation of 80 per cent was placed on total retirement
ellowance, including pension (before optional modification, conversion,
Or actuarial reduction), normal annuity, and total Social Security
benefit, but excluding additional annuities provided by the member's
Voluntary contributions.
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Federal Reserve Bank of St. Louis
'
6/11/64
-22There had been distributed a memorandum dated June 1, 1964,
from the Division of Personnel Administration stating that it had become
aPParent that for present Reserve Bank employees with long service the
80 per cent limitation would create an inequity, in that with such a
limitation under the new formula some of those employees would receive
less than they would under the present formula without such a limitation.
It was therefore proposed to allow current employees their choice of
either formula, and a change to that effect in the Rules and Regulations
Of the Retirement System was being included among others for which the
Iloardis approval would be sought in due course.
In the opinion of the
Retirement Committee, however, that choice did not completely eliminate
discrimination between present employees with long service and recent
new or future employees who would retire after long service.
The
Committee had therefore offered for consideration of the Conference,
the Board of Governors, and the Board of Trustees of the Retirement
SYstem an alternative amendment to the Rules and Regulations that would
in effect be a change in the definition of "normal annuity." At present,
4°11mal annuity was based upon required contributions made by the employee
cillning employment; the alternate amendment would base it upon the emcontributions as if he had contributed during his employment
the required rate of contribution in effect at the date of his refinement.
This would mean that, if the contribution rate at retirement
1'148 4 per cent of salary above $4,800, all contributions that had been
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Federal Reserve Bank of St. Louis
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made in excess of that rate would be refunded either in cash or in the
form of an additional annuity.
The Conference of Presidents had dis-
cussed this proposed amendment at its meeting on May 26, 1964, but took
no action.
The memorandum from the Personnel Division explored various
circumstances bearing upon the proposed amendment and concluded that,
vith the contemplated choice of formula, there were not sufficient
reasons for the Board to depart from the
810 per cent limitation.
After summary comments by Mr. Sprecher, members of the Board
raised questions, to which the staff responded, regarding application
of the
8o per cent limitation to certain individual cases. A circumstance
having special bearing was that any present employee with more than 30
Years' service would have been given some credit, toward which he had
not contributed, for years prior to 1934, when the Retirement System
vaS established.
At Chairman Martin's request, Mr. Sherman commented on his
exploration of the question with Mr. Treiber, who had represented Mr.
RaYes at the May 26, 1964, meeting of the Conference of Presidents.
*. Treiber saw it, the problem of inequity under the
As
80 per cent limi-
tation specified by the Board arose because retirement allowances under
the Bank Plan were based on three components:
the pension provided by
the Bank; the annuity provided by the employee's awn contribution plus
that provided by the Bank's contribution for service prior to 1934; and
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Federal Reserve Bank of St. Louis
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Social Security, half of which was paid for by the Bank and half by
the employee.
Social Security benefits were set by Congress and could
not be touched by the Board or the Retirement System. The position of
Messrs. Hayes and Treiber was that the whole concept of prior service
credit was that the funds contributed by the Bank became the employee's
money, and they thus reasoned that it would be improper and perhaps
Illegal to take away any of the annuity that would be provided by those
funds.
Therefore, if neither the Social Security benefit nor the annuity
ec)uld be reduced by the 80 per cent limitation, the entire cutback would
have to come out of the pension portion, provided by the Bank.
As a
result, application of the 80 per cent limitation to the retirement
ellovance of the employee who would have received more under the proPosed new formula would mean that the Bank would have contributed
relatively less to
his pension benefits than to the pension benefits
or emPloyees not affected by the limitation.
Messrs. Hayes and Treiber
4180 felt that, because of the structural aspects of the Retirement
Sstem, meeting the 80 per cent limitation through downward adjustment
t the Pension portion of the retirement allowance would exact a heavier
Penalty on lower incomes than on higher ones. (Mr. Sherman noted that
the Actuary for the Retirement System, Mr. Buck, had indicated that he
17°1-11
(
1 not advocate the existing structure if the Retirement System were
to
he set up today, and Dr. McGill, whom the Board had consulted on
Retil'ement System matters, had thought such a structure undesirable.)
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Federal Reserve Bank of St. Louis
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While Messrs. Hayes and Treiber could understand why the Board considered
a limitation advisable, they believed it would be more equitable to apply
a formula against only the pension portion and the half of Social Security
benefits that came from Bank contributions, rather than against the combined pension, normal annuity, and total Social Security benefit.
had stated that many private employers had such a plan, with a
They
60 per cent
limitation.
Mr. Sherman pointed out that from 1934, when the Retirement
System was set up, until the middle 1950's, employee contribution rates
1114er the Bank Plan ranged up to
age.
7 or 8 per cent or more, depending on
Employees who had contributed at relatively high rates for many
Years would have accumulated a sizable annuity fund, though it was true
that since the mid-1950's they had contributed only on the portion of
their salary above $4,2001 unless they had elected to continue the
higher payments as a voluntary contribution.
For such an employee,
111% Treiber had reasoned, a downward adjustment of pension to meet the
80
Per cent limitation would constitute an inequitable penalty, whether
he fell in high or low-salary brackets.
Mr. Sherman concluded with the
coMment that such so-called inequities arose because the new formula
To
coMputing retirement allowances, which the Board had indicated it
14°111(1 aPProve, would result in many allowances well above 80 per cent
Of final average salary, with the result that the Board had indicated
it
aPProval was subject to the over-all limitation of 80 per cent.
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Federal Reserve Bank of St. Louis
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-26Mr. Sherman commented that Mr. Treiber had also pointed out
that, aside from current employees who had a long term of service, there
Would be some continuing effect of the 80 per cent limitation, in that
it would tend to encourage early retirement.
An employee with about
40 years' service at age 60 might have reached his 80 per cent.
If he
continued in service to age 65, his retirement allowance would not
increase unless there was a further increase in his salary.
While he
'would continue to contribute at the 4 per cent rate, the Bank would be
reducing each year the portion of his pension that it would pay, in
order to keep within the 80 per cent limitation.
Thus, there would
be an incentive to retire as soon as the 80 per cent was reached.
Mr. Sprecher then commented on consultations he had had with
Mr. Buck, the Actuary for the Retirement System, and with Mr. Harris,
Chairman of the Retirement Committee, regarding the possibility of
Inaking any adjustments that were necessary in the annuity, or in a
combination of the pension and the annuity, to arrive at benefits comParable to those provided by the Board Plan.
A difficulty had been
encountered, in that under the fixed annuity of the Board Plan the
benefits payable at 42 years' service were known, whereas under the
variable annuities of the Bank Plan they were not.
An arbitrary ad-
Jklstment applicable to two-thirds of the annuity and one-third of the
lension had been considered, but had been deemed of doubtful legality.
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Federal Reserve Bank of St. Louis
6/11/64
-27Governor Mitchell suggested that, from a welfare standpoint,
there might be something to be said for abrogating the 80 per cent rule
or retirees below, say, the $71000 salary level, in response to which
Mr. Sprecher observed that treating different salaries differently
vould be likely to conflict with regulations of the Internal Revenue
Service regarding the tax status of pension plans.
In reply to another
question by Governor Mitchell as to what term of service would call the
80 per cent rule into play in the Bank Plan, Mr. Sprecher indicated
that it would be roughly the 40-year mark, although the period would
be shorter in some cases.
Governor Mills remarked that, as a practical matter, it seemed
to him
there was no other choice than to adhere to the 80 per cent
limitation, with regret that there would be some inequities and inconsistencies, but with recognition that many present retirees would not
get be
nefits equal to those that future retirees would under the pro-
Pc)sed formula and the 3-1/2 per cent funding rate.
In his view, it
l'/ould never be possible to Obtain complete equity for every individual,
and there were decisions that must be made with respect to the System
as a
vhole.
Chairman Martin observed that perhaps the only way to avoid
all
Inequity would be to have no limit, but this opened the way to
8111e unduly high allowances.
Ensuing comments indicated that he, as
'4ell as other members of the Board, found such a resort unacceptable.
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Federal Reserve Bank of St. Louis
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Another possible recourse would be to apply the limitation only to the
Pension portion of the retirement allowance but to set it so low that
the combined pension, annuity, and Social Security benefit would never
exceed 8o per cent of final average salary.
Still another possibility
vould be to re-examine the 1 and 1-3/4 per cent normal pension formula
that was expected to be adopted, with a view to dropping it back to a
lower rate.
Governor Mills expressed the view that if the Retirement System
could operate under the higher formula without at the same time raising
the rate of contribution of the employing Banks, it would seem difficult
to Justify reverting to a lower benefit rate, unless the Board wished
to reduce the contribution rates of the Banks below those that had
bee„
,1 in effect for some time.
In further discussion of the effect of the 8o per cent limita-
tion on
the retirement allowances of long-service employees, Governor
SheParason commented that the 80 per cent limit would apply only under
the Proposed new formula, and since employees would have the choice
°f that formula or the present one without the 80 per cent limit, he
vas unable to see that long-service employees would in any way be
de
prived.
Governor Mills then requested comparison of the retirement
allowances that would be available under the increased pension formula
'41:th those provided by Civil Service, in response to which Mr. Sprecher
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Federal Reserve Bank of St. Louis
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cited various salary levels and terms of service indicating that, for
example, at 40 years' service the benefits were roughly parallel through
about the $10,000 level, but that at the $20,000 and higher levels Civil
Service retirees would not fare quite so well as Bank Plan retirees.
After further discussion, it was agreed unanimously that the
80 per cent limitation on retirement allowances, as expressed in the
Board's letter of April 10, 1964, to the Chairman of the Conference of
Presidents, should be retained.
Governor Robertson, who had withdrawn
from the meeting during the discussion, had indicated before leaving
that he favored retaining such limitation.
A copy of the letter in-
fc)rming the Chairman of the Conference of Presidents of this action is
attached as Item No. 9.
Mr. Sherman reported that, before departing for his present
1-1ropean travel, Governor Balderston had expressed his views on several
P°Ints of principle in the proposals that had been under consideration.
l'irst, the Board had wanted to be sure that the Retirement System was
fillancially sound, and assurance on that point had been given as a
l'esult of the study made by Dr. McGill.
Second, it had been desired
that Bank benefits be commensurate with those furnished by good private
ernPloyers, which had been accomplished through the prospective adoption
°r the
that
1 and 1-3/4 per cent pension formula.
Third, application of
formula had pointed to the desirability of imposing a top limit
°4 allowances to keep them within the bounds of propriety for quasi-
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Federal Reserve Bank of St. Louis
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Public institutions.
Governor Balderston had been of the view that the
80 per cent limitation accomplished this.
Fourth, the Reserve System
Should not be in the position of making a large lump-sum contribution
toward payment of accrued liabilities as a result of the increased
benefit scale, and use of so-called "excess earnings" to cover such
liabilities would avoid payments of that sort.
Retirement System - excess earnings (Item No. 9).
4ction at the meeting of the Board on April
Pursuant to
7, 1964, regarding various
Proposals relating to the Retirement System, the Board stated in a
letter of April 10 to Mr. Hayes, Chairman of the Conference of Presi'lents of the Federal Reserve Banks, that "The Board is not prepared,
at this time, to approve a proposal for distribution of excess earnings
°f the Retirement System."
The proposal then under consideration did
4(4 include specific procedures to govern distribution.
For various
Ileasons Mr. Deming, Chairman of the Board of Trustees of the Retirement
SYstera, inquired whether the Board would be willing to consider such a
llrePosal if resubmitted accompanied by suggested distribution procedures.
14 a letter of April 29, 1964, the Board informed Mr. Deming that it
'1011La review such a proposal, with the understanding that this should
t4 no way be considered as a willingness to approve or disapprove.
In a distributed memorandum dated June 5, 1964, the Division of
l'er8onnel Administration reported that the Retirement Committee, to which
141". Deming had referred the question, had submitted details of a proposed
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Federal Reserve Bank of St. Louis
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Plan for distribution of excess earnings with a letter of May 19, 1964,
including examples of the effect on retirement allowances.
After con-
sidering the Committee's report at a special meeting on May 26, 1964,
the Conference of Presidents voted to recommend to the Board that (1)
an amount be transferred from excess earnings to the Income Equalization
Reserve account sufficient to bring it to a level of 3-1/2 per cent of
the book value of investments, that being the new rate for valuation
Purposes and for crediting interest; (2) the
5 per cent limitation on
the Reserve Against Investments account be continued; (3) an amount
equal to the accrued liability to result from the increased benefits
Under the Retirement System proposed to become effective July 1, 1964,
be transferred from excess earnings to the Pension Accumulation Account;
(4) there be established at this time a policy of distributing
Etnnually all earnings in excess of the amounts determined by the actuary
to be necessary to maintain the Retirement System reserve accounts at
their appropriate levels, such distribution to be prorated on the basis
eet forth in Exhibit G to the May 19 report of the Retirement Committee.
44 indication of the Board's views on this recommendation was desired
1)11.°I" to June 16, when the Trustees of the Retirement System were to
Q°11sider this and other proposed changes in benefits.
The memorandum from the Personnel Division indicated that
estimated earnings of
$4,898,000 were currently available in excess
°I' the needs of all retirement accounts.
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Federal Reserve Bank of St. Louis
If, as recommended, accrued
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liability (estimated at $2,58)4.,000) resulting from the anticipated
increase in the pension formula was paid from that excess, $141,000
Of the remainder would be pro rated for credit to the Board Plan and
$2,173,000 to the Bank Plan.
The latter amount would be distributed
on a proportionate basis to the Pension Accumulation Account ($1,169,000),
Atnuity Accumulation Account ( 354,000), and Retirement Reserve Account
($650,000).
The credit to the Annuity Accumulation Account would allow
a credit to each individual annuity account equal to .8 per cent of
the individual account balance - an average of about $16 for each annuitant or, for example, a credit of $80 for an individual with a $10,000
annuity accumulation.
A somewhat detailed analysis of the earnings distribution proP°8al was set out in the memorandum, on the basis of which the Division
°f Personnel Administration presented, with evaluating comments, the
following alternatives: (1) approval of the plan for distribution of
e ceas earnings, as recommended by the Conference of Presidents at the
sPeoial meeting on May 26; (2) approval of the payment of accrued
liabilities from excess earnings, without approval of the distribution
Of the
remainder; (3) approval of payment of accrued liability from
excess earnings and deferment of approval or disapproval of distribution
cif the remainder; and (4) disapproval of the entire recommendation,
with a statement that the Board believed there should be no consideration
Of distribution of excess earnings.
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Federal Reserve Bank of St. Louis
The Division recommended the third
6/11/64
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alternative, supporting reasons being that (1) the net excess ($2.3
milli n) remaining after the payment of the accrued liability would not
Permit a significant distribution to the individual accounts of annuitants, and there could be no distribution to retirees or their beneficiaries at this time; (2) the plan for distribution presented some
Problems, such as whether the excess earnings prior to retirement should
be treated as additional contributions resulting in annuities in excess
or the
8o per cent limitation and in much greater percentage increases
in retirement allowances for higher salaried than for lower-salaried
ell1Ployees; (3) the Reserve Banks and the Board would have an opportunity
t° review experience in the next year or so under the recently-approved
increase to a 3-1/2 per cent interest rate; and (4) a decision to distribute excess earnings now might be subject to criticism as untimely.
It vas assumed that
in the event the Board accepted the Division's
recommendation of the third alternative, the so-called excess earnings
remaining at the present time after payment of accrued liabilities,
48 veil as future such excess earnings, would not. be used to reduce the
eeerve Banks' rates of contribution, and that suspension of the 5 per
eellt limitation on the Reserve Against Investments account mould continue.
Mr. Sprecher commented on the salient points of the June 5
/11el
indtml, remarking that although the Division favored the third of
the
alternatives presented for consideration, it could not be said that
the
recommendation was a strong one.
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Federal Reserve Bank of St. Louis
6/11/64
Governor Mills stated that the third alternative was a logical
one, and he would favor it.
Governor Shepardson weighed the second and third alternatives.
4 consideration against the second, to approve payment of accrued
liabilities from excess earnings but not to approve the distribution
of the remainder, was that it contemplated placing present and future
excess earnings in the Pension Accumulation Account and using them to
reduce the contribution rates of the Reserve Banks, thus foreclosing
a later reopening of the subject of distributing them to members or
retirees.
In favor of the second alternative was his feeling that
Mortality tables had always lagged.
With average life expectancy
running ahem) of the tables, annuitants were in effect already getting
a share of excess earnings.
Also, such action would conclusively
dispose of the matter, whereas under the third alternative - deferring
decision - repeated agitation might be expected.
On balance, however,
the fact that the second alternative would foreclose a later appraisal
°II the basis of experience under the new funding rate and other changes
threw the weight of his preference to the third alternative.
Governor Mitchell expressed concern about increases in the cost
f 1.
iving of present retirees and ways of meeting their needs.
He was
11°t familiar with the general practice of private industry in this
esPect, but he would not want to see Federal Reserve retirees suffer
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by comparison.
Although he did not know what cost-of-living increases
would do to the Retirement System's costs, he would not want to set a
P°1icy of using so-called excess earnings of the Retirement System to
reduce the contributions of the Reserve Banks until the cost-of-living
contingency had been considered.
That was the only reason he could see
for postponing a decision against distribution of the excess earnings
that would remain after the payment of accrued liabilities now being
incurred.
Like Governor Shepardson, Governor Mitchell said he would
Prefer a final disposition of the question, but on balance his thinking
Solved in favor of the third alternative, which could be lived with
Uritil 1965, when it was contemplated that the question would again
come up.
Chairman Martin also expressed himself in favor of the third
alternative.
Mr. Sherman noted that Governor Robertson, before withdrawing
r11°m the meeting, had indicated his willingness to accept the third
alt
ernative, if that seemed to be the Board's preference, although he
44 some inclination toward the second.
The third alternative - use of so-called excess earnings to
Cover accrued liabilities and deferment of a decision on any further
°-ist
ribution at this time - was therefore approved unanimously.
Or this action
Notice
was also included in the letter to the Chairman of the
conference of Presidents, a copy of which is attached as Item No. 9.
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Federal Reserve Bank of St. Louis
6/11/64
-36All members of the staff except Mr. Sherman then withdrew from
the meeting.
Appointment of Acting Director.
Governor Shepardson noted
that the resignation of Mr. Schwartz as Director, Division of Data
Processing, had become effective as of the previous day.
Pending
selection of a new Director, Governor Shepardson
recommended that the
Board designate W. M. Davis as Acting Director, effective June 11, 1964,
to serve for the remainder of 1964 or until a new Director was appointed.
Mr. Davis, Assistant Cashier of the Federal Reserve Bank of Atlanta,
/4as on assignment to the Board for a period of approximately six
Months, and Governor Shepardson had discussed the recommended designati°n with President Bryan, who was agreeable to it.
Governor Shepardson's recommendation was approved unanimously.
Direct purchase authority (Item No. 10).
Chairman Martin stated
that he proposed to send to Chairman Robertson of the Senate Committee
°11 Banking and Currency a report on S. 2891, a bill to extend for
a/lother two years the authority of the Federal Reserve System to purchase up to $5 billion of special securities direct from the Treasury.
The report, which had been requested by Chairman Robertson, would
13liesent the same views that Chairman Martin had expressed on
a cornbill, H. R. 11499, at a hearing earlier in the day before the
1/°14se Committee on Banking and Currency.
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Federal Reserve Bank of St. Louis
6/11/64
-37There being concurrence with Chairman Martin's suggestion, the
letter was sent to Chairman Robertson in the form attached as Item
112.!_lo
The meeting then adjourned.
6
i./1/vo
rri
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Federal Reserve Bank of St. Louis
Secret
AA et
BOARD OF GOVERNORS
Item No. 1
6/11/64
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
June 11, 1964.
Board of Directors,
State Street Bank and Trust Company,
Boston, Massachusetts.
Gentlemen:
The Board of Governors of the Federal
Reserve System approves the establishment by
State Street Bank and Trust Company, Boston,
Massachusetts, of a branch on the southwestern
side of Longwood Avenue, near the corner of
Longwood Avenue and Brookline Avenue, in Boston,
Massachusetts, provided the branch is established
within two years from the date of this letter.
Very truly yours,
(Signe.6) Karl
Bakke
Karl E. Bakke,
Assistant Secretary.
(The letter to the Reserve Bank stated that the
Board also had approved a six-month extension
of the period allowed to establish the branch;
and that if an extension should be requested,
the procedure prescribed in the Board's letter
of November 9, 1962 (S-1846), should be followed.)
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Federal Reserve Bank of St. Louis
BOARD OF GOVERNORS
Item No. 2
6/11/64
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
AoDREFis orrtctAL caRREsPoNatNcE
TO THE BOARD
June 11, 1964.
Board of Director
Southern Bank and Trust Company,
Richmond, Virginia.
Gentlemen:
The Board of Governors of the Federal
Reserve System approves the establishment by
Southern Bank and Trust Company, Richmond,
Virginia, of a branch at 128-136 East Belt Boulevard, Chesterfield County, Virginia, provided
the branch is established within one year from
the date of this letter.
Very truly yours,
(Signed)Karl E. Bakke
Karl E. Bakke,
Assistant Secretary.
(The letter to the Reserve Bank stated that the
Board also had approved a six-month extension
of the period allowed to establish the branch;
and that if an extension should be requested,
the procedure prescribed in the Board's letter
of November 9, 1962 (S-1846), should be followed.)
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Federal Reserve Bank of St. Louis
2064
BOARD OF GOVERNORS
Item No.
3
6/11/64
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, O. C. 20551
AOOFICIIII OFFICIAL COFIREOPONOICNCIL
TO THIC BOARD
June 11, 7_964.
Board of Directors,
Central Savings Bank and Trust Company,
Monroe, Louisiana.
Gentlemen:
The Board of Governors of the Federal
Reserve System approves the establishment by
Central Savings Bank and Trust Company, Monroe,
Louisiana, of a branch on the east side of the
600 block of North Fourth Street, West Monroe,
Louisiana, provided the branch is established
within one year from the date of this letter..
Very truly yours,
(Signed) Karl E. Bakke
Karl E. Bakke,
Assistant Secretary.
(The letter to the Reserve Bank stated that the
Board also had approved a six-month extension
of the period allowed to establish the branch;
and that if an extension should be requested,
the procedure prescribed in the Boardts letter
of November 9, 1962 (s-1846), should be followed.)
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Federal Reserve Bank of St. Louis
Item No.
BOARD OF GOVERNORS
4
6/11/64
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS
arriCIAL
CORRESPONDENCE
TO THE SOAND
June 11, 1964.
Board of Directors,
First State Bank,
Loraine, Texas.
Gentlemen:
The Federal Reserve Bank of Dallas has forwarded
to the Board of Governors two letters, one dated May 5,
19b4, and the other dated May 22, 1964, both of which are
Signed by President Herbert Mearse, and resolution dated
May 5, 1964, signifying your intention to withdraw from
membership in the Federal Reserve System and requesting
waiver of the six months' notice of such withdrawal.
The Board of Governors waives the requirement of
Six months' notice of withdrawal. Under the provisions of
Section 200.10(c) of the Board's Regulation H, your institution may accomplish termination of its membership at any
time within eight months from the date that notice of
intention to withdraw from membership was given. Upon
surrender to the Federal Reserve Bank of Dallas of the
Federal Reserve stock issued to your institution, such
stock will be canceled and appropriate refund will be
made thereon.
It is requested that the certificate of membership be returned to the Federal Reserve Bank of Dallas.
Very truly yours,
(Signed) Karl E. Bakke
Karl E. Bakke,
Assistant Secretary.
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Federal Reserve Bank of St. Louis
C"Ift,1
oiCout)(,)
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
S-1916
Item No.
6/11/64
WASHINGTON, D. C. 20551
ADDRES5 OFFICIAL CORRESPONDENCE
TO THE BOARD
June 12, 1964.
Dear Sir:
This letter is designed to bring together in a single
communication previous Board approvals for employee hospitaliz
ation
a_od surgical benefits, as well as major
medical insurance coverage,
for both
active and retired employees; and to advise of recently
aPProved revisions regarding eligibility of retirees for such
b enefits and
coverage. The following Board letters are superseded:
7nrch 11, 1946 and August 19, 1952 (F.R.L.S. 3189); June 2, 1959
‘S-1699; F.R.L.S. 3190); January 30, 1959 and March 1, 1961 (S-1686
and S -178(j;
F.R.L.S. 9155).
Pursuant to its March 11, 1946 letter, the Board approved
the specific plan of each Federal Reserve Bank for hospitalization
and
surgical benefits, including the payment by the Reserve Banks
two-thirds of the premium cost, under the general program that
.1d been recomended by the Presidents Conference
'
on February 25,
_46. The Reserve Banks should continue to submit any significant
Change
in cost or benefits of those plans for Board consideration
Prior to
adoption. However, it is not necessary to submit changes
2,1 -tiated by the insuring organization (Blue Cross Associatio
n,
:crier comparable
nonprofit organizations, or any other insuror
ec ifically approved by the Board) entailing relatively minor
blili reases in costs or benefits where the Bank is left no alternative
to pay the increased rate or withdraw from group coverage.
7
j
The Board also approved the System major medical plan
el 'Imended by the Presidents' Conference on May 26, 1959, inp;uding the payment by the Reserve Banks of two-thirds of the
um cost. In the interest of maintaining a uniform approach,
114
"understood that all Reserve Banks will keep their programs
in„1,
1111 the maximum benefits provided under this approved plan,
-Luding any
modifications subsequently approved by the Board.
In addition, the Board approved the recommendations of
the ,
0
tot
nference of Presidents with respect to extending the foreng coverages of retired employees: for basic hospitalization
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Federal Reserve Bank of St. Louis
5
-2end surgical benefits, as recommended on November 6, 1958; and for
Irlajor medical coverage, as recommended on December 13, 1960.
recommenRecently, the Board approved the January 28, 1964
d/v.
ien of the Conference of Presidents to revise the eligibility
,
equirements of retirees and their families for inclusion in the
!
;31Q8pital-8urgical-medica1 and major medical coverage as set forth
e Banks of
.elow, and for the payment by employing Federal Reserv
July 1, 1964:
after
or
on
ive
effect
10" thirds of the premium cost,
ement
A. Service retired employees, with the requir
Rethe
under
e
servic
able
of five years of credit
in the
tirement System of the Federal Reserve Banks
1964.
1,
July
after
case of employees hired
B. Ssssial service retirees (including those
already retired) who qualify under the "rule of
80," meaning any combination of age at time of
retirement and total years of service (not
limited to "creditable service") that equals
at least 80.
C. Disability retirees, with the restriction
that major medical coverage will include only
employees who retired for disability on or after
the varying dates that active employees at the reby
spective Federal Reserve Banks were covered
major medical insurance.
Very truly yours,
Merritt Sherman
Secretary.
1° IRE PRESIDENTS OF ALL FEDERAL RESERVE BANKS
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Federal Reserve Bank of St. Louis
206
BOARD OF GOVERNORS
Item No.
OF THE
6
6/11/64
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
June 11, 1964.
Board of Directors,
The Meadow Brook National Bank,
Jamaica, New York.
Gentlemen:
This relates to the application from your bank,
submitted through the Federal Reserve Bank of New York,
for permission to maintain the same reserves against deposits
as are required to be maintained by banks located outside of
reserve cities.
After consideration of the information submitted
With your application, the Board of Governors believes that
the character of your bank's business, as reflected in the
amount of its total demand deposits and its competition with
other banks, is more like that of the reserve city banks in
New York City than that of banks to which the Board has
granted permission to maintain reduced reserves. Accordingly,
the Board believes that it would not be justified in granting
Your application for reduced reserves.
Very truly yours,
(Signed) Merritt Sherman
Merritt Sherman,
Secretary.
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Federal Reserve Bank of St. Louis
TITLE 12 - BANKS AND BANKING
Item No.
7
6/11/64
CHAPTER II - FEDERAL RESERVE SYSTEM
SUBCHAPTER A - BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[Reg. H]
PART 208 - MEMBERSHIP OF STATE BANKING INSTITUTIONS
IN THE FEDERAL RESERVE SYSTEM
Undivided Profits as "Capital", "Capital Stock", or "Surplus"
i 208.111 Whether undivided profits may be considered part of
capital or surplus of member banks.
(a) The Board of Governors has been presented with the
question whether a bank's undivided profits may be considered as
Part of its "capital stock", "capital", or "surplus" for the purposes
of provisions of law imposing requirements or limitations upon member
banks of the Federal Reserve System.
(b) It is obvious that undivided profits are not a part of a
bank's "capital stock"; and Congress has explicitly indicated in
the national banking laws that the more general term "capital" is
limited to common stock and preferred stock (12 U.S.C. 51c).
(c) In the banking field, the undivided profits account
trad itionally represents a fluctuating amount as distinguished from
he relatively fixed and permanent amount of a bank's "surplus" or
Surplus
fund".
This distinction has been explicitly recognized
by the Supreme Court of the United States:
"By incorporated banks the term [undivided profits]
commonly employed to designate the account in which
Profits are carried more or less temporarily, in contradistinction to the account called surplus in which are
carried amounts treated as permanent capital, and which
"WY have been derived from payments for stock in excess
of par, or from profits which have been definitely devoted
to use as capital." 'Edwards v. Douglas, 269 U.S. 204,
215 (1925)
is
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Federal Reserve Bank of St. Louis
ArIflessii
fiCetfir*,
-2-
(d) The Federal banking laws use the terms "undivided profits"
and "surplus" as having different meanings.
For example, with respect
to the admission to membership in the Federal Reserve System of mutual
savings banks having no capital stock, the Federal Reserve Act requires
such a bank to have "surplus and undivided profits" not less than the
amount of capital required for the organization of a national bank in
the place in which the savings bank is located (12 U.S.C. 333).
Similarly, various provisions of the National Bank Act distinguish
between "undivided profits" and "surplus fund".
Thus, a national bank
may not declare dividends if its losses have exceeded its "undivided
Profits" (12 U.S.C. 56); and, until a national bank's "surplus fund"
equals its common capital, it may not declare dividends unless a
specified percentage of its net profits is carried to its "surplus
fund" (12 U.S.C. 60).
(e) If undivided profits were regarded as a part of a bank's
8urplus or "surplus fund", such provisions for transfer of profits
to
surplus would be meaningless and the application of other provi-
sions would be uncertain and impracticable.
For example, subscriptions
by member banks to Federal Reserve Bank stock are based upon the amount
of the member bank's"capital stock and surplus" (12 U.S.C. 287), so
that, if undivided profits were regarded as a part of "surplus", the
amount of a bank's subscription to Reserve Bank stock would have to
be
4
increased and decreased continuously, an inconvenient and costly
Procedure that could not have been contemplated by Congress.
(0 It is recognized that the question whether undivided profits
maY be added to capital stock and surplus in calculating the lending
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limitations governing
Federal Reserve Bank of St. Louis
member banks is a matter for determination under
,
_3-
applicable State law in the case of State banks and under the National
Bank Act in the case of national banks, except as further limited by
Particular provisions of the Federal Reserve Act.
For the reasons
indicated above, it is the Board's opinion that undivided profits do
not constitute "capital", "capital stock", or "surplus" for the purPoses of provisions of the Federal Reserve Act, including those that
limit member banks with respect to loans to affiliates (12 U.S.C.371c),
Purchases of investment securities (12 U.S.C. 335), investments in bank
premises (12 U.S.C. 371d), loans on stock or bond collateral
(12 U.S.C. 248(m)), deposits with nonmember banks (12 U.S.C. 463), and
bank acceptances (12 U.S.C. 372, 373), as well as provisions that limit
the amount of paper of one borrower that may be discounted by a Federal
Reserve Bank for any member bank or accepted as security for an advance
to a member bank (12 U.S.C. 330, 345, 347).
(12 U.S.C. 248(i).
Interprets 12 U.S.C. 24, 84, 248(m), 287, 330,
335, 345, 347, 371c, 371d, 372, 373, 463.)
Dated at Washington, D. C., this 11th day of June, 1964.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
(Signed) Merritt Sherman
Merritt Sherman,
Secretary.
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Federal Reserve Bank of St. Louis
BOARD OF GOVERNORS
Item No.
OF THE
8
6/11/64
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
June 15, 1964
Dear Sir:
As you will recall, the Board of Governors by a letter of
August 22, 1963, requested the comments of the Federal Reserve Banks
tegarding an enclosed first draft of a proposed revision of the
1 d'8 Regulation A that might be issued in the event of enactment
4:,,legislation recommended by the Board (now pending as S. 2706 and*
,4
8505) to liberalize requirements as to advances by Federal Reserve
flanks.
The Board has carefully considered the Comments received from
the
Reserve Banks, as well as the views of the loan officers of the
'xeserve
Banks expressed at meetings of such officers. In the light of
ch
comments, the Board is now considering a revised draft of such a
prIsible revision of Regulation A in the form enclosed herewith. The
en UciPal changes that would be made by this redraft are described in
te necomp anying memorandum, and an enclosed comparative print shows
Ittunl changes that would be made in the present Regulation.
10
g
Reserve Banks that specific
Standards The Board concurs in the view of the
regarding collateral for Federal Reserve advances under the
i
P nlIng legislation should be included in policy statements rather than
le Regulation itself. In this connection, there is enclosed a draft
of "
at!letter regarding such standards that might be approved by the Board
penthe time of adoption of a revised Regulation after enactment of the
d ing legislation.
It seems unlikely that the legislation will be enacted at this
eessie_
11 Of Congress. However, as a basis for further consideration of
the
th,, 'natter and in anticipation of possible Congressional hearings on
te
:Pending bills, the Board would be glad to have your comments with
oclect to the proposed redraft of Regulation A and the suggested draft
'letter
regarding collateral for Federal Reserve advances.
Very truly yours,
I('
Should have read S. 2076.
4e10-Urea
,4
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To
Federal Reserve Bank of St. Louis
Merritt Sherman,
Secretary.
148' PRESIDENTS OF ALL FEDERAL RESERVE BANKS.
47,
BOARD OF GOVERNORS
Item No.
9
6/11/64
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
June 11, 1964.
Alfred Hayes,
Ch airman, Conference
of Presidents
,of the Federal Reserve Banks,
e/0 Federal Reserve Bank
of New York,
New York, New York.
10045
bear Mr. Hayes:
This refers to Mr. Deming's letter of June 1, 1964, advising
Board of the action of the Conference of Presidents on May 26, 1964,
;;garding the treatment of so-called excess earnings of the Retirement
th
!
tem of the Federal Reserve Banks and requesting an expression of
'
Board's views on these recommendations.
the
Subject to the prior approval of the Board of Trustees,
will be prepared to approve the transfer from these earn4.rigsBoard
of
the
an amount sufficient to bring the Income Equalization
Reserve account to a level of 3-1/2 per cent of the
book value of investments, and
the accrued liability of approximately $2.6 million
Which results from the increased benefits under the
Retirement System proposed to become effective July 1,
1964.
treat_
The Board has concluded that it should defer action on the
thus 'ent of the remainder of such excess earnings for at least a year,
114de affording
an opportunity to review the experience of the System
l the revised mortality tables and the proposed increase in the
reaur
that ar rate of interest. In this connection, it would be understood
as w
Retirement System would earmark earnings currently available,
q
1 as
future earnings, which are in excess of the actuarial resuch-ments for
all of the Retirement System accounts in order that
Qontrearninga would not be used for purposes of calculating rates of
ibution for the Federal Reserve Banks.
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Federal Reserve Bank of St. Louis
)71
Arise
Mr. Alfred Hayes
- 2
The Board has also reviewed the matte-L. of a limitation on
total retirement allowances and continues to believe that the 80 per
cent limitation should be applied, as specified in the Board's letter
to the Chairman of the Conference of Presidents, dated April 10, 1964.
Very truly yours,
(Signed) Merritt Sherman
Merritt Sherman,
Secretary.
Mr. Frederick L. Deming,
Chairman, Board of Trustees,
Retirement System of the
Federal Reserve Banks,
C/o Federal Reserve Bank of Minneapolis,
Minneapolis, Minnesota.
55440
Mr. Marcus A. Harris,
Chairman, Retirement Committee,
Retirement System of the
Federal Reserve Banks,
C/o Federal Reserve Bank of New York,
New York, New York.
10045
Mr. Thomas M. Timlen, Jr.,
Secretary, Conference of Presidents
of the Federal Reserve Banks,
C/O Federal Reserve Bank of New York,
New York, New York.
10045
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Federal Reserve Bank of St. Louis
ox.
....••...
. 9ofGOtzi.
Item No. 10
6/11/64
BOARD OF GOVERNORS
OF THE
Tr%
w,
f...
'I
.).
›..
<.,'
.
4``"..
.&AI.ROO .
FEDERAL RESERVE SYSTEM
WASHINGTON
OFFICE OF THE CHAIRMAN
June 11, 1964.
Tha Honorable A. Willis Robertson,
Chairman, Committee on Banking and Currency,
United States Senate,
Washington,
D. C. 20510.
tear Mr. Chairman:
This is in response to your request for the Board's views on
s' '-o91, a bill to extend for another two years the authority of the
Fed'Reserve System to purchase up to $5 billion of special securIes direct from the Treasury.
This direct borrowing authority is an operating convenience
hat
i L., while seldom used in recent years, has contributed to flexibility
the Treasury's management of the public debt. Its use in the past
!
t s avoided needless strains in the banking system immediately preceding
)
c payment dates. Even when not used, it has enabled the Treasury to
0"
rate with lower cash balances than otherwise would have been feasible,
IT has provided added leeway in timing new offerings. Furthermore, it
possible that we may find ourselves in an emergency in which
the
"e availability of this sort of "standby" financing would be very important.
X
Borrowing under this authority has been temporary as well as
tool
'
o
i rrIft_equent. It has been confined to its proper role as a useful
ebt management, and has not been used as a lever to induce financing
Government deficits through unwarranted expansion of Federal Reserve
credit.
The statutory provisions which this bill would continue/ require
that ,
ed
the details of all transactions directly with the Treasury be reportaddln the Annual Report of the Board of Governors. I should also like to
in ,Plat such borrowing, when it is outstanding, is reported separately
'he weekly statement of condition of Federal Reserve Banks.
The Board recommends enactment of this legislation.
Sincerely yours,
(Signed) Wm. Mee. Martin, Jr.
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Federal Reserve Bank of St. Louis
Wm. McC. Martin, Jr.
@FedFRASER