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Minutes for To: Members of the Board From: Office of the Secretary June 9, 1964. 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 -11) ,„0„ A& Minutes of the Board of Governors of the Federal Reserve System on Tuesday, June 9, 1964. PRESENT: Mr. Mr. Mr. Mr. Mr. The Board met in the Board Room at 10:00 a.m. Mills, Acting Chairman Robertson Shepardson Mitchell Daane Mr. Mr. Mr. Mr. Mr. Mx. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Discount rates. Sherman, Secretary Bakke, Assistant Secretary Hackley, General Counsel Farrell, Director, Division of Bank Operations Solomon, Director, Division of Examinations Johnson, Director, Division of Personnel Administration Hexter, Assistant General Counsel O'Connell, Assistant General Counsel Shay, Assistant General Counsel Smith, Assistant Director, Division of Examinations Leavitt, Assistant Director, Division of Examinations Spencer, General Assistant, Office of the Secretary McClintock, Supervisory Review Examiner, Division of Examinations Sanford, Review Examiner, Division of Examinations The establishment without change by the Federal Reserve Bank of Boston on June 8, 1964, of the rates on discounts and advances in its existing schedule was approved unanimously, with the understanding that appropriate advice would be sent to that Bank. Investment in bank premises (Item No. 1). Unanimous approval Igas given to a letter to Silsbee State Bank, Silsbee, Texas, approving an investment in bank premises. these minutes as Item No. 1. A copy of the letter is attached to 46 L9S3 6/9/64 -2Report on competitive factors (Roswell-Hagerman, New Mexico). There had been distributed a draft of report to the Comptroller of the Currency on the competitive factors involved in the proposed purchase Of assets and assumption of liabilities of The First National Bank of Hagerman, Hagerman, New Mexico, by The First National Bank of Roswell, Roswell, New Mexico. In discussion, certain suggestions were made for a rephrasing Of the proposed conclusion. Unanimous approval then was given to the report for transmittal to the Comptroller in a form containing the following conclusion: There is presently little competition between the First National Bank of Hagerman and The First National Bank of Roswell, closely related through common control and management, and the immediate effect of the proposed merger would not be adverse. Consummation of the transaction would, however, eliminate forever any potential for competition between these banks. Report on competitive factors (Edison-Milltown, New Jersey). There had been distributed a draft of report to the Federal Deposit Insurance Corporation on the competitive factors involved in the proPosed merger of The First National Bank of Milltown, Milltown, New Jersey, into The Edison Bank, Edison, New Jersey. Governor Mitchell commented that he felt some reference should be made in the Board's report to the method used in planning this merger, i.e., that the officers and directors of one bank had purchased a controlling interest in another bank with an apparent intent of a future Merger. 984 6/9/64 -3Governor Robertson said that he, too, was inclined to have the report highlight that situation and point out that any potential for competition was being precluded. In his view the record should clearly Show that the Board looked askance at such a practice. There followed a general discussion during which several members indicated that this problem should be highlighted in an appropriate manner. It was the consensus, however, that in the case under discussion coMpetition between the two banks involved would have been minimal even in the absence of common ownership. Therefore, it was agreed that a statement of the Board's position on the subject would be deferred until a case embodying the practice together with a clear-cut diminution of competition due to common ownership was before it. After further discussion the report was approved unanimously for transmittal to the Corporation. The conclusion read as follows: The Edison Bank, Edison, New Jersey, and The First National Bank of Milltown, Milltown, New Jersey, serve different areas and are separated by major residential and industrial developments in which a number of other banks are located. There would appear to be very little, if any, existing or potential competition between the participants even if there were no common ownership. The proposed merger would have little effect on competition. Application of Farmers Bank of Clinch Valley. There had been (listributed a memorandum from the Division of Examinations dated June 4 196k, and supporting material regarding the application of Farmers Bank c't Clinch Valley, Tazewell, Virginia, for permission to merge with Bank °1" Graham, Bluefield, Virginia, under the charter of the applicant and 40 , -4- 6/9/64 title Bank of Tazewell County. The Division recommended approval of the aPplication. At the Board's request, Mr. Leavitt discussed the facts of the case and the reasons underlying the recommendation of the Division of Examinations, his comments being based substantially on the information presented in the June 4 memorandum. Following Mr. Leavitt's comments, the application was approved unanimously, with the understanding that the Legal Division would draft an order and supporting statement for the Board's consideration. Mr. Sanford then withdrew from the meeting. Examination of Dallas Reserve Bank (Item No. 2). There had been circulated to the Board the report on the examination of the Federal Reserve Bank of Dallas made by the Board's examining staff as of February 25, 1964. The usual accompanying memoranda also had been circulated, and a summary memorandum from the Division of Examinations dated May 19, 1964, had been distributed. Following a review of the examination findings by Mr. Smith, there was discussion of the comments contained in the report concerning the indebtedness of four members of the Bank's staff for the purpose of Purchasing stocks. A question was raised whether the Bank had made inquiries to determine if there were speculative aspects of the borrowings. In this connection, Mr. Smith noted that the Board had sent a letter to all Federal Reserve Banks under date of February 10, 1964, 6/9/64 -5- expressing views on outside activities and certain financial transactions Of Reserve Bank officers and employees. The letter had stated that the Board did not consider it appropriate for any officer or employee of a Federal Reserve Bank to engage in speculative dealings, as distinguished from investments. The brief period of time between the date of the Board's letter and commencement of the examination of the Dallas Reserve Bank on February 25 was suggested as the reason for the limited information on the nature of the transactions and the attitude of the Bank's management toward them. After further discussion, agreement was expressed with a suggestion that inquiry should be made of the Reserve Bank concerning steps taken or proposed to be taken by management in the four cases noted, in light of the Board's February 10 letter, and it was understood that an aPpropriate letter would be transmitted. A copy of the letter is attached as Item No. 2. At the conclusion of the foregoing discussion it was agreed that there were no other matters disclosed by the examination that required action on the part of the Board at this time. Mr. Johnson then withdrew from the meeting. Interpretation regarding messenger service (Items 3 and 4). There had been distributed a memorandum from Mr. Hackley dated June 8, 1964/ discussing the question whether "messenger service" provided by a. State member bank would constitute branch banking if there were an -6- 6/9/64 agreement between the customer and the bank that the messenger was acting solely as the agent of the customer. The memorandum indicated that this question had been raised in a letter of May 19, 1964, from Wachovia Bank and Trust Company, Winston-Salem, North Carolina, transmitted through the Federal Reserve Bank of Richmond, prompted by recent rulings of the Comptroller of the Currency and the Federal Deposit Insurance Corporation to the effect that messenger service under such an agency agreement would not be regarded as branch banking. The memorandum went on to point out that the question involved waS not whether the use of messenger service was a bad practice, but only whether it would be considered the establishment and operation of a branch, requiring approval of one of the Federal bank supervisory agencies. It was pointed out that the definition of "branch" contained in section 5155 of the United States Revised Statutes, which the Board held 4PPlicable to State member banks by virtue of the terms of section 9 of the Federal Reserve Act, involved two elements: (1) certain types of b4nking transactions, including the receipt of deposits, the payment of Cheeks, or the lending of money, must be carried on; and (2) one or more (If these transactions must occur at an "agency", "office", or "place of business" of the bank. The memorandum stated that the conclusion whether use of messenger service in connection with deposits, payment checks, or making of loans constituted branch banking depended upon whether one favored a "strict" approach or a "broad" approach. 6/9/64 -7Under the "strict" approach, where the messenger acted as agent Of the customer the bank would not be regarded as engaging in any of the Specified transactions at the customer's premises, and therefore the definition of "branch" would not apply. On the other hand, a "broad" aPproach would lead to the conclusion that these transactions occurred at the location of the customer, despite an agency relationship between the messenger and the customer. In the latter case, there being a receipt of deposits, payment of checks, or lending of money at a place Other than the bank's premises, the definition of "branch" would embrace such messenger activity if the customer's premises were held to be an agency, office, or place of business of the bank. The determination of this latter question again was stated to be dependent upon a choice between the "strict", or traditional, approach and a broader approach, based upon consideration of the underlying purposes of the law. The memorandum also noted that in addition to a choice between a strict” approach and a "broad" approach, the question before the Board involved recognition of the practical dilemma in which the Board had been placed by the recent rulings of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. If the Board should take the Position that messenger service of the kind described constituted branch banking, State member banks would be placed at a competitive disadvantage in relation to national banks and nonmember insured State banks. It was pointed out that while there was a difference of opinion within • 6/9/64 -8- the Legal Division, on balance the "strict" approach was believed to be the sounder. Accordingly, it was recommended that the Board publish an interpretation holding the use of messenger service under certain expressly stated factual circumstances not to constitute operation of a branch, and stating that in other circumstances determination of the question would have to be made on a case by case basis. A draft of such interpretation was appended to the memorandum. At the Board's request, Mr. Hackley elaborated on certain aspects of the information presented in the memorandum, during the course of which he called attention to the position taken by the Board in 1953 that the use of armored cars to pick up deposits of customers constituted the operation of a branch at each place at which the car stopped. Mr. Hackley went on to note that pursuant to the understanding reached at the Board meeting on May 21, 1964, at which time the Comptroller's recent ruling on the use of messenger service by national banks was discussed, an attempt had been made to arrange a meeting with counsel tor the comptroller and counsel for the Federal Deposit Insurance Corporation to discuss the matter. However, counsel for the Comptroller had exPressed the view that such a meeting would serve no useful purpose. Mr. Hexter then commented that he favored the "broad" approach to the question under consideration, leading to a conclusion that use °t messengers, even where agents of customers, constituted branch banking. 19SO 6/9/64 He recognized that the Comptroller of the Currency and the Federal Deposit Insurance Corporation had ruled to the contrary. However, it waS his personal opinion that the position taken by the Board in 1953 waS the correct one and in accord with the statutory purpose of branch banking laws, which were intended to limit the geographic area of a bank's influence. There followed a lengthy discussion of the proposed interpretation. Governor Robertson expressed the view that it was difficult to separate the legal aspects from the policy implications of the questions presented. In his view, the Board should not adopt a position contrary to the one it had followed for a number of years, unless based on sound legal ground. Further, the mere fact that the Comptroller of the Currency and the Federal Deposit Insurance Corporation had reached e conclusion contrary to that reached by the Board in 1953, was not sufficient reason to change that position now. He believed that the Board's position in the past was a sound one and that the use of a hired agent, as was being contemplated, was bad from both policy and legal s tandpoints. Mr. Hackley observed that in his view the position advanced in connection with the proposed interpretation would be more likely to stand under judicial review than would the Board's previous ruling on the subject. ) 6/9/64 -10Governor Robertson went on to say that he felt the draft inter- pretation should be revised to point out that the use of messenger service as proposed constituted a violation of the branching statute When viewed from the standpoint of the whole transaction, making it clear that acceptance of deposits away from a bank's offices was contrary to statute. However, the interpretation might then say that since Congress obviously did not intend for State member banks to operate at a disadvantage vis-a-vis national banks, and considering the position taken by the Comptroller of the Currency and Federal Deposit Insurance Corporation, the Board would raise no objection to the use of messenger service pending an opportunity for the Board to seek appropriate legislative action at the next session of Congress. Following Governor Robertson's comments, discussion centered Principally on whether to publish an interpretation in the form recommended by Mr. Hackley to the effect that the use of messenger service in certain situations would not involve the operation of a branch, or to issue an interpretation along the lines of Governor Robertson's suggestion. Governor Shepardson commented that he was inclined to favor the recommendation contained in Mr. Hackley's memorandum. While there were %Dealing features to Governor Robertson's proposal, he thought that it Illight open a Pandora's box of questions regarding the proper approach to 4 number of other areas in which the views of the Board and the Comptroller 6/9/64 -11- differed regarding operating practices. In his opinion, certain such situations might present clear-cut issues, but this type of question was in a grey area. Governor Mills observed that he too, was inclined to favor Mr. Hackley's proposal. Governor Mitchell then remarked that banks were essentially service institutions, and they were becoming more alert to this fact. When it came to an operating development where the customer would benefit, the Board should not stand in the way unless absolutely necessary. On the matter under discussion, he was of the view that small banks would not be placed at a competitive disadvantage should the use of messenger service be authorized. This would be a competitive device that would give the public better service, and it would not be unfair to small banks. On balance, he favored the draft interpretation as submitted. A suggestion was then made that the matter be held over for turther consideration. However, a majority of the Board members present e%Pressed the view that it would be desirable to conclude consideration ' et today's meeting. Accordingly, after further discussion, the inter- Pretation on the use of messenger service by State member banks submitted t° the Board with Mr. Hackley's memorandum of June Governor Robertson dissenting. 8 was approved, A copy of the interpretation, in the f°rm transmitted to the Federal Register, is attached as Item No. 3. A e°113Y of a letter sent to the Federal Reserve Bank of Richmond is attached Ets Item No. 4. I c, 6/9/64 -12All of the members of the staff except Messrs. Sherman, Hackley, and Farrell then withdrew from the meeting. Coin shortage developments. Mr. Farrell reported on conversations he had held late yesterday afternoon with President Scanlon of the Federal Reserve Bank of Chicago and Assistant Secretary of the Treasury Wallace c ncerning a holding by the Treasury Department's General Counsel that the proposal of Jewel Tea Company to issue scrip, to overcome oPerating problems due to the coin shortage, would be illegal under Federal statutes. Mr. Farrell also reported that Assistant Secretary Wallace had informed him of plans being developed for a substantial increase in production of coin by the mints in the near future, and for announcement of these plans later in the month in a manner that the Treasury hoped would result in some release of coin into circulation by h oarders and speculators. The meeting then adjourned. t BOARD OF GOVERNORS Item No. 1 6/9/64 OF THE FEDERAL RESERVE SYSTEM WASHINGTON, 0. C. 20551 ADDREBB OFFICIAL CORREBPCINDENCE TO THE BOARD June 9, 1964. Board of Directors, Silsbee State Bank, Silsbee, Texas. Gentlemen: The Board of Governors of the Federal Reserve System approves, under the provisions of Section 24A of the Federal Reserve Act, an investment in bank premises of $157,000 by Silsbee State Bank, Silsbee, Texas, for the purpose of expanding and remodeling banking quarters. This amount does not include the present book value ($68,000) of bank premises. Very truly yours, (Signed) Karl E. Bakke Karl E. Bakke Assistant Secretary. BOARD OF GOVERNORS Item No. 2 6/9/64 OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 ADD/7E6S OFFICIAL CORRESPONDENCE TO THE BOARD June 17, 1964. (Confidential FR.) Mr. Watrous H. Irons, President, Federal Reserve Bank of Dallas, Dallas, Texas. 75222 Dear Mr. Irons: Among the matters that came to the attention of the Board as a result of the examination of the Federal Reserve Bank of Dallas as at February 25, 1964, were four cases of indebtedness, described as for the purpose of purchasing securities, which were reported by members of the Reserve Bank's staff at the July 1, 1963, reporting date. The staff members concerned were: Ralph T. Green, Vice President; Coy Lynn Vick, Assistant Manager, Accounting Department; James F. Williamson, General Clerk, Transit Department; and Charles H. Hutton, Teller, CVU. Since the information was provided on a confidential reporting basis, and since the reports themselves are available to you, it seemed desirable not to include the pertinent details in this letter. Certain of these details at least raise a question whether a speculative rather than an investment purpose may be involved. By its letter of February 10, 1964 (S-1907) the Board outlined its current views on the subject of outside activities and certain financial transactions of Federal Reserve Bank officers and employees. Of relevance to the subject under discussion is paragraph 4 of that letter, as follows: "4. The Board considers it inappropriate for any officer or employee of a Federal Reserve Bank to engage in speculative dealings (as distinguished from investments), whether on a margin or a cash basis, and whether in securities, commodities, real estate, exchange, or otherwise. Frequency of trading would be a significant indicator in judging whether dealings were speculative, particularly any transactions that appeared to be for the purpose of taking advantage of short-term price fluctuations, and the use of credit also would be a pertinent consideration." 11_9L43 -2-. Mr. Watrous H. Irons It is realized that the information summarized above was as of mid-1963, and that the examination of your Bank followed so closely Upon the Board's letter of February 10, 1964, that there was scarcely time for adequate consideration and appropriate administrative action regarding the situations mentioned, if any was necessary. The Board would be interested in knowing, however, if you have made inquiries to determine whether there were speculative aspects in the borrowings listed above, and, if so, whether the staff members concerned have closed out the transactions, or are taking steps to do so. Very truly yours, (Signed) Merritt Sherman Merritt Sherman, Secretary. Item No. 6/9/64 TITLE 12 - BANKS AND BANKING 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 Establishment and Operation of Branches § 208.110 "Messenger service" provided by State member banks. (a) The Board of Governors has been asked whether an arrangement under which a State member bank provides "messenger service" for a customer, subject to an agreement that the messenger acts as agent for the customer, would involve the operation of a branch by the bank. (b) Section 9 of the Federal Reserve Act (12 U.S.C. 321) Provides, in effect, that a State member bank, if permitted to do 80 by State law, may establish branches on the same terms and conditions and subject to the same limitations and restrictions as are applicable to the establishment of branches by national banks, except that the approval of the Board of Governors, instead of the Comptroller of the Currency, shall be obtained before a branch may be established by a State member bank. It is apparent that it was the intent of Congress that national banks and State member banks Should have substantially equal opportunity to establish branches. (c) Section 5155 of the Revised Statutes (12 U.S.C. 36), relating to branches of national banks, provides that the term "branch" shall be held to "include any branch bank, branch office, branch agency, additional office, or any branch place of business 3 -2- • . . at which deposits are received, or checks paid, or money lent." (d) Whether any of the banking transactions described in the law, or other banking transactions, are conducted at an "additional office" or other "place of business" can be determined only on the basis of particular factual situations. The question here presented refers only to "messenger service" provided by the or the Bank, without any indication of the purpose of the service "act circumstances in which it would be provided. question (e) It is assumed, however, that the service in would involve picking up deposits at the respective addresses of drawn by such Particular customers and the payment of checks Customers on the bank; that the "messenger" normally would be an ctor; armored car owned by the bank or by an independent contra that the cost of the service would be borne by the bank; that, in the case of deposits, there would be a written agreement between the bank and the customer under which the messenger would act as no liability for agent of the customer and the bank would assume the funds collected until they were received by it from the payment messenger at the bank's premises; and that, in the case of by of checks, the checks would be presented at the bank's premises proceeds the messenger acting as agent of the customer and the customer, with no received by the messenger for transmittal to the liability on the part of the bank for such proceeds after their delivery to the messenger. -3- (f) Assuming the facts to be as stated above, the Board does not regard such arrangements as involving the establishment and operation of branches by State member banks. Whether the use of messenger service in other circumstances would constitute branch banking would, of course, have to be determined on the basis of the facts involved. (12 U.S.C. 248(i). Interprets 12 U.S.C. 36 and 321.) Dated at Washington, D. C., this 9th day of June, 1964. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM (Signed) Merritt Sherman Merritt Sherman, Secretary. LOC() BOARD OF GOVERNORS Item No. C.Ott : •*. so 4 6/9/64 OF THE FEDERAL RESERVE SYSTEM o WASHINGTON, D. C. 20551 k-• CORRESPONDENCE A07RESS OFFICIAL TO THE BOARD '1:t)th 1 •• • &Iiii".;0: • •• June 10) 1964 Mr. John L. Nosker, Vice President, Federal Reserve Bank of Richmond, Richmond, Virginia. 23213 Dear Mr. Nosker: to This refers to your letter of May 22, 1964, addressed Mr. Hooff, Assistant General Counsel, enclosing a letter from Mr. E. T. Shipley, Comptroller, Wachovia Bank and Trust Company, whether Winston-Salem, North Carolina, dated May 19, 1964, inquiring where banking branch es constitut bank a by provided messenger service the there is an agreement between the customer and the bank that messenger acts as agent for the customer. There is enclosed a copy of an interpretation by the in Board of Governors regarding this matter which is being published Federal the of the Federal Register and will appear in the next issue ation will serve Reserve Bulletin. It is believed that this interpret to answer Mr. Shipley's inquiry. Very truly yours, (Signed) Merritt Sherman Merritt Sherman, Secretary. Enclosure
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