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Minutes for
To:
Members of the Board
From:
Office of the Secretary
March 10, 1965.
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. Robertson
Gov. Balderston
Gov. Shepardson
Gov. Mitchell
Gov. Daane
Minutes of the Board of Governors of the Federal Reserve
System on Wednesday, March 10, 1965.
The Board met in the Board
Room at 10:00 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Robertson, Acting Chairman
Shepardson
Mitchell
Daane
Kenyon, Assistant Secretary
Hackley, General Counsel
Solomon, Director, Division of Examinations
Hooff, Assistant General Counsel
Leavitt, Assistant Director, Division of
Examinations
Miss Hart, Senior Attorney, Legal Division
Mrs. Ulrey, Economist, Division of Research
and Statistics
Messrs. Egertson and McClintock, Supervisory
Review Examiners, Division of Examinations
Mr.
Mr.
Mr.
Mr.
Mr.
Voluntary credit restraint effort.
Governor Robertson indicated
that he was arranging a meeting at the Federal Reserve Building on
Monday, March 15, to be attended by officers of the Federal Reserve
Banks designated by their Presidents as having responsibility for
ad ministration of the voluntary program to restrain foreign lending
and investment.
The general purpose of the meeting would be to answer
such questions as might be raised by the Reserve Bank officers and to
work toward a uniform approach throughout the Federal Reserve System.
In reply to a question, Governor Robertson said it was recognized
that the President of each Reserve Bank would head up the responsibility
fnr the program at his Bank and would undertake the bulk of the discussions with financial institutions.
A meeting with the Presidents
3/10/65
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would be planned on Tuesday, March 23, to discuss the progress of
the voluntary program, this being the day when the Presidents would
be in Washington for a meeting of the Federal Open Market Committee.
Obviously, however, the Presidents could not personally administer all
Phases of the Reserve Bank functions incident to the program, and the
persons attending next Monday's meeting would be the principal officers
designated by the respective Presidents for administrative purposes.
Reports on competitive factors.
Reports to the Comptroller
of the Currency on the competitive factors involved in the following
Proposed mergers or similar transactions were approved unanimously for
transmittal to the Comptroller in a form in which the conclusions were
stated as follows:
Merger of First National Bank of Gate City, Gate City,
YALaialaa_11212 Virginia National Bank, Norfolk, Virginia
There appears to be little, if any, competition existing
between First National Bank of Gate City and Virginia National Bank,
Norfolk.
Consummation of the proposed merger would expand Virginia
Na tional's geographical coverage in the far southwestern portion of
the State, and continue the trend in Virginia toward the grouping of
(Immercial banks into large aggregations with a consequent decline
in locally headquartered banking outlets.
l'Ill!rger of The Peoples National Bank of Farmville, Farmville,
lr inia into Vir inia National Bank Norfolk Vir inia
While the proposed merger of The Peoples National Bank of
Pa
rmville into Virginia National Bank, Norfolk, would eliminate little
competition existing between them, it would expand Virginia National's
!
gt °graphical coverage in the central section of the State and expose
0(.:oe smaller banks in the Farmville area to the competitive capabilities
a substantially larger institution.
3/10/65
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Consummation of the transaction would continue the trend in
Virginia toward the grouping of commercial banks into large aggregations with a consequent decline in locally headquartered banking
outlets.
Purchase of assets and assumption of liabilities of
Martin State Bank, Martin, Michigan, by The First National
and Trust Company of Kalamazoo, Kalamazoo, Michigan
1.2allk
The proposed purchase of assets and assumption of liabilities
of Martin State Bank by First National Bank and Trust Company of
Kalamazoo would eliminate competition that exists between the two
banks, and would increase the volume of deposits and branch office
representation of the largest bank in Kalamazoo. The competitive
effects of the proposed transaction would be adverse.
Application of Commercial State Bank (Item No. 1).
On Febru-
ary 26, 1965, the Board concluded that the application for membership
in the Federal Reserve System of Commercial State Bank, Boise, Idaho,
a newly-organized bank that had not yet begun operations, should be
denied because the proposed capital structure was inadequate.
It
was understood that a letter would be sent to the bank's organization
committee indicating that the application had been denied for this
reason, and in the same letter a comment would be made reflecting
the Board's knowledge of the true ownership of the stock of the bank.
A copy of the letter was to be sent to the Idaho State banking authorities so that they would be informed officially concerning the true
Ownership of the bank.
The Board also indicated, however, that the
matter might be discussed with the Federal Reserve Bank of San
Francisco, and this was done subsequent to the meeting.
On the basis
Of that discussion the Division of Examinations recouuaended in a
3/10/65
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distributed memorandum dated March 2, 1965, an approach differing somewhat from the procedure previously envisaged.
A letter would be sent
to the organization committee of the bank approving the bank's membership application subject to the two standard conditions of membership
and two special conditions: (1) that at the time of admission to
membership the bank have total capital funds of not less than $750,000;
(2) that the Board of Governors be provided with satisfactory evidence
that the State banking authorities had been informed of the true ownership of the bank.
In discussion Governor Robertson indicated that he would favor
a procedure whereby a letter would be sent to the bank's organization
eftmittee stating that the membership application was denied on the
basis of capital inadequacy, that a new membership application could
of course be submitted on the basis of additional capital being provided
(which matter the organizers might want to discuss with the Federal Reserve
Bank), and that if such an application was approved one of the conditions
Would be that the bank must provide the Board evidence that the State
banking authorities had been informed of the true ownership of the bank.
This approach was generally favored and was considered preferable
to a possible alternative, also mentioned during the discussion, under
which the bank's organization committee would be advised that the Board
was
Prepared to deny the membership application unless additional capital
was supplied and the identity of the bank's ownership was made known to
the State banking authorities.
3/10/65
-5Accordingly, unanimous approval was given to a letter to the
bank's organization committee in the form attached as Item No. 1.
Question under Regulation U (Item No. 2).
There had been dis-
tributed a memorandum from the Legal Division dated March 3, 1965,
regarding a question presented by the Federal Reserve Bank of Boston
as to whether New England Merchants National Bank of Boston, Boston,
Massachusetts, could accept in good faith, within the meaning of
section 221.3(a) of Regulation U, Loans by Banks for the Purpose of
Purchasing or Carrying Registered Stocks, "nonpurposen statements
submitted by mail under a plan the bank was advertising whereby it
°ffered to make installment loans for up to 70 per cent of the redemption value of any acceptable mutual fund shares pledged by the borrower
as collateral.
The memorandum brought out that in a letter of July 30,
1964, the Board held that another national bank in Boston could not
accept similar statements in good faith within the meaning of Regulation U under essentially similar circumstances.
However, no interpre-
tation based on that letter had been published.
The Board's staff had reached the conclusion that the position
taken on the earlier occasion, namely, that nonpurpose statements
Obtained by mail under a plan of this kind would not meet the requirements of Regulation U, seemed equally applicable to the plan of New
England Merchants National Bank.
Attached to the memorandum was a draft
Of letter to the Federal Reserve Bank of Boston reflecting this view,
3/10/65
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and it was recommended that an interpretation along the lines of the
draft letter be published in the Federal Register and the Federal
Reserve Bulletin to place other banks on notice.
After discussion of the situation in light of the Board's
statutory responsibilities for the regulation of loans for the purchasing or carrying of registered stocks, the members of the Board expressed
their views on the position that should be taken.
Governor Robertson said that if the Board were to approve the
Plan described in the memorandum, he felt that the intent of Regulation U
would be nullified.
He believed that persons would be inclined to indicate
more readily, on a printed statement received by them through the mail,
that a loan was not a purpose loan than if they had to make such a statement in the presence of, and after discussion with, a bank officer.
Governor Shepardson said that under the mandate given to the
Board by statute he felt that no other approach than the one recommended
by the Legal Division could properly be taken.
taken,
If such a position were
borrowers could obtain loans on the collateral of acceptable
mutual fund shares by going to the nearest office of their bank.
This
Should be no significant deterrent, while at the same time it might
tend to prevent abuses.
Governor Mitchell expressed the opinion that if an individual
w°111d make a false statement in a document mailed to a bank, that
individual probably would also make a false statement on the bank
3/10/65
-7-
premises.
He did not see that there was justification for drawing a
distinction.
Individuals would be denied a convenient method of borrow-
ing, and banks would be prevented from offering a reasonable service
to their customers.
Governor Daane indicated agreement with the conclusion and
recommendation of the Legal Division.
Accordingly, the letter to the Federal Reserve Bank of Boston
was approved, Governor Mitchell dissenting, with the understanding that
an interpretation based on the letter would be published in the Federal
Register and the Federal Reserve Bulletin.
A copy of the letter is
attached as Item No. 2.
Question relating to sale of bank money orders (Item No. 3).
Mr. Hackley recalled that on previous occasions, most recently at the
meeting on February 24, 1965, the Board had discussed a proposed letter
with regard to the question, raised by a State member bank through the
Pederal Reserve Bank of Cleveland, whether the issuance of money orders
by an authorized agent of a State member bank would involve the operation
Of a branch.
The proposed letter would express the opinion that the
issuance of a bank's money orders by an authorized agent would not
involve the receipt of deposits at a branch place of business and,
accordingly, would not require the Board's permission to establish a
branch.
Up until February 24, neither the Federal Deposit Insurance
C°rporation nor the Comptroller of the Currency had replied to the Board's
3/10/65
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request for comments on the matter, and it was decided by the Board
that the so-called "Dillon procedure" should be followed before the
letter was sent.
Mr. Hackley reported that letters had now been received from
the Treasury, the Comptroller of the Currency, and the Federal Deposit
Insurance Corporation interposing no objection to the Board's taking
the position stated in the proposed letter.
Accordingly, the sending
of the letter was approved unanimously, with the understanding that
the interpretation contained therein would be published in the Federal
Register and the Federal Reserve Bulletin.
A copy of the letter to
the Federal Reserve Banks is attached as Item No. 3.
The meeting then adjourned.
Secretary's Notes: Governor Shepardson
today approved on behalf of the Board
the following items:
Memorandum from June E. Burns, Administrative Assistant, Division
°f Personnel Administration, requesting permission to engage in activicles incidental to the rental of a house.
Memorandum from Susan D. Chapman, Personnel Clerk, Division of
sonnel Administration, requesting permission to work as Admitting
Clerk at the Washington Hospital Center.
Per
Acting in the absence of Governor Shepardson,
Governor Robertson today approved on behalf of
the Board a memorandum from Ethel A. Bergstein,
Statistical Clerk, Division of Data Processing,
requesting permission to work for Bergstein
Temporary Help Service.
Ar
.510
Assistant S
tary
-42
Item No. 1
BOARD OF GOVERNORS
OF THE
3/10/65
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
March 12, 1965.
Organization Committee,
Commercial State Bank,
Boise, Idaho.
Gentlemen:
This refers to the application made on
behalf of Commercial State Bank, Boise, Idaho, for
stock in the Federal Reserve Bank of San Francisco.
In view of the bank's expected growth, proposed
capital structure is considered inadequate, and,
therefore, the application has been denied. The
Board would consider a new application based upon
more adequate capital, and your committee may wish
to discuss this feature with officers of the Federal
Reserve Bank of San Francisco. However, admission
to membership would not be approved if the actual
ownership of Commercial State Bank has not been
officially revealed to the State authorities.
Very truly yours,
/
‘1.:1-7
,,--
,-/-7
-/ -7
Kenneth A. Kenyon,
Assistant Secretary.
•41'
BOARD OF GOVERNORS
Item No. 2
3/10/65
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADORESS OFFICIAL CORRESPONDENCE
TO THE HOARD
March 10, 1965.
Mr. Laurence H. Stone, Secretary and
Associate General Counsel,
Federal Reserve Bank of Boston,
Boston, Massachusetts.
02106
Dear Mk. Stone:
This refers to your letter of December 29, 1964, in which
You ask for the Board's views on the question whether New England
Merchants National Bank of Boston ("Merchants") can accept in good
falth, within the meaning of section 221.3(a) of the Board's Regulation
"nonpurpose" statements submitted by mail under a plan Merchants
la-s recently been advertising. Regulation U covers, of course, "Loans
DY Banks for the Purpose of Purchasing or Carrying Registered Stocks."
Under the plan, Merchants offers to make installment loans
for
UP to 70 per cent of the redemption value of any acceptable mutual
fund shares pledged by the borrower as collateral. A customer may
either go personally to one of Merchants' offices, or mail in a loan
_ 1313lication, but the problem before the Board does not arise unless
ue chooses to apply by mail.
Among material to be completed by the borrower on the
appli• cation form is the following:
"I/We state that this loan is for the following purpose
(describe briefly):
and that it is not for the purpose of purchasing or carrying
mutual fund shares or any securities registered on a national
securities exchange."
Rep
'bulation U, of course, limits the amount a bank may lend against
ctrlateral consisting of stock, where the loan is "directly or indirectly"
ser the purpose of purchasing or carrying stocks registered on a national
the urities exchange (so-called "purpose loan"), and places upon a bank
e responsibility for taking appropriate action to determine the true
Purpose of a proposed loan.
Mr. Laurence H. Stone
-2-
Mutual fund shares are "stock" for purposes of Regulation U,
and under § 221.3(b)(2) shares issued by some open-end investment
companies are deemed to be registered stocks. Consequently, the loans
are secured by stock, and are purpose loans if they are for the purpose
of purchasing such mutual fund shares (or other registered stocks).
At present, a bank may lend no more than 30 per cent of the current
market value of stock collateral if the loan is a purpose loan, so
that the regulation would forbid the making of a loan under the plan
if, despite the borrower's statement to the contrary, it was really a
Purpose loan.
Section 221.3(a) of Regulation U permits a bank to rely on a
statement by the borrower as to the purpose of a loan
. . . only if such statement (1) is signed by the
borrower; (2) is accepted in good faith and signed by
an officer of the bank as having been so accepted; . . .0
and the regulation explains that
". . . to accept the statement in good faith, the
officer must be alert to the circumstances surrounding
the loan and the borrower and must have no information
which would put a prudent man upon inquiry and if
investigated with reasonable diligence would lead to
the discovery of the falsity of the statement."
The bank's manual of instructions to its employees with respect
to this plan indicates precautions which are to be taken in attempting
to ensure that the statement can be accepted in good faith. For
!
xamPle, if a check is to be mailed to the borrower in care of a
broker or dealer, a purpose statement may be required from the latter.
1)elivery to the bank as collateral of a certificate dated shortly
before the loan application would indicate the need for further
inquiry. Repeated loan applications with certificates dated subsequent
to Prior loans would also suggest the possibility of a violation.
Although these precautions are useful and demonstrate the
effort Merchants has made to bring the plan into conformity with the
regulation, the Board does not believe it would be feasible, under the
circumstances described, for the circumstances surrounding each loan
4
4_ 1d each borrower to be adequately known to the loan officer so that
"le officer could become aware of circumstances that might indicate
4 need for further investigation. While no precautions can completely
:
liminate error or evasion, the Board does not believe there is any
atisfactory substitute for a face-to-face meeting between borrower
and lending officer in developing information as to the purpose of a
Mr. Laurence H. Stone
-3-
loan. The regulation makes the officer responsible for determining
the purpose of a loan, and it is difficult to see how he can discharge
this responsibility, particularly in a routine case, without an
oPportunity to question the customer. In addition, a customer
relationship, or the possibility that such a relationship may arise
in the future, tends to put both customer and loan officer on a more
realistic footing in respect to Regulation U.
While it is true that not all stock-secured loans involve
personal interviews between borrowers and loan officers, or a customer
relationship, these do obtain in the normal case. Loans made by mail
under the plan put into operation by Merchants would tend to create a
new class of stock-secured loan, to be made in relatively small amount
for each loan, and potentially made in large numbers, so that the
absence of these safeguards would be especially likely to result in
the making of "purpose" loans that exceeded the permissible amount.
Accordingly, the Board does not believe that a purpose statement
submitted by mail in connection with a plan of this kind can satisfy
the requirements of section 221.3(a).
One further difficulty remains to be discussed. In 1962
Federal Reserve Bulletin 690, the Board held that certain loans to be
made by a bank against stock of American Telephone and Telegraph
C°mPany, although earmarked for "living expenses", must be considered
to be purpose loans where the borrower was simultaneously purchasing
additional shares under an employee stock purpose plariand the loans
were to be geared to the amount of the monthly installment payment
tequired. The Board pointed out that payroll deductions to finance
Purchases under the plan could be as high as 38 per cent of base pay,
and a larger percentage of "take-home pay", and that deductions of this
magnitude are in excess of the savings rate of many employees.
It may be asked whether this interpretation applies to loans
made by Merchants under the present plan, if the borrower is simultane°uslY purchasing mutual fund shares under a periodic purchase plan,
re gardless of the use he may make of actual proceeds of the loan. The
t
_°ard believes that the'principle of the interpretation just discussed
could apply where a purchaser is obviously buying more stock than he
"'
tan carry out of current income, or where loan disbursements are geared
10 Payments under such a purchase plan, and that in such cases, the
ending bank should treat the loan as a regulated loan.
Since information normally obtained by lending officers would
whether the borrower was purchasing stock under such a plan, and
ether the purchases were disproportionate to the borrower's income and
ather expenditures, it should not be difficult for the officer to make
judgment on this point. The existence of this question, however,
re,
*QL
L'uould have read stock purchase plan.
Laurence H. Stone
Provides an additional reason why a personal interview is advisable
in the case of a loan against mutual fund shares, if the bank is to
satisfy itself that the loan is not a purpose loan and subject to the
regulation.
A copy of this letter is enclosed for the use of Merchants.
The substance of the letter will be published shortly in the Federal
Register and the Federal Reserve Bulletin.
Very truly yours,
Signed
Merritt Sherman
Merritt Sherman,
Secretary.
Enc osure
v
,
Item No. 3
3/10/65
S-1945
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
March 10, 1965.
Dear Sir:
The Board of Governors has been asked to consider whether
the appointment by a State member bank of an agent to sell the bank's
money orders, at a location other than the premises of the bank,
constitutes the establishment of a branch office.
Section 5155 of the Revised Statutes (12 U.S.C. 36), which
"branch"
is also applicable to State member banks, defines the term
addiagency,
branch
office,
as including "any branch bank, branch
which
at
.
.
.
business
tional office, or any branch place of
The basic
deposits are received, or checks paid, or money lent."
an agent
by
orders
money
questicn is whether the sale of a bank's
business"
of
place
"branch
amounts to the receipt of "deposits" at a
Within the meaning of this statute.
Money orders are classified as deposits for certain
traveler's
Purposes. However, they bear a strong resemblance to
In both
premises.
off
sold
checks that are issued by banks and
deposit
a
establish
cases, the purchaser does not intend to
part is
account in the bank, although a liability on the bank's
, the
liability
deposit
a
created. Even though they result in
money
bank's
a
of
issuance
Board is of the opinion that the
orders by an authorized agent does not involve the receipt of
ly does
deposits at a "branch place of business" and according
branch.
a
not require the Board's permission to establish
Banks engaging in this practice should, of course, exercise
the utmost discretion in choosing agents to sell the bank's money
orders. It has been suggested that the agents be bonded, their
authority be limited, and proceeds of the sales be remitted daily.
Also the bank's blanket bond might be amended to provide protection
if the present provisions are inadequate.
Very truly yours,
L-TO THE PRESIDENTS OF ALL
FEDERAL RESERVE BANKS.
Merritt Sherman,
Secretary.
@FedFRASER