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Minutes of actions taken by the Board of Governors of the Pederal Reserve System on Tuesday, May 10, 1949. The Board met in the Board Room at 10:35 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. McCabe, Chairman Eccles Szymczak Draper Clayton Mr. Mr. Mr. Mr. Mr. Mr. Mr. Carpenter, Secretary Sherman, Assistant Secretary Morrill, Special Adviser Thurston, Assistant to the Board Riefler, Assistant to the Chairman Vest, General Counsel Millard, Director of the Division of Examinations Mr. Young, Associate Director of the Division of Research and Statistics Mr. Solomon, Assistant Counsel Mr. Carpenter stated that in accordance with the action at the ' eting last Friday, he talked by telephone with Mr. Evans and 4. v ardaman regarding the draft of the letter to the Bank of America N, T. k S. A., San Francisco, California, with respect to that Bank's 4PPli,+. --1°ns for permission to establish three branches in. Germany, that 14, "zvans stated that he had read the memorandum of the conferetice8 wIth Mr. Russell G. Smith, Executive Vice President of the Bank Of Ameri ea) on April 13 and 14, 1949, and that he found no reason to the view 4 which he expressed at the meeting on February 21, 1949, ',hat h e 'mould not vote to approve any of the branches applied for in 836 5/10/149 -2- Germ anY. Ur. Carpenter stated that Mr. Vardaman said that, for reasons whi Qu he had stated at earlier meetings of the Board, he would approve the aPPlications for the three branches in Germany and would not write the Bank concerning its capital position. Mr. Clayton stated that he still felt the Board would be in a bette P POSitiOn to grant permission to establish the branches in Ger,rn --ianY and to state in a letter to the Bank that approval of these hranche-s was given because the Bank WAS not on notice as to the Board's with respect to its capital position at the time the applications were f. lied, and that the Board would not be inclined to approve establish' .."3 Of anY further branches until the capital position had been im- Proved. He added that he would also inform the Bank that the Board '4°t111 be glad to consider a request for establishment of a corporation 114der Q L'ection 25a of the Federal Reserve Act for the purpose of operatine the f °reign branches of the Bank. 14_r. Szymozak stated that he felt differently, that the Bank of knerica made it clear that it intended to expand in the foreign t:: such expansion in the services offered by the Bank would 'etld to at to the Bank additional customers and deposits in the dotestic and foreign fields, that he did not feel the Board would be the Bank an injustice by bringing to its attention the relation411143 Of its capital position to expansion tether in the domestic or tore. 1g4 field, and that he would not vote to approve the three pend-11 aP1) pa '1 --"Ions but mould tell the Bank of the possibility of exktiriC in the foreign field by establishment of a corporation under _3_ 5/10/49 Section 25(a) of the Federal deserve Act. The matter was discussed in the light of these differing views, and Mr. Szymczak moved that a letter be sent to the Bank of America, informing it of the Board's views with respect to its capital position, that the Board was denying the pending applications for permission to establish three branches in Germany, and that the Board would be glad to consider the formation of a separate corporation under Section 25(a) of the Federal Reserve Act to carry on the foreign operations of the Bank. Mr. Clayton moved that Mr. Szymczak's motion be amended in so far as it was related to the application for three branches in Germany to provide that the Board would approve the three applications. Mr. Clayton's motion was put by the Chair and lost, Messrs. Eccles, Szymczak, and Draper voting "no" and Messrs. McCabe and Clayton voting "aye". Thereupon, Mr. Sz3rmczak's original motion was put by the Chair and carried, Messrs. Eccles, Szymczak,and Draper voting "aye" and Messrs. McCabe and Clayton voting "no". As recorded previously in these minutes, Mr. Evans had stated over the telephone that he mould vote "aye" on this motion, and Mr. Vardaman had stated that he would vote to approve the applications for the three branches but would make no reference to the capital position of the Bank in advising the Bank of the action. In taking this action, it was understood that the draft of letter to Bank of America would be revised and sent in the following form With copies to Mr. Earhart, President of the Federal Reserve Bank of San Francisco, Mr. Delano, 838 Comptroller of the Currency, and Mr. Han, Chairman of the Federal Deposit Insurance Corporation, for their information: "In connection with the applications filed by your bank for permission to establish branches in Bremen, Hamburg, and Frankfurt-am-Main, Germany, the Board stated in its letter of /larch 17, 1949, that it mould be desirable to have a meeting between representatives of the Board and a senior officer or officers of your bank to discuss certain questions which had arisen. Pursuant to this suggestion, Mr. Russell G. Smith, Executive Vice President of your bank, with Mr. Roland Pierotti, conferred at the Board's offices on April 13 and 14 with members of the Board and its staff. The Board appreciates the information /14ich was furnished by Mr. Smith and the frankness with /which the entire matter was discussed. "It appears from Mr. Smith's statements that the Bank Of America will wish to expand its business in foreign countries whenever opportunity offers and the bank feels that there is a reasonable probability of successful OPMr.!i Smith advised that your bank feels it should nave in the foreign field a volume of business, correspondellt relationships, volume of deposits, and volume of transwhich would be comparable in size (in relation to re size of your bank) to foreign business of other large ftmerican banks in relation to their size. of the matters discussed with Mr. Smith when he ;:p here was the capital position of the Bank of America cl4 A- Comparative figures taken from call reports of conindicated that the percentage of capital accounts to 1 184 assets of Bank of America had dropped from 16 per cent : 1935 to 9.2 per cent at June 30, 1948, a reduction of 42 itis per cent as compared with a reduction of 23.6 per cent comparable percentage for all member banks in the Unit ed States. Also, on December 31, 1948, the percentage or he 0,,djusted book capital to risk assets in the case of Bank p:rAmerica was 9.8 per cent, as compared with 15.8 and 19.9 par :"in the case of two other national banks of come size which are active in the foreign field. In view of the bank's program for expansion in the tor Of eign field as outlined by Mr. Smith, the Board would it as "eltY have to consider any application filed with Part of that program and not as a single application 5/10/49 -5- "Standing by itself. It is apparent that in carrying out the program numerous branches might be established over the years and, if the foreign business of the bank develops as it might well do, it would result in the creation of large additional deposit and other liabilities. The Board is cognizant of the statements of Mr. Smith to the effect that it is the policy of your bank not to invest any substantial amount of capital in connection with the establishment of branches in foreign countries and to make loans at a branch in a total amount not to exceed the total deposits received at the branch. Nevertheless, the existence of a number of foreign branches would make possible a substantial expansion of the business of the bank which in turn mould create additi°nal liabilities which would have to be taken into account in determining the adequacy of the bank's capital structure. Therefore, the Board feels that actual and relative capital Position becomes an important factor in consideration of a comprehensive program or a single application as a part such a program for expansion through establishment of ulrect foreign branches. "In all the circumstances, the Board is unwilling to !"13Prove the applications for authority to establish branches 3r.1 Bremen, Hamburg, and Frankfurt-am-Main and will not be T:sposed to approve any further applications of your bank t.?I' Permission to establish foreign branches until such ulme as its capital position has been substantially improved the percentage of its capital accounts to its risk asbe's is more nearly in line with the average of other memin the United States including banks which operr atbanks e"foreign branches. on 4 During the discussion above referred to with Mr. Smith Of Pril 13 reference was made to the possible organization Act/ a corporation under Section 25(a) of the Federal Reserve 110/in as the Edge Act). The creation of such a corpor of ron would not dispose of the question of the adequacy i'al of Bank of America as discussed earlier in P er However, if upon further consideration of the amatter, you should desire to propose the organization wcladc?rporation under this section of the law, the Board tor toe willing to consider such a proposal, with capital pre,% corporation to be supplied in an adequate amount, l neerAm , ng, oi-J4 from sources other than Bank of America, assumcourse, that the various provisions of Section 25(a) 810 5/1o/49 -6- 'are met. The operations of such a corporation, which under the statute would be organized 'for the purpose of engaging in international or foreign banking or other international or foreign financial operations,' would of course be segregated from the operations of the bank. If such a corporation should be organized, the Board would consider giving its approval for the establishment of branches by the corporation in foreign countries at such places and under such circumstances as the corporation might desire and as the Board might feel were justified. If you should wish to pursue this aspect of the matter, the Board will be glad to discuss it further with you either here in Washington or through the Federal Reserve Bank of San Francisco." Mr. Clayton stated that further consideration had been given to the proposed reduction in margin requirements applicable to securities purchased through the exercise of rights, that a conference had been held on Wednesday, May 4, 1949, with the members of the Securi- ties and Exchange Commission, and that the Commission had no objection t° the proposed amendment to Regulations T, Extension and Maintenance c) Credit by Brokers, Dealers, and Members of National Securities Excha?, -ges, and U, Loans by Banks for the Purpose of Purchasing or CarStocks Registered on a National Securities Exchange. Mr. Clayton als° stated that a letter from the New York Stock Exchange dated MaY 6, 1949, Commented favorably on the proposed changes, and that ill informal Consultations Messrs. Rouse and Norman P. Davis, Vice President and Assistant Vice President, respectively, of the Federal ilesel've Bank of New York, favored the changes. He suggested that the l'egillations be amended to permit the purchase of stocks through the ercise of subscription rights with a 25 percent margin, provided 841 5/10/49 _7_ auch transactions were set up in a special account with the requirement that no substitutions or withdrawals could be made and provided filrther that if the margin in the special account were not increased to 50 percent within either six or nine months, no further credit %lad be extended in the account on the preferential basis. During a discussion of the proposed amendments, Mr. Eccles suggested that before taking final action, the matter be presented to 4.L. ' 41e Federal Reserve Banks by telegram for comment with the under'1C that the Board would consider the matter at a meeting on „„ icLv of this week. Mr. Eccles' suggestion was approved unanimously. Chairman McCabe referred to a draft of the statement which he T11- ' uposed to make before the sub-committee of the Senate Banking CurrencY Committee tomorrow with respect to proposed legislation 41.a.tin„ to supplemental reserve requirements and consumer instalcredit. nietber 8 tocitn „ He said that copies of the statement had been sent to of the Board and that he would appreciate their giving him allY comments that they might have. MeSSrs. rt'°111 the McCabe, Riefler, Young,and Solomon then withdrew meeting to keep another appointment, and Mr. Hostrup, Assist- krector of the Division of Examinations, entered. Mr. Clgyton referred to the discussion at the meeting of 5/10/49 -8- jarillary 281 1949, regarding a proposed revision in the uniform exaltination procedure agreement adopted by the Federal bank supervisory agencies and the executive committee of the National Association of SuPervisors of State banks in 1938, and stated that since that time he had met with representatives of the supervisory agencies on several occasions. In this connection, he referred to a memorandum Ithich he prepared under date of May 9, 1949, copies of which were aent to each member of the Board before this meeting, and at his re(111 Mr. Carpenter read the memorandum as follows: "On January 28, 1949, the Board gave consideration to IV memorandum of January 7, with respect to the uniform examination procedure agreement adopted by the Federal Suj P rvisory Agencies and the Executive Committee of the NaAssociation of Supervisors of State Banks in 1938. that memorandum, after reviewing the results of discusof the matter at staff level, I recommended that the B5 ;lard give consideration to approval of revision of the thnif°rm Agreement' to provide for recommended changes in .form of the report of examination as follows: -L That the present classification of loans (II, III, and IV) be changed to Unsatisfactory, Doubtful and Estimated Loss. That the definitions of the loan classifications be eliminated except that a definition of 'Unsatisfactory' be included along the following lines: 'Loans, or portions of loans, not classified as doubtful or estimated loss but with unsatisfactory credit characteristics, as noted in the examiner's comments.' 2, That the definitions of the Schedule 'Summary of Examiner's Classifications' be eliminated except for the definition of 'Unsatisfactory' which -would read: Book assets or portions thereof, not classified as doubtful or estimAted loss but which appear to be unsatisfactory as bank assets. Included in this classification are loans so classified on page 11, that Portion of the bank's fixed assets considered excessive, V ? % 5/10/49 _9— "holdings of other real estate, and other undesirable assets as scheduled.' 3. That the 18 months average price for Group 2 securities be dropped and that such securities be appraised at market value. "It was felt that there was no need to define 'Doubtful' or 'Estimated Loss' as used in reports of examination and it was contemplated that the one schedule would include all loans criticized because of unsatisfactory credit characteristics, except purely technical exceptions which would continue to be included in the schedule of other loans especially mentioned, possibly under the caption: 'Loans subject to technical and similar exceptions.' "With further reference to securities, I felt that any revision of the Uniform Agreement should include: A statement that the 1938 agreement was intended to apPly to recognized sound investment practices of banks and that it was not intended to be a protection to banks With undue concentrations in securities other than U. S. Governments. Also, that supervisory authorities may Properly ask for corrections in such cases. "At the conclusion of the Board's discussion of the matter it was agreed that I would continue negotiations vith the other bank supervisory agencies to bring about , 11 agreement as to changes to be made in the procedure, It being understood that I would have discretion in the I_I gotiations except that I would avoid other than minor anges in the existing definition of loans classified II in the existing definitions in the summary of examin3 classifications. n "On February 14, 1949, Mr. Millard and I met with Puty Comptroller Robertson and Assistant Chief Shearer FDIC Division of Examination for further discussion • el the matter. Three different designations for the former cation II were offered. Instead of 'Unsatisfactory' the • Crptroller preferred 'Substandard' and the FDIC 'Un. Three somewhat different definitions of the sug• ed terms were also offered. Little was accomplished to 1.?elputY Comptroller Robertson stated that he would like rj-tve further thought to the matter and present his memo,, On the subject at a later date. mentOn March 31, 1949, Mr. Robertson submitted for corna, „arnd suggestions his proposal that the term 'Substandoe defined as follows: 4 5/10/49 -10- "Book assets or portions thereof which involve more than a normal bankable risk due to the financial condition or unfavorable record of the obligor, insufficiency of security, or other factors noted in the examiner's comments. In some cases, assets so classified Should be pressed for complete and immediate payment. However, in most cases this classification signifies that the specified assets should be given such special and corrective attention as may be warranted -- by obtaining suitable reductions in amount, additional security, more complete financial data concerning the obligor's condition, etc.' "Before further consideration of the matter between the Federal agencies, Mr. Elliott Bell, Chairman of a Special Committee of the National Association of Supervisors of State ! 3anks, advised each of the agencies of a resolution passed 0 7 the Executive Committee of the Supervisors' Association at a meeting in early April, which recommended changes in the Uniform Agreement substantially the same as those set forth ?-r1 memorandum of January 7, and requested that a meeting oe arranged for a discussion of the matter. m "The meeting was held at the offices of the FDIC on Q46r 2, 1949, between representatives of the three Federal Pervisory Agencies and the three representatives of the ''ate Supervisors: Messrs. Bell, Lyon and Hospelhorn. , "Mr. Bell explained that the recommendation of the !'xecutive Committee was based upon a questionnaire on ExamProcedure to which the banking authorities of 45 _rates had responded, and was made in the light of the actual icactices of the State authorities and in the interest of 6 !ater uniformity. In brief, the resolution recommended: 1 Abandonment of Roman numerals for classification of assets and use of words, such as: Unsatisfactory, Doubtful and Loss. . Retention of the present Grouping of Securities. Retention of Fourth rating (Baa) securities in 4. Group 1. Abandonment of the 18 month average for pricing _Group II securities. to i,"After a discussion in which the views of the Board as ,„ Lne nature and effect of proposed changes, substantially ; 7 i) ,TRressed at the meeting on January 281 were presented for sei0eration, general agreement was reached among repreag_Vves of the State authorities and the other two Federal les on the following points: ; 845 5/10/49 -11- Use of the words, Substandard, Doubtful, and Loss, in lieu of the present classifications II, III and IV. 2. Definition of 'Substandard' as: 'Book assets or portions thereof not classified as doubtful or loss and which involve more than a normal risk due to the financial condition or unfavorable record of the obligor, insufficiency of security, or other factors noted in the examiner's comments. These assets should be given special and corrective attention, for example, by obtaining suitable reductions in amount, additional security, more complete financial data concerning the obligor's condition, etc. 3. Abandonment of the use of the 18 months average Price with respect to Group II securities. "It should be noted that the definition of 'Substandard' as set forth above is designed to apply to all such assets With no separate definition of substandard loans. "No commitment was made on behalf of the Board, of course, and it • was understood that the matters with respect to which t t,he other agencies appeared to concur would be submitted the Board for consideration. They were to be advised of the Board's concurrence or nonconcurrence. ,„ "Mr. Bell advised that, if the Board should withhold , 11JProval of the suggested changes, he would endeavor to ar: i nge for further discussion. Mr. Robertson advised that, ti; agreement could not be reached, he would recommend to e Comptroller that action along the lines indicated should ue taken by that office with respect to the designation of class ifications and the definition of the term substandard, co ticularl,y with respect to loans. He advised that the mPtroller's Office wished to have revised examination rev°rt for in use by July 1, 1949. 'Presenting my memorandum of January 7, I stated that fo'' MY recommendation of the proposed changes in the Uniw4T Agreement was based upon my belief that the action revitalize the agreement but would not change in any tizmental way the principles involved. It now appears anti :the Comptroller is prepared to take independent action lar it probable that the other agencies will adopt simiwas Procedures with respect to the matters on which there alreement among them at the recent meeting. a In the circumstances, I submit the attached draft of v"DPosed letter to the other two Federal Supervisory Agencies 1 5/10/49 -12- and the Committee of the Association of State Supervisors which I recommend that the Board approve. In view of the fact that agreement has not been reached with respect to Joint announcement and in regard to the proposed statement concerning securities concentrations, I would ask that the Board authorize me to negotiate with respect to such matters and act to secure the most acceptable compromise in the interest of united action." In commenting upon the proposals in the memorandum, Mr. ClaZrton stated that if an agreement could be reached with the super- rY agencies as outlined, he hoped a joint statement would be is- sued bY the three Federal supervisory agencies and the executive comkittee Ot the National Association of Supervisors of State Banks which 111°111c1 revitalize the present agreement, and he outlined the contents °f such a statement. There was a discussion of the background of the agreement, °t the tact that it was not being carried out effectively at the Present time, and of the significance of the changes proposed in C145rtont s memorandum. During this discussion, Mr. Carpenter et4ted that Chairman McCabe requested before he left the meeting that he be recorded as voting to authorize Mr. Clayton to negotiate th resPect to the matters discussed in the memorandum and to act to 3ecure the most acceptable compromise possible in the interests c'rtinited action by the supervisory agencies. At the conclusion of the discussion, the members present expressed concurrence in the 847 5/10/49 -13changes in the uniform agreement, and upon motion by Mr. Clayton, he was authorized to confer with the other agencies for the purpose of perfecting the proposed joint statement which would be submitted to the Board for approval. Reference was made to the discussion at the meeting on May ' 2 1949, of the question raised by Mr. Vardaman what, if any, action should be taken by the Board with respect to the policy adopted on januarY 31, 1945, of not making reports of examination of holding e°111PaAY affiliates available to such affiliates. ille111°randiun written by Mr. Morrill on May 4, A portion of the 1949, recording the tele- Phone conversation which he had with Mr. Townsend on this subject in accordance with the Board's request on May 2 was read, and after laformal ter discussion, it was agreed that consideration of the mat- 8 hould be deferred until the next meeting at which Mr. Vardaman 1/48 Present. At this point Messrs. Vest, Millard, and Hostrup withdrew an the to action stated with respect to the matter hereinafter referred "as taken by the Board: 441 Minutes of actions taken by the Board of Governors of the -1 aeserve System on May 9, 1949, were approved unanimously. retary.