The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
The attached set of minutes of the
meeting of the Board of Governors of the
Federal Reserve System on May 12, 1959, has
been amended at the suggestion of Governor
ft
Robertson to delete one paragraph from page
4.
If you approve these minutes as amended,
please initial below.
Governor Szymczak
Governor Mills
Minutes for
To:
Members of the Board
From:
Office of the Secretary
Mar 12, 159
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, if you
were present at the meeting, please initial in
column A below to indicate that you approve the
minutes. If you were not present, please initial
in column B below to indicate that you have seen
the minutes.
A
Chin. Martin
Gov. Szymczak
Gov. Mills
Gov. Robertson
Gov. Balderston
Gov. Shepardson
Gov. King
709--
Minutes of the Board of Governors of the Federal Reserve System
The Board met in the Board Room at 10:00 a.m.
on Tuesday, May 12, 1959.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Balderston, Vice Chairman
Szymczak
Mills
Robertson
Shepardson
King
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Discount rates.
Sherman, Secretary
Kenyon, Assistant Secretary
Riefler, Assistant to the Chairman
Thomas, Economic Adviser to the Board
Johnson, Director, Division of Personnel
Administration
Hackley, General Counsel
Farrell, Director, Division of Bank
Operations
Shay, Legislative Counsel
Noyes, Adviser, Division of Research
and Statistics
Sprecher, Assistant Director, Division
of Personnel Administration
Nelson, Assistant Director, Division
of Examinations
Benner, Assistant Director, Division
of Examinations
Daniels, Assistant Director, Division
of Bank Operations
Hill, Assistant to the Secretary
Young, Assistant Counsel
The establishment without change by the Federal
Reserve Banks of New York, Philadelphia, Cleveland, Richmond, Atlanta,
St. Louis, Kansas City, and Dallas on May 7, 1959, of the rates on
discounts and advances in their existing schedules was approved
Unanimously, with the understanding that appropriate advice would
te sent to those Banks.
5/12/59
-2Items circulated to the Board.
been
The following items, which had
circulated to the Board and copies of which are attached to these
minutes under the respective item numbers indicated, were approved
unanimousl
y:
Item No.
Letter to The First National Bank of Millersburg,
Millerdbur
g, Pennsylvania, approving its application for fiduciary powers. (For transmittal
through
the Federal Reserve Bank of Philadelphia)
Letter to the McIlroy Bank, Fayetteville, Arkansas,
aPProving an investment in bank premises. (For
tr
ansmittal through the Federal Reserve Bank of
St. Louis)
1
2
Letter to the Comptroller of the Currency recommendins
application to organize a
nationalapproval of an
bank at Wauchula, Florida. (With a copy
to the
Federal Reserve Bank of Atlanta)
3
Letter to the Federal Reserve Bank of Atlanta
laterposing no objection to the employment of
8-rchitects for the New Orleans Branch building
Program.
4
Letter
to the Federal Reserve Bank of Minneapolis
PProving a revision of the employees' salary
a
st
ructure for the head office and Helena Branch.
5
Messrs. Sprecher and Daniels then withdrew from the meeting.
Proposed amendments to Federal Credit Union Act (Item No.
6).
There had
been distributed to the Board a memorandum from Mr. Young
dated May
8, 1959, regarding a request from the Bureau of the Budget
5/12/59
-3--
for a report on H. R.
Union Act."
5777, a bill "To amend the Federal Credit
None of the provisions of the bill would directly
affect the Board's functions and responsibilities, and most of
them would involve no substantive changes in the present law.
However, one amendment would extend loan maturities and another
vauld increase the unsecured loan limit.
Provision would also
be made for the establishment of Federal central credit unions.
Hearings on the bill began this morning and the Bureau of the
Budget therefore requested the Board's views as soon as possible.
During discussion of the bill the view was expressed
that credit unions, although serving a useful and constructive
Purpose, should be limited to the area of operations for which
they were originally authorized and that certain of the amendments
might tend toward undesirable commercialism.
the
It appeared that
proposed extension of loan maturities and increase in the
unsecured loan limit were designed primarily to facilitate home
Improvement loans, and doubt was expressed whether credit unions
811c)uld extend such loans unless supported by FHA Title I insurance
in view of the risks inherent in them.
It was then agreed to refer the draft reply to the
Legal and Research Divisions for modification in the light of
5/12/59
the views expressed at this meeting, with the understanding that
the revised letter would be transmitted to the Bureau of the
Budget this afternoon.
A copy of the letter sent pursuant to
this action is attached as Item No. 6.
Messrs. Benner and Young then withdrew from the meeting.
Reply to Senator Douglas
(Item No. 7).
There had been
distributed
to the Board under date of May 11, 1959, a draft of
l'ePlY to a letter from Senator Douglas of Illinois dated April
29, 1959.
Senator Douglas had enclosed a copy of the Senate
Committee
Report dealing with proposed reserve requirement legislation, with particular reference to his own supplemental views
included therein, and commented on factors involved in the use
°f open market operations and reserve requirement changes as
alternative
instruments of monetary policy.
After discussion, the proposed letter to Senator Douglas
1448 unanimously approved in the form attached hereto as Item No. 7.
Ratification of action taken in the absence of a quorum
(Item No
taken
The Board ratified by unanimous vote the action
at a meeting of the available members of the Board on May
8, 1959. Minutes of that meeting are attached hereto as Item No. 8.
!.)
5/12/59
-5-
Amendments to Regulations T and U
(Items 9 and 10).
Pursuant to the understanding at the meeting on May 7, 1959, Governor
Balderston
had discussed informally with a Treasury representative
the timing of the release of the amendments to Regulation T,
Extension and Maintenance of Credit by Brokers, Dealers, and
Members of National Securities Exchanges, and Regulation U, Loans
by Banks for the Purpose of Purchasing or Carrying Stocks Registered
°Y1 a National Securities Exchange, Which the Board had approved
°n MaY 1 and May 6, 1959.
On the basis of that conversation,
Plans had been
made for announcement of the amendments at 4:00 p.m.
this
afternoon.
1/
The plan for announcement of the amendments was referred
to by
Governor Balderston and no objection was indicated.
Secretary's Note: The amendments to
Regulations T and U were released
to the press at 4:00 p.m. today and
sent to the Federal Register for
publication. Telegraphic advice
was sent to all Federal Reserve Banks
and branches and copies of the amendments were sent by airmail with the
suggestion that the Banks might wish
to duplicate and distribute copies
until printed copies of the amended
Regulations were available. The
amendments were in the form attached
hereto under Items 9 and 10.
All members of the staff except Messrs. Sherman and Johnson
then
-1/
withdrew.
Titles of Regulatinns T and U changed.
see Items 9 and lu.
For new titles,
1670
5/12/59
-6Governor Shepardson referred to the entry in the minutes for
April 21, 1959 regarding the continued service of Harold V. Roelse at
the Federal Reserve Bank of New York after retirement.
In reviewing
the minutes, it appeared to him that the letter that had been approved
by the
Board might not provide the best record of the Board's underof the arrangement.
This caused him to raise the question
Whether it might be desirable to send a supplemental letter to President
Hayes calling attention to the Board's understanding that total annual
comPensation (per diem plus the pension portion of his retirement
allowance) paid to Mr. Roelse in the future would not exceed his
salary at the time of retirement.
Such a letter might also ask for
reports from time to time of the progress Mr. Roelse was making in
the
historical studies that he was expected to make, and it might
indicate that the Board did not expect a "free rein" operation.
Mr. Johnson stated that arrangements had been made for the
Division of Examinations to make a review of Mr. Roelse's service and
submit a report at the time of each examination of the Federal Reserve
13a4k of New York in the future.
Such review would cover not only the
eomPensation paid
Mr. Roelse, as mentioned at the Board meeting April
21, but the
examiners would also check with officials of the New York
'lank
regarding the progress of the historical reports being prepared by
hila and would attempt to obtain information as to the probable length
5/12/59
-7-
of time Mt. Roelse's service would be required. Mr. Johnson indicated
that he felt such an arrangement preferable to
having a time limitation
provided in the Board's letter approving the continued service of Mt.
Roslse, which would have made it necessary for the New York Bank to
"'Die in periodically for an extension of the arrangement.
Governor Balderston said that in reading these minutes he had
been concerned about this entry, thinking of the reaction
that might be
caused if the Board's letter were to become available to
Congressional
sources.
He inquired whether the confidential section of the exami-
nation reports of the Federal Reserve Banks, in which presumably the
rePort on the arrangement regarding Mt. Roelse would
appear, was
included when the reports were submitted for the inspection of the
}hulking and Currency Committees of the House of Representatives and
the
Senate, to which the Secretary responded that this had not been
the
practice in the past.
Governor Mills stated that it was important to avoid misunderstanding between the Board and the New York Bank concerning the
arrangement.
However, he recalled that this had been discussed
informally by Chairman Martin and Mr.
Hayes, and he suggested that
to avoid any possible conflict it would be preferable if the matter
%Iere taken
up informally when Mr. Hayes was next in Washington for a
nleeting of the Open Market Committee.
5/12/59
-8There was general agreement with Governor Mills' suggestion,
and it was understood that Governor Balderston would arrange to talk
'with Mr. Hayes at the
time of his next visit to Washington.
The meeting then adjourned.
Secretary's Notes: Pursuant to the recommendation
contained in a memorandum dated May 4, 1959, from
Mr. Farrell, Director, Division of Bank Operations,
Governor Balderston, acting in the absence of
Governor Shepardson on May 8, 1959, approved on
behalf of the Board acceptance of the resignation
of Mary Catherine Johnson, Clerk-Stenographer in
that Division, effective May 1, 1959.
Pursuant to recommendations contained in memoranda
from appropriate individuals concerned, Governor
Shepardson approved on behalf of the Board on May 11,
1959, the following items affecting the Board's staff:
Ap o
intments
Re Malcolm Hugh Liggett as Research Assistant in the Division of
_search and Statistics, with basic annual salary at the rate of $4,9801
rfective the date of entrance upon duty.
88111Y B. Kirby as Substitute Nurse in the Division of Personnel
:_-_,,,4tuali trati0n, with
basic salary at the rate of ,1518 for each day worked,
8
1-rective the date of entrance upon duty.
al
increases
effective May 17, 1959
Ak jearl S.
Thompson, Records Clerk, Office of the Secretary, from
1-,‘,040 to $4,135
per annum.
d„. Marcia G.
Patz, Secretary, Division of International Finance, from
94:340 to
$4,490 per annum.
E
Carl A. Zimmerman, Assistant Federal Reserve Examiner, Division of
Xaminations, from $5,280 to $5,430 per annum.
fr Roc,!semarie
H. Smith, Clerk, Division of Personnel Administration,
401,985 to $2,033 (half-time basis) per annum.
1
5/12/59
-9-
increases, effective May 17, 1959 (continued)
a,
John N. Pope, Guard, Division of Administrative Services
Y3,730 to $3,825 per annum.
from
Quincy W. Barnes, Messenger, Division of Administrative Services,
from y2,960 to $3,055 per annum.
Nina L. Marcey, Cafeteria Helper, Division of Administrative Services,
fr°111 $3,055 to $3,150 per annum.
Susan O. Hoffman, Accounting Technician, Office of the Controller,
from $4,190 to $4,340 per annum.
Transfer
Constance A.
Serve Examiner
becretary in the
annual salary at
Dyer, from the position of Special Assistant Federal
in the Division of Examinations to the position of
Office of the Secretary, with no change in her basic
the rate of $4,790, effective May 25, 1959.
Pursuant to the recommendation contained in a
memorandum dated April 30, 1959, from Mr. Noyes,
Adviser, Division of Research and Statistics,
Governor Shepardson today approved on behalf of
the Board the transfer of Dorothy Duke from the
position of Secretary, Board Members' Offices,
to the position of Secretary, Division of Research
and Statistics, effective upon assuming her new
duties, with an adjustment in her basic annual
salary from $7,510 to $5,840 effective July 12,
1959.
BOARD OF GOVERNORS
OF THE
'
4.
:1
*
si+
.*
*
tt4 *
Item No. 1
5/12/59
FEDERAL RESERVE SYSTEM
WASHINGTON 25, D. C.
"4
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
—''kL4444—
May 12, 1959.
Board of Directors,
The First National Bank of Millersburg,
Mi
llersburg, Pennsylvania.
G
entlemen:
The Board of Governors of the Federal Reserve System
i
,,--ven consideration to your application for fiduciary
3wers and, effective upon an increase in the bank's capital
Stock
to not less than $150,0001 grants you authority to act,
When not
in contravention of State or local law, as trustee,
executor,
administrator, registrar of stocks and bonds,
I,'clian of estates, assignee, receiver, committee of estates
b -Lunatics, or in any other fiduciary capacity in which State
hks, trust companies, or other corporations which come into
sion with national banks are permitted to act under
'
'
t
sFTIIt
of the State of Pennsylvania, the exercise of all
Rech rights to be subject to the provisions of the Federal
,,serve Act and the regulations of the Board of Governors of
Federal Reserve System.
has
T
2
of the
CornPtr 11 When advice is received from the Office
of the Currency that the capital stock of The
"National Bank of Millersburg has been increased to not
its,,s,than .-150,000, the minimum capital required by Pennsylvania
0," -Lori the exercise of trust powers by banks if the population
ntthe
or township in which the bank is located does
exceed six thousand persons, the Board of Governors will
and forward a formal certificate evidencing the bank's
alltr
1°ritY to exercise fiduciary powers.
Very truly yours,
(Signed) Kenneth A. Kenyon
Kenneth A. Kenyon,
Assistant Secretary.
*
4010o**4
eoparit 006,*4
:41
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Item No. 2
5/12/59
WASHINGTON 25. D. C.
4
44a
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
,.41.MiSt
May 12, 1959;
Board of Directors,
Mollroy Bank,
Fa
yetteville, Arkansas.
Gentlemen
:
Pursuant to your request submitted through the
Federal Reserve Bank of St. Louis, the Board of Governors
of the Federal
Reserve System approves, under the pro—
nsions of Section 24A of the Federal Reserve Act, an ad—
investment in bank premises in the amount of
'
'
1 201500 by McIlroy Bank, Fayetteville, Arkansas. The
ao
'.c„Iditional expenditure is understood to be for the purpose
:T
y-Loi
te
ladditional parking facilities as stated in
Very truly yours,
(Signed) Kenneth A. Kenyon
Kenneth A. Kenyon,
Assistant Secretary.
It;
BOARD OF GOVERNORS
it**
OF THE
CO G019 4
4'14
4,
Item No. 3
FEDERAL RESERVE SYSTEM
5/12/59
WASHINGTON 25, D. C.
44
ADDRESS OFFICIAL CORRESPONDENCE
**Ott
TO THE BOARD
'4,5441. KIP
0,441:04*
Nay 12, 1959.
Comptroller
of the Currency,
Treasury Department,
W
ashington 25, D. C.
Attention Mr. W. M. Taylor,
Deputy Comptroller of the Currency.
Dear
Mr, Comptroller:
Referonce is made to a letter from your office dated
November 6,
1958, enclosing copies of an application to organize
!national bEalk
at Wauchula, Florida, and requesting a recommen'
44tion as to whether or not the application should be approved.
A report of investigation of the application made by
an e
xaminer for the Federal Reserve Bank of Atlanta indicates
t hat a capital structure of $400,000 would be provided for the
a!,Ink instead of $300,000 shown in the application. This report
u;acloses satisfactory
findings with respect to the factors
w uallY considered in connection with such proposals, with the
IfeaPtion of the qualifications of the proposed executive officer.
0
;aPPears that the board of directors would consist of a group
atasuccessftl businessmen who have not had banking experience,
°ur informant is of the opinion that the services of a more
sui,
Govuable executive
officer would be desirable. The Board of •
ranernors recommends approval of the application, provided argements are made for executive management satisfactory to
Your
office.
The Board's Division of Examinations will be glad to
any
"
off4
aspects of this case with representatives of your
'ca if you so desire.
Very truly yours,
(Signed) Kenneth A. Kenyon
Kenneth A. Kenyon,
Assistant Secretary.
BOARD OF GOVERNORS
kottiorr,
Got,**,0
q4Y
OF THE
t
tr'
Item No. 4
FEDERAL RESERVE SYSTEM
*
rt,
5/12/59
WASHINGTON 25, D. C.
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
4*4:1tMtOt
:
owl.*
May 12, 1959.
Mr. Malcolm Bryan, President,
Federal Reserve Bank of Atlanta)
Atlanta 3, Georgia.
Dear Mr. Bryan:
Reference is made to your letter of
April 20, 1959, concerning a proposed agreement
with Toombs, Amisano & Wells and with Goldstein,
Parham & Labouisse to perform jointly architectural
and engineering services in New Orleans.
The Board will interpose no objection
to the employment of architects for the New Orleans
Branch building program, as outlined in your letter.
Very truly yours,
(Signed) Merritt Sherman
Merritt Sherman,
Secretary.
BOARD OF GOVERNORS
OF THE
Item No. 5
FEDERAL RESERVE SYSTEM
5/12/59
WASHINGTON 25, ID. C.
ADDRESS OFFICIAL CORRESPONDENCE
TO THE EIOARD
Nay 12, 1959.
P0N_I
Z_EILLLSY-4/
14r. Frederick
L. Deming, President,
Pederal Reserve Bank of Minneapolis,
fleapMinolis 2, Minnesota.
Dear Ur.
Deming:
In accordance with your letter of April 23, 1959, the Board of
Govern
re, ()rs approves the following minimum and maximum salaries for the
pe,dPeective grades of the employees' salary structure applicable to the
Reserve Bank of Minneapolis and its Helena Branch, effective
'
-`41ecilately:
Grade
Minimum Salary
Maximum Salary
1
2
$ 2,160
$ 2,910
3
4
6
7
8
9
10
11
2,410
2,690
3,020
3,420
3,830
4,280
4,790
5,310
5,890
3,250
3,630
4,08o
4,600
5,170
5,780
6,450
7,170
7,930
12
13
14
15
16
6,520
7,200
7,920
8,710
9,560
8,780
9,700
10,680
11,750
12,900
5
Other , The Board approves the payment of salaries to the employees,
the,°Ian officers, within the limits specified for the grades in
whictavosn
of the respective employees are classified. It is assumed
a a „,11. employes whose salaries are below the minimum of their grades
Priat'"ult of the structure increase will be brought within the approe range as soon as practicable and not later than August 15, 1959.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
lir• De ming
-.2 —
It is understood that sufficient allowance has been made in
the 1 n
„.1 -7)9 budget to cover increased salary costs resulting from these
-J stments
in salary structure.
Very truly yours,
(Signed) Kenneth A. Kenyon
Kenneth A. Kenyon,
Assistant Secretary•
1.679
BOARD OF GOVERNORS
OF THE
Item No.
FEDERAL RESERVE SYSTEM
,13wo
P:
oottY
;:
*44,ti\' -
5/12/59
WASHINGTON 25. D. C.
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
May 12, 1959.
1:1r. Phillip
S. Hughes,
kissistant Director for
b_Legislative
Reference,
of the Budget,
Was
n ashington
25, D. C.
Dear Mr. Hughes:
This is in response to your Legislative Referral Memorandum
dated m
a 1,4„ ay 7, 1959, requesting the views of the Board on H.R. 5777,
u,:,t4.
. 1 To amend the Federal Credit Union Act." There was enclosed
i;',r_this communication a copy of a proposed report on the bill by
uspartment of Health, Education and Welfare.
Credit u The bill contains 22 separate amendments to the Federal
to
nion Act, most of which appear to be technical in nature or
tu:ntain no important substantive changes in the present law. A
orp er of the amendments are concerned with internal management and
Itit,Tlization of Federal credit unions. The Board has no comments
u respect
to these amendments.
It is recognized that Federal credit unions serve a useful
constructive purpose and should be encouraged, but should be
'
authtied to the area of operations for which they were originally
to c,
,
c)1?ed. In view of the special privileges which are accorded
elaa
it
be re
r-eac-L -,unions on the basis of their nonprofit and cooperative
1 the Board believes it is important that their activities
trirl _equired at all
times to conform to such character and to avoid
a1 commercialism. The Board has some question whether some
°t
e)q)axie,amendments now proposed may not tend to encourage undue
s.
t rn of the activities of credit unions in a manner at variance
with .
whioCueir basic purposes. One example of this is the provisions
Paas 1,14°1-11d permit compensation to be paid an officer authorized to
or th;l'n loans. The Board feels that especially careful consideration
that
Proposals from this point of view would be desirable in order
,
redit unions may serve their proper purposes but without tending
to bee
-°171e organizations of a commercial character.
6
Mr. Phillip
S. Hughes
-2--
The Board questions the need for granting new authority
for the c
hartering and operation of Federal central credit unions
aTI is contained in the proposed amendments to sections 2, 9, 10
!
n,1 11(d) of the Federal Credit Union Act. Such authority would
,Li6 COntribUte to the soundness or stability of credit unions that
;% _operating in their proper sphere and in some instances might
d to encourage
undesirable promotional activity.
Section 2 of the bill would extend loan maturities from
the
a, Present maximum of three years to a maximum of five years and
ic'n 9 would increase the unsecured loan limit from the present
)
41Z
to
la,000. It is assumed that these changes are designed
In t;"---LY to facilitate home improvement loans by credit unions.
mu, "e light of the facilities for this purpose provided by the
L Title I
c;
program and the risks inherent in unsecured, uninsured
of longer maturities, the Board does not favor such an amendAn alternative might be to limit any such expansion of the
allth
to 42ritY of credit unions to make unsecured home improvement loans
uuose insured under Title I.
i
Very truly yours,
(Signed) Merritt Sherman
Merritt Sherman,
Secretary.
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON
Item No. 7
5/12/59
OFFICE OF THE VICE CHAIRMAN
,Aty.,I)*
May 12, 1959
The
Honorable Paul H. Douglas,
k,ommittee on Banking and Currency,
yinited States
Senate,
washington 25, D. C.
Dear
Senator Douglas:
Thank you for your letter of April 29 concerning the
Prop°sod
to change the structure of member bank reserve
glilrements. I have also carefully read your Supplemental Views
ve_""is legislation contained in the Committee Report, which you
'were kind
enough to enclose.
Z
I share your view that the public generally does not
4clequat
eio„ 61Y understand the principles of multiple bank credit expanis:! under our fractional reserve requirements structure. Even
eir:u adequately understood is the relationship between bank credit
aand
the growth in the money supply, and the inflationary
r
t:,.
c
b 15118
would arise if all desires for credit were permitted to
ni 'ullY satisfied in a period of active credit demand. The discus-4°n
he, of these basic principles in your Supplemental Views should be
„431.ul in promoting better understanding of the nature and purposes
or4 mon
etary
- policy.
Your statement and your letter also discuss certain implications
mark
relating to the use of reserve requirement changes and open
The
Perations as alternative instruments of monetary policy.
of course, is aware of the considerations you mention,
Boardt:'
-es
rieed
them into account, along with all the other factors which
strurato
be weighed, in reaching decisions as to the use of these inents of monetary policy.
on your ,Despite the many heavy demands which I realize are placed
Prepa,,uime, I am taking the liberty of enclosing a copy of a paper
'by Mr. Young, the Director of our Division of Research and
mo;'t", for the American Assembly, entitled "Tools and Processes
find;
e uarY Policy." Especially on pages 21-27 and 29-33, you will
et forth some of the other considerations which are taken into
ace
°tint in connection with changes in reserve requirements.
Stata
BOARD OF OOVERNOR9 OF THE FEDERAL RESERVE SYSTEM
The
onorable Paul H. Douglas
HhY I take this occasion to express again the Board's
appre
elation
for your efforts to increase the understanding of the
vrocesees
of monetary expansion and contraction and the role of
tarY
Sincerely,
(Signed) C. Canby
derton
C. Canby Balderston,
Vice Chairman.
41010sure
Item No. 8
Minutes of a meeting of the available members of the Board
5/12/59
of Governors of the Federal Reserve System which was held in the
Board Room at 10:00 a.m. on Friday, May 8, 1959.
PRESENT:
Mr. Balderston, Vice Chairman
Mr. Szymczak
Mr. Mills
Mr.
Mt.
Mt.
Mr.
Mr.
Mr.
Sherman, Secretary
Kenyon, Assistant Secretary
Hackley, General Counsel
Shay, Legislative Counsel
O'Connell, Assistant General Counsel
Nelson, Assistant Director, Division
of Examinations
Bank merger legislation (Item No. M-1).
At the meeting on
May 6, 1959, Mr. O'Connell reported a conversation with a representative
of the
Department of Justice concerning a proposed amendment to the bank
illerger bill, S. 1062, in the form in which it was reported by the Senate
411king and Currency Committee.
Mr. O'Connell had understood from the
e°nversation that
the Attorney General intended to call Vice Chairman
Balderston that day to request the Board's opinion on the proposal, and
the Board reached agreement on the type of response that should be made
if such a call were received.
It developed that no call was received
by Governor Balderston from the Attorney General, but substantially the
8a4le amendment was subsequently introduced by Senator O'Mahoney of
WY°1ming-
An oral request was then received from the Chief of Staff
°11 the Senate Banking and Currency Committee to the effect that
Committee Chairman Robertson would like to have the views of the
Iloar°1 regarding the amendment.
Accordingly, there had been distributed
5/8/59
-2-
to the available members of the Board prior to this meeting a draft
Of letter to
Senator Robertson, along with a supplementary memorandum
intended for transmittal with the letter.
The position taken in the
draft letter was, in essence, that the Board would be strongly opposed
to
enactment of the proposed amendment.
The nature and effect of the amendment were discussed, and it
Ilas brought out, among other things, that its adoption would appear to
he directly at variance with the underlying purposes of the bill reported
by the Senate Banking and Currency Committee.
By giving the Attorney
General authority to obtain judicial review of a bank supervisory agency's
decisicr,
Li it would vest in him an effective control over bank mergers,
tending to minimize factors that should be considered in determining
.7/lether such a merger was in the over-all public interest.
Its
adPiption would be inconsistent with the concept of giving due weight
t0 all factors pertinent to the public interest and at variance with
the concept of vesting judgment in the banking agencies with respect
to
all of the pertinent factors, including the competitive effect of
a Particular
merger.
After several suggestions had been made for changes in the draft
letter and memorandum in the interest of emphasis and clarity, agreement
/gas reached on
a letter in the form attached as Item No. M-1, with the
understanding that
the letter and accompanying memorandum would be sent
t° Senator
Robertson by messenger this afternoon.
ttit,t
q
tytt
tt
w
BOARD OF GOVERNORS
OF
THE
FEDERAL RESERVE SYSTEM
WASHINGTON
Item No. 14-1
5/8/59
OFFICE OF THE VICE CHAIRMAN
May 8, 1959
The Honorable A.
Willis Robertson, Chairman,
Committee
on Banking and Currency,
United States Senate,
Washington
25, D. C.
Dear
Mr. Chairman:
It is understood from the Chief of Staff of your Committee
that
11,03criZzish to have the views of the Board regarding an amendment
by Senator C'Mahoney on May 7, 1959, to the bill S. 1062,
rp4 1Lating to bank mergers which was favorably
reported by your. ComLttee
April 17.
The Board strongly opposes enactment of the proposed
end nent.
In the Board's opinion, adoption of the amendment
t;
1 31-Ld be
directly at variance with the underlying purposes of the
1)043 as reported by
your Committee. The reasons for the Board's
sltion are set forth in detail in the
enclosed memorandum,
Briefly stated, the proposed amendment would (1) prohibit
the
if .Federal bank
supervisory agencies from approving any bank merger
ten ts effect might be
substantially to lessen competition or to
des
'
to creatc, a monopoly,
except in certain limited circumstances
visc
,fibed in the amendment; (2) require the appropriate bank superthe''Y authority to
hold a hearing in any case in which either of
Gen Other two Federal bank
supervisory authorities or the Attorney
aT,,n1 expresses disapproval of a proposed merger;
(3) allow an
coT;
I a1 from the
decision of the bank supervisory authority, to the
affet
for the District of Columbial by any party adversely
ballketed APpeals
or by the Attorney General; and
(4) require each of the
to ll1Pervisory agencies to submit a report twice a year
with respect
Or ti,
aj- bank mergers approved by it, indicating the namQ3and
resources
the -e hanks involved and submitting a copy of
the report made by
GeneZel
l 4:I
:
tral bank supervisory agencies and by the Attorney
the competitive factors involved in the merger.
onicithat
The proposed amendment, by prohibiting approval of
ni
eerg
ser
any
might substantially lessen competition, would bar all
desir
ation of other factors that might make a proposed merger
"-Le, or even essential, in the pilj
interest. This would
S
The Honorable
A. Willis Robertson
-2-
r!present a fundamental change in the concept of the reported bill
which contemplates that due weight should be given to financial
!cndition, character of management, and convenience and needs of
611/3 COMMUnitY) as well as effect upon competition.
The amendment
would make
"substantial lessening" of competition the controlling
factor in all cases.
The holding of hearings with respect to bank mergers as
liequired by the amendment would be inadvisable and in many
cases
could have
detrimental effects upon the banks involved, their customers, and the general public. The provisions of the proposed
alendlileat granting judicial review of orders of the bank supervisory
!
'gentles at the instance of aggrieved parties are unnecessary.
dbtThe authority that would be given the Attorney General to
judicial review of the banking agency's decision would vest
the Attorney General an effectiv control over
e
bank mergers that
ruld tend to minimize, if not ignore, factors that should
be
'
43nsidered in determining whether such a merger
is in the over-all
P
olPlic interest. Again, this would be inconsistent with the concept
giving due weight to all factors pertinent to the public interest
not to competition alone. It would also be at variance with
the
concept of the bill of vesting judgment in the bank supervisory
erncies with respect to all of the statutory factors including the
:
,Petitive
1
Ge1
effect of a particular merger. Furthermore, the Attorney
'
tb eral would be placed in the anomalous position of representing
a"e United States in appealing from the decision of a
Federal
!
a encY while at the same time representing the agency itself as
lee, unless, of course, special arrangements were
made for the
11$e
6 bY such agency
of its own counsel.
For these reasons the Board earnestly hopes that the
Prop
"ed amendment will not be adopted.
Sincerely yours,
/Cea
C. Canby Baldorston.,
Vice Chairman.
Enclosure
MEMORANDUM REGARDING AMENDMENT SUGGESTED BY
SENATOR O'MAHONEY TO BANK MERGER BILL (S. 1062)
(1) The proposed amendment would prohibit any merger the
effect of which "may be substantially to lessen competition, or to
tend to create a monopoly". The obvious effect of this prohibition
would be to make "substantial" lessening of competition, the standard
now contained in the Clayton Act, the controlling test as to bank
mergers. It would require disapproval of any merger which might
quantitatively lessen competition, notwithstanding offsetting
favorable factors that would clearly make the proposed merger
desirable in the public interest. While the proposed amendment
nuld purport to set forth certain situations in which this prohiultion would not apply, there is no assurance that the situations
described in the amendment are exhaustive of the types of situations
that might require consummation of a bank merger even though it
would lessen competition. In other words, the proposed amendment
be directly contrary to a fundamental concept of the reported
bill, which is designed to enable the bank supervisory agencies to
?onsider and weigh various factors affecting the public interest,
including but not limited to the effect of the merger upon competition.
As stated in the Report of the Senate Banking and Currency
Committee of
April 17, 1959, it is essential in the case of a bank
merger that any lessening of competition "should not be used as a
controlling or determinative factor in and of itself" (p. 22) and
"that the competitive factors, however favorable or unfavorable,
are not, in
and of themselves, controlling on the decision". (p. 24)
(2) The proposed amendment would require the holding of
_hearing with respect to every merger considered by one of the
three Federal bank supervisory agencies as to which either of the
Other bank supervisory authorities or the Department of Justice
have,_
expressed disapproval. Such a hearing requirement could well
detrimental to the public interest. The standards stated in the
,eported bill would require the appropriate bank supervisory agency
,Il0_ consider the financial condition and competency of management of
_ e banks involved, as well as the competitive effect of the proposed
merger. In
order to provide a complete record, a hearing would of
Z
necessity contain references to the internal condition and
management of a bank that for good reasons should not be disclosed other than to the authority considering the matter.
Various items of information of this kind, taken alone,
could easily give rise to unfounded rumors as to the financial
condition of a bank, the adequacy of its capital structure, or
the character of its management, and might well result in
irreparable injury to the bank., its stockholders, its depositors,
and the public. It is for this reason that such information has
always been treated in the most confidential manner by all bank
sl.ipervisory authorities. Furthermore, revelation of all information relating to the required consideration of the competitive
effect of a proposed merger could easily result in giving comi?eting banks information now held in confidence which might unjustly injure the comnetitive position and business prospects of
the bank
involved.
(3) Apart from the inadvisability of such hearings) the
holding of hearings with respect to bank mergers is questionable.
The Federal
bank supervisory agency that would be required to pass
°n a bank merger would be the agency that normally has supervision
Of the
bank that would continue after the merger. That agency
would therefore have available to it, or could obtain, full information as to the financial condition, management, and other
factors pertinent to a decision as to whether the merger should be
Permitted. A hearinr would add little or nothing to the information
available to that agency and needed by it in order to appraise
-tthe merger in the light of the statutory standards.
(4) The propcsed amendment would require hearings even
in those cases
in which, because of emergency circumstances, a
report would
not be required under the reported bill to be obtained
from the
Attorney General. For example, if one of the Federal bank
IfluPervisory agencies should express its disapproval of
the proposed
whatever
reason,
hearing
a
would
mandatory,
be
despite
the
'dfle existence of
emergency conditions requiring immediate action.
The provisions of the proposed amendment authorizing
appeal
ppeal from a bank supervisory agency's decision on a proposed
!_llerger are unnecessary.
Under present law, a person aggrieved
the agency's decision could seek judicial review
of the agency's
i nl°n, either through a suit for a declaratory judgment or an
;
-'2-Junction, or a combination of the two, wherein a court of law
Z,
..-1.
14
-4. oitrdetermine whether the agency's decision was capricious or
y or in excess of its statutory authority.
-3(6) The provision of the proposed amendment that would
give the Attorney General a right of appeal from the decision of
one of the bank supervisory agencies as to a proposed merger
would obviously afford the Department of Justice an effective
Power to substitute its judgment for the judgment of the banking
agency and to assert that power solely on the basis of the
D?partment‘s opinion as to the effect of the merger upon competition, without regard to any favorable factors that would make
the proposed merger desirable in the public interest. Again,
this result would clearly be contrary to the basic intent of the
reported bill.
In this connection, it is important to observe that in
the event an appeal should be taken by the Attorney General pursuant
to the proposed amendment, unless the agency involved obtained
its own counsel, there would result a situation in which the
Attorney General would appear before the appellate court both as
the appellant and also as representative of the appellee, the
Particular bank supervisory authority whose decision would be in
estion. This result would, of course, follow from the fact
that the Attorney General, as the legal officer of the United
States, normally represents agencies of the Federal Government
In suits involving such agencies.
r
The proposed amendment would give the Attorney General
unqualified right to challenge the decision of the appropriate
oanksupervisory agency by appeal to a court solely on the basis
of his disapproval of the merger on the ground of its competitive
effect. Nevertheless, the Attorney General's right to appeal
ruld not be limited to cases in which he might disagree with the
a
to effect on competition; on appeal
he couldagency's judgment as
if
challenge that agency's judgment as to factors related
60 financial condition, character of management, and other matters
1411°11Y unrelated to competitive effect.
It should be borne in mind that, if a proposed merger
approved by one of the banking agencies should in fact violate
the antitrust
laws, the Attorney General would continue to have
Power to prevent the merger pursuant to his jurisdiction under
"e Sherman Act. In the absence of such a situation, however, the
.Proposed amendment would have the effect of substituting the
,211dgment of the Attorney General for that of the banking agency
IT to all
statutory factors, including competition, notwithstanding
he
banking agency's specialized experience in the field of banking.
213 would be in direct conflict with the sound philosophy of the
reported bill and the proposed amendment itself, both of which would
place in the banking agencies charged with primary supervision of
the institutions involved the responsibility for exercising judgment as to all of the statutory factors including the competitive
effects of a proposed bank merger.
TITLE 12 - BANKS AND BANKING
Item No. 9
5/12/59
CHAPTER II - FEDfRAL RESERVE SYSTEM
SUBCHAPTER A - BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[Reg. T]
Part 220. Credit by Brokers, Dealers, and Nembers of
National Securities Exchanges
Withdrawals of Cash or Securities
1. Part 220 (Regulation T), isSued by the Board of Governors
Of the Federal Reserve System pursuant to the authority cited
therein, prescribes the conditions upon which credit may be extended
and maintained by brokers, dealers end members of national securties exchanges.
amendEffective June 15, 1959, the Board has adopted certain
ments to Part 220 (Regulation T) in order more effectively to prevent
the excessive use of credit for purchasing or carrying securities.
8 (the
Specifically, amendments to section 3(b)(2) and to section
second paragraph of section 3(h) of Regulation T and the Supplement
to Regulation T) further restrict withdrawals of cash or securities
from so-called "restricted" accounts(i.e., accounts in which more
credit is outstanding on the securities in the account than would
be permitted in a new purchase of those securities under current
margin requirements).
Accounts can become "restricted" by declines in market value
Of the securities held in the account or by increases in margin requirements. (The margin requirement cf a stock is the difference between
its prescribed maximum loan value and its current market value.)
Securities can be withdrawn from these "restricted" accounts through
Bala or otherwise if there is a specified reduction in the debt owing
in the account.
withdrawn
Under the previous regulation, when a security was
debt in the
frem a "restricted" account, the amount by which the
1
account had to be reduced woiked out to be the same as the maximum
loan value of the security at the time.
This percentage automatically
changed with each change in margin requirements.
The amendment to section 3(b)(2) (the second paragraph of
section 3(b) of Regulation T) provides for a new method of limiting
withdrawals from "restricted" accounts. The amendment provides for
8 separate figure which represents the "retention requirement" of
a registered noneYempted security (i.e., in the case of a withdrawal
of securities, the percentage of market value that must be deposited
in the account; Cr, in the case of a sale, the percentage of sale
proceeds that must be left in the account). In a new paragraph (c)
of section
8 (the Supplement to Regulation T) the "retention require-
ment" is set at 50 per cent of the market value of the securities
involved.
This "reteation requirement" may be changed by the Board
from time to time.
The effect of the amendment may be illustrated by an example
in which a,000 of registered nonexempted securities held in a
"restricted" account are sold or witndrawn.
Under the previous
regulation and current level of margin requirements, the debt in the
account would have to be reduced by only C100.
Under the amendment,
SO long as the account remains "restricted", the debt would have to
be reduced by $50°.
The amendment does not alter existing provisions that allow a
purchase of registered nonexempted securities to be made in a
"restricted,) account without additional margin if the purchase is
made on the same day that an equal or greater market value of such
securities is sold in the account and the proceeds applied to the
Purchase.
Conforming amendments have been mode to paragraphs (e) and (g)
Of section
3.
-32.
The amPndments to Part 220 (Regulation .T)
et forth herein
shall become effective June 15, 1959.
(a) §220.3(b)(2) (the second paragraph of section 3(h)
of Regulation T) in hereby amended to read as follows:
§220.3
General accounts.
(b) General rule. * * *
(2) Except as permitted in this subparagraph, no withdrawal of cash or registered or exempted securities shall
be permissible if the adjusted debit balance of the account
would exceed the maximum loan value of the securities in
the account after such withdrawal.
The exceptions are avail-
able only in the event no cash or securities need to be
deposited in the account in connection with a transaction
on a previous day and none would need to be deposited
thereafter in connection with any withdrawal of cash or
securities on the current day.
The permissible exceptions
are: (i) registered or exempted securities may be withdrawn
Upon the deposit in the account of cash (or registered or
exempted securities counted at their maximum loan value)
at least equal to the "retention revirement".of any
registered or exempted securities withdrawn, or (ii) cash
may be withdrawn upon the deposit in the account of
registered or exempted securities having a maximum loan value
at least equal to the amount of cash withdrawn, or (iii) upon
the sale (other than short sale) of registered or exempted
securities in the account, there may be withdrawn in cash an amount
equal to the difference tetwcen the current market value of the
securities sold and the "retention r,quiremont" of those
securities.
ihe "retention requirement" of an exempted
security is the same as its maximum loan value, and the
"retention requirement" of a registered nonexempted
security is prescribed from time to time in 5 220.8(c)
(the Supplement to Regulation T).
(b) § 220.3(e) (section 3(e) of Regulation T) in hereby
amended to read as follows:
220.3 General accounts.
* * * * *
(e) Liquidation in lieu of deposit. 1/ In any case
in which the deposit required by paragraph (b) of this
section, or any portion thereof, is not obtained by the
creditor within the four-day period specified therein,
registered nonexempted securities shall be sold (or, to
the extent that there are insufficient registered
nonexempted securities in the account, other liquidating
transactions shall be effected in the account), prior to
the expiration of such feur-dav period, in such amount
that the resulting decrease in the adjusted debit balance
of the account exceeds, by an amount at least as great as
such required deposit or the undeposited portion thereof,
the "retention requirement" of any registered or exempted
securities sold.
1/ This requirement relates to the action to be taken
when a customer fails to make the deposit required by
220.3(b), and it is not intended to countenance on the
part of customers the practice cogmonly known as "freeriding", to prevent which the principal national securities exehnges have adopted certain rules. See the
rules of such exchnnges and ; 220.7(e).
-5(c) § 220.3(g) (section 3(g) of Regulation T) is hereby
amended to read as follows:
220.3 General accounts.
•N• 41 .11.
(g) Transactions on given day.
For the purposes of
paragraph (b) of this section, the question of whether or not
an excess of the adjusted debit balance of a general account
over the maximum loan value of the securities in the account
is created or increased on a given day shall be determined on
the basis of all the transactions in the account on that
day exclusive of any deposit of cash, deposit of securities,
covering transaction or other liquidation that has been
effected on the given day, pursuant to the requirements
of paragraphs (b) or (e) of this section, in connection
with a transaction on a previous day.
In any case in which
an excess so created, or increase so caused, by transactions
on a given day does not exceed ;1CO3 the creditor need not
Obtain the deposit specified therefor in subparagraph (b)(1)
of this section.
Any transaction which serves to meet the
requirements of paragraph (e) of this section or otherwise
serves to permit any offsetting transaction in an account
shall, to that extent, be unavailable to permit any other
transaction in the account.
For the purposes of this part
(Regulation T), if a security has maximum loan value in the
account under subparagraph (c)(1) of this section, a sale
of the same security (even though not the same certificate)
in the account shall be decred to be a lontLl sale and shall
not be deemed to be or treated as a short sale.
-6(d)§ 220.8 (the Supplement to Regulation T) is hereby
amended by adding a new paragraph, § 220.8(c) to read as
follows:
220.3
Supplement.
***
(c) Retention renuirement for general accounts.
In the case of a general account which would have an
excess of the adjusted debit balance of the account
over the maximum loan value of the securities in the
account following a withdrawal of cash or securities
from the account, the "retention requirement" of a
registered security (other than an exempted security),
pursuant to § 220.3(b)(2), shall be 50 per cent of
its current market value.
3. These amendments are issued pursuant to the Securities
Exchange Act of 1934, particularly section 7 thereof (!8 Stat.
886; 49 Stat. 704; 15 U.S.C. 78g). Drafts of these amendments
were published in 24 F. R. 1988-1989 as proposed rules, to
afford interested persons an opportunity to participate in the
rule making through submission of written data, views and
After consideration of all relevant matter
Presented, the Board has adopted these amendments to become
arguments.
effective June 15, 1959.
pursuant to section
(60 Stat. 238;
All the foregoing has been done
4 of the Administrative Procedure Act
5 U.S.C. 1003) and section 2 of the Board's
Rules of Procedure (12 CFR 262.2).
d
-7(Sec. 11, 38 Stat. 262; 12 U.S.C. 248.
Interprets or
applies secs. 2, 3, 7, 6, 23, 48 Stat. 881, 832, 886, 886,
901, as amended; 15 U.S.C. 78b, 78c, 78g, 78h, 78w.)
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
(signed) Merritt Sherman
MerraTt Sherman,
Secretary.
SEAL]
TITLE 12 - BANKS AND BANKING
Item No. 10
5/12/59
CHAPTER II - FEDERAL RESERVE SYSTEM
SUBCHAPTER A - BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
(Reg. U]
Part 221.
Loans by Banks for the Purpose of Purchasing
or Carrying Registered Stocks
Withdrawals of Collateral; Statement of Purpose of Loan;
"Carryingtof Registered Stocks; Reports from Unregulated Lenders;
Loans Relying on Collateral Which Has Served to Permit a Purpose
Loan; Exemption Discontinued for Certain Unsecured Loans;
Loans to Purchase Convertible Bonds
1. Part 221 (Regulation U), issued by the Board of Governors
of the Federal Reserve System pursuant to the authority cited
therein, prescribes requirements for the making and maintenance
of loans by a bank for the purpose of purchasing or carrying any
stock registered on a national securities exchange ("purpose loans").
Effective June 15, 1959, the Board has adopted certain
amendments to Part 221 (Regulation U) in order more effectively
to prevent the excessive use of credit for purchasing or carrying
securities. Specifically these amendments will: (1) amend the
third paragraph of section 1 in order further to restrict withdrawals of collateral against so-called "restricted" loans (i.e.,
stock-collateralled loans which are larger than would be permitted
in the case of a new loan to purchase registered stocks under
current margin requirements); (2) strengthen the provisions of
section 3(a) regarding statements accepted by a bank as to the
Purpose of a loan; (3) broaden the provision relating to "carrying"
in section 3(b)(1); (4) provide for reports from certain nonbank
lenders by amending section 3(j);
(5) prohibit, in section 3(n),
the weakening of collateral behind n "purpose loan which occurs
when that same collateral is also unod as the basis of a "nonpurpose" loan;
(6) add a new section 3(q) to require that bank
loans to borrowers importantly engaged in relending for stock
-2U) even
market purposes :than compl:; with this part (Regulation
and (7) add
though the bank loans are not secured by any stock;
se
a new section 3(r) to require loans originally for the purcha
with the
of convertible securities to be brought into conformity
into a regismargin requirements within 30 days after conversion
tered stock takes place.
s
The amendments also make conforming change
at several places in the regulation.
"restricted" by
Withdrawals of collateral. - Loans can become
the loan or by
declines in warket value of the stocks securing
requirement of a
increases in margin rEquirements. (The margin
m loan value
stock is the difference between its prescribed maximu
icted"
and its current market value.) Stock securing a "restr
is a
loan can be withdrawn through sale or otherwise if there
Specified reduction in the loan.
"restricted"
Under the former rule, if a stock securing a
to be
loan was withdrawn, the amount by which the loan had
loan value of
reduced worked out to be the same as the max_trum
the stock at the time.
This percentnge automatically changed
With each change in margin requirements.
provides
The amendment to the third paragraph of section 1
ng
for a new method of limiting withdrawals of collateral securi
"restricted" loans.
The amendment provides for a separate figure
(i.e.,
Which represents the "retention requirement" of a stock
in the case of a sale or other withdrawal of collateral, the
the colamount, stated as a percentage of the market value of
new paralateral, by which the loan must be reduced). In a
the
graph (b) of section 4 (the Supplement to Regulation U)
the market value
'ittention reouirement" is set at 50 per cent of
be
of the stocks ire/
A. This "retcntion requirement" may
changed by the Bo.krd from time to time.
-3by an exarhple
The effect of the amendment may be illustrated
loan
in which $1,000 of registered stocks securing a "restricted"
are withdraun.
t
Under the previous regulation and the curren
be reduced
level of margin requirements, the loan would have to
s
by only $100. Under the amendment, so long as the loan remain
d by $500.
"restricted", the loan would have to be reduce
section 3(a)
Statement of purpose of loan. - The former
ent signed by an
Provided that a bank could rely upon a statem
the purpose of a
officer of the bank or by the borrower as to
good faith.
loan, if the statement was accepted by the bank in
that a loan
Under that section, a bank could accept a statement
ered
was not for the purpose of purchasing or carrying a regist
for which
stock without ascertaining affirmatively the purpose
the loan was to be used.
The amendment requires that the state-
If the
ment be signed by both borrower and lending officer.
of the loan, the
statement merely states what is not the purpose
on describing
lending officer must provide a memorandum or notati
the purpose of the loan. The amendment also emphasizes the alertent can be
ness and diligence required of the bank before a statem
Said to be accepted in good faith.
section 3(b)(1)
"Carrying" of registered stocks. - The former
registered stocks
excluded from loans for the purpose of "carrying"
prinall loans except a limited group specified in that section,
retire indebtedcipally loans to enable the borrower to reduce or
floss originally incurred to purchase such stock.
The net effect
was to exclude from regulation a large number of loans which wore
. The
Closely related to the financing of positions in stocks
ch and instead
amendment strikes this earlier, narrower approa
a loan will
describes affirmatively certain situations in which
.
not be deemed to be for the purpose; of "carrying" registered stooks
former section 3(j)
Reports from unregulated lenders. - The
Board of Governors may
required banks to make such reports as the
require.
include, in ,
The amendment expands this requirement to
ss of extending credit
http://fraser.stlouisfed.org/ addition, "every person enraged in the busine
Federal Reserve Bank of St. Louis
-4who, in the ordinary course of business, extends credit for the
Purpose of purchasing or carryAng" registered stocks.
Loans relying on collateral which has served to permit a purpose
loan. - Part 221 (Regulation U) allows a bank to lend a specified
Portion, currently 10 per cent, of the market value of a stock used
as collateral where the loan is to purchase or carry registered
otocks.
However, after the bank made such a loan, unless the bor-
rower was a broker or dealer, the regulation previously allowed the
bank to lend as much more as it pleased on the same collateral for
any other purpose.
The f,xmer section 3(n) forbade such double use
Of collateral when the borrower was a broker or dealer.
The amend-
ment exprlds this prohibition to forbid such double use in the case
of loans to all borrowers under Part 221 (Regulation U), just as it
is already forbidden in all cases under Part 220 (Regulation T).
The amendment does not, however, require the bank to forego or to
waive any lien, nor does it apply to loans to meet emergency expenses
not reasonably foreseeable provided the circumstances are suitably
documented.
Exemption discontinued for certain unsecured loans. - The regulation previously exempted all loans that were not secured, directly
or indirectly, by at least some stock.
The new section 3(q) discon-
tinues this exemption as to loans made to companies engaged princimaking
PallY, or as one of the company's important activities, in
losns on an exempt basis to finance the purchase of registered stocks.
Conforming amendments have been made to section 1 and section 3(m).
Loans to nurchase convertible securities. -
The regulation
Previously did not apply to loans for purchasing or carrying convertible bonds.
The new section 3(r) requires the entire trans-
altion to be brought into conformity with margin requirements
prevailing at the time when conversion into a registered stock
oce!urs, allowing, however, 30 days for this to be done.
amendment has been made to section 3(d).
A conforming
2.
The amendments to Part 221 (Regulation U) set forth
herein shall become effective June 15, 1959.
hereby
(a) § 221.1 (section 1 of Regulation U) is
amended to read as follows:
§ 221.1
General rule. (a) No bank shall make
any loan secured directly or indirectly by any stock
for the purpose of purchasing or carrying any stock
(and
registered on a national securities exchange
q)
no bank shall make any loan described in § 221.3(
d
regardless of whether or not such loan is secure
m
by any stock) in an amount exceeding the maximu
from
loan value of the collateral, as prescribed
ment
time to time for stocks in § 221.4 (the Supple
in
to Regulation U) and as determined by the bank
gond faith for any collateral other than stocks.
(b) For the purpose of this part, the entire
ed
indebtedness of any borrower to any bank incurr
carryat any time for the purpose of purchasing or
ing stocks registered on a national securities
exchange shall be considered a single loan; and
an tile collateral securin,r, such indebtedness shall
be considered in deter&ining whether or not the
loan =plies with this prrt.
(c) While a bank maintains any such loan,
whenever made, the bank shnil not at any time
eral
permit ay Idthdrawal or subLAitution of collat
the
unless either (1) the loan would not exceed
1113-.Ci.711M loan value of the collater1 after such
is
witae.raaA or substitW,Ien, ec (2) the loan
maidred-ece, by at least thc meal!, by vilich the
is leas
mun lor t.ilue of any cnllateral dei: sited
-6than the "retention requirement" of any collateral
withdrawn.
The "retention requirement" of nonstock
collateral is the same as its maximum loan value,
and the "retention requirement" of stock collateral
is prescribed from time to time in § 221.4 (the
Supplement to Regulation U). If the maximum loan
value of the collateral securing the loan has become
less than the amount of the loan, the amount of the
loan may nevertheless be increased if there is provided additional collateral having maximum loan value
at least equal to the amount of the increase.
(b) § 221.3(a) (section 3(a) of Regulation U) is hereby
amended to read as followa:
5 221.3 Miscellaneous provisions. (a) In
determining whether or not a loan is for the purpose specified in
221.1 or for any of the purposes
specified in § 221.2, a brink may rely upon a statement with respect thereto 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; and (3) if it merely
states what is not the purpose of the loan, is
supported by a memorandum or notation of the lending officer describing the purposa of the loan.
To accept the statement in good faith, the officer
must be alert to the circumstances surroundinr, the
loan antt the bofrower and must have no information
which would put n prualnt man upon inquiry and if
investigated with reasonable 6iltrence would lend
to the discovery of the falsity of the statement.
-7(c) § 221.3(b)(1) (section 3(b)(1) of Regulation U)
is hereby amended to read as follows:
§ 221.3 Miscellaneous provisions.
* **
*
(b)(1) A loan Made to a borrower when he has
owned a stock registered on a national securities
exchange free of any lien for a continuous period
of as much as one year need not be treated as a
loan for the purpose of "carrying" that stock
unless the loan is for the purpose of reducing or
retiring indebtedness incurred to purchase that
stock.
A loan also need not be treated as a loan
for the purpose of "carrying" a stock registered
on a national securities exchange if the loan is
for the purpose of meeting emergency expenses not
reasonably foreseeable or meeting recurring expenses
the borrower has customarily met by temporary borrowing.
(d) § 221.3(d) (section 3(d) of Regulation U) is hereby
amended to read as follows:
§ 221.3 Miscellaneous provisions.
* *** *
(d) Except as provided in paragraph (0 of this
section, thc renewal or extension of maturity of a
loan need not be treated as the making of a loan
if the amount of the loan is not increased except
by the addition of interest or service charges on
the loan or of taxes on transactions in connection
with the loan.
(e) § 221.3(j) (section 3(j) of Regulation U) is hereby
amended to read as follows:
t
-8§ 221.3 Miscellaneous_Erovisions.
41-
41- 41-
it-
in
(j) Every bank, and every person engaged
the business of extending credit who, in the
t for
ordinary course of business, extends credi
the purpose of purchasing or carrying securities
registered on a national securities exchange,
nors
shall make such reports as the Board of Gover
to enable
of the Federal Reserve System may require
it by
it to perform the functions conferred upon
881;
the Securities Exchange Act of 1934 (48 Stat.
15 U.S.C. Chapter 2B).
U) is hereby
(f) § 221.3(m) (section 3(m) of Regulation
amended to read as follows:
§ 221.3 Miscellaneous provisions.
**** *
(m) Indebtedness "subject to § 221.1" is
indirectly
indebtedness which is secured directly or
by any stock (or made to a person described in paraof
graph (q) of this section), is for the purpose
purchasing or carrying any stock registered on a
ted
national securities exchange, and is not excep
by § 221.2.
is hereby
(g) § 221.3(n) (section 3(n) of Regulation U)
amended to read as follows:
§ 221.3 Miscellaneous provisl.ons.
* * ** *
(n)(1) The bank shall identify all the colts
lateral used to meet the collateral requiremen
dered
of § 221.1 (entire indebtedness being consi
cona single loan and collateral being similarly
sidered, as required by § 221.1) and shall not
-9cancel the identification of any portion thereof
except in circumstances that would permit the
withdrawal of that portion. Such identification
may be made by any reasonable method, and in the
case of indebtedness outstanding ;At the opening
of business on June 15, 1959 need not be made
until immediately before some change in that or
other indebtedness of the borrower or in collateral
therefor.
(2) Only the collateral required to be so
of
identified shall have loan value for purposes
§ 221.1 or be subject to the restrictions therein
specified with respect to withdrawals and substitutions; and
(3) For any indebtedness of the same borrower
that is not subject to § 221.1 (other than a loan
described in § 221.2(d), (f), (g) or (h)), the
bank shall in good faith require as much collateral
not so identified as the bank would require (if
t
any) if it held neither the indebtedness subjec
to § 221.1 nor the identified collateral.
This
shall not be construed, however, to require
the bank, after it has made any loan, to obtain
any collateral therefor because of any deficiency
of
in collateral already existing at the opening
the
business on June 15, 1959, or any decline in
value or quality of the collateral or in the credit
rating of the borrower.
It also does not require
on,
a bank to waive or foreco nny lien. In additi
borrower
it shall not apply to a loan to enable the
eable,
to meet emergency expenses not reasonably forese
-10-.
provided the loan is supported by a statement
of the borrower describing the circumstances,
accepted in good faith and signed by an officer
of the bank as having been so accepted.
(h) § 221.3 (section 3 of Regulation U) is hereby
amended by adding at the end thereof a new § 221.3(0 reading as follows:
§ 221.3 Miscellaneous apvisions.
it- * * *
(q) Any loan to a person not subject to this
part (Regulation U) or to Part 220 (Regulation T)
engaged principally, or as one of the person's
important activities, in the business of making
loans for the purpose of purchasing or carrying
stocks registered on a national securities exchange,
is a loan for the purpose of purchasing or carrying
stocks so registered unless the loan and its purposes arc effectively and unmistakably separated
and disassociated from any financing or refinaning,
for the borrower or others, of any purchasing or
carrying of stocks so registered.
Any loan
to any such borrower, unless the loan is so separated Pnd disassociated or is excepted by 5 221.2,
is a loan "subject to § 221.1" regardless of
whether or not the loan is secured by any stock;
and no bank shall make any such loan subject to
§ 221.1 to any such borrower on or after June 15,
1959 without collateral or without the loan being
secured as would be required by this Part 221
if it were secured by any stock.
Any such loan
subject to § 221.1 to any such borrower, whether
-11or not made after June 15, 1959, shall be subject
to the other provisions of this Part 221 applicable to loans subject to § 221.1, including proof
visions regarding withdrawal and substitution
collateral.
hereby amended
(i) § 221.3 (section 3 of Regulation U) is
reading as folby adding at the end thereof a new § 221.3(r)
lows:
§ 221.3 Miscellaneous provisions.
** ***
(0 If, on or after June 15, 1959, a loan
carrying
is made for the purpose of purchasing or
on a
a security other than a stock registered
is
national securities exchange and the loan
there
secured by the security, but subsequently
teral
is substituted as direct or indirect colla
for the loan a stock so registered which is
acquired by the borrower through the conversion
its terms,
or exchange of the security pursuant to
the loan shall thereupon be deemed to be for the
purpose of purchasing or carrying a stock so
the
registered. In any such case, the amount of
outstanding loan, or suet)
plus any increase
therein to enable the boi.row,)r to acquire the
on
stock so registered, shall not be permitted
the date such stock is substituted as crllateral
teral
to exceed the maximum loan value of the colla
such
for the loan on such datc:, )1-1(1 thereafter
indebtedness shall be treated as subject to
tion
§ 221.1; provided, however, that any reduc
-12in the loan or deposit of collateral required
on that date to meet this requirement may be
brought about within 30 days of such substitution.
(j) § 221.4 (the Supplement to Regulation U) is hereby
amended to read as follows:
§ 221.4 Supplement - (a) Maximum loan value
of stocks. For the purpose of § 221.1, the maximum
loan value of any stock, whether or not registered
on a national securities exchange, shall be 10 per
'lent of its current market value, as determined by
any reasonable method.
(b) Retention Reouiremnnt. For the purpose
of § 221.1, in the case of a loan which would
exceed the maximum loan value of the collateral
following a withdrawal of collateral, the "retention
requirement" of a stock, whether or not registered
on a national securities exchange, shall be 50 per
cent of its current market value, as determined
by any reasonable method.
3. These amendments are issued pursuant to the Securities
Exchange Act of 1934, particularly section 7 thereof (48 Stat. 886;
49 Stat. 704; 15 U.S.C. 78g). Drafts of these amendments were published in 24 F. R. 1989-1991 as proposed rules, to afford interested
Persons an opportunity to participate in the rule making through
submission of written data, views and arguments.
After considera-
tion of all relevant matter presented, the Board has adopted these
amendments to become effective June 15, 1959.
has been done pursuant to section
Act (60 Stat. 238;
5 U.S.C.
4
of the Administrative Procedure
1003) and scction 2 of the Board's
Rules of Procedure (12 CFR 262.2).
All the foregoing
The reporting and record-keeping
'71
-13Bureau of
requirements contained herein have been approved by the
the Budget in accordance with the Federal Reports Act of 1942.
applies
(Sec. 11, 38 Stat. 262; 12 U.S.C. 248. Interprets or
amended;
secs. 2, 3, 7, 17, 23, 48 Stat. 881, 882, 886, 897, 901, as
15 U.S.C. 78b, 78c, 78g, 78q, 78w.)
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
(signed) Merritt Sherman
Merritt Sherman,
Secretary.
[SEAL]
@FedFRASER