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543 A meeting of the Board of Governors of the Federal Reserve System the Federal Advisory Council was held in Washington on Tuesday, May 17, 4 " 1.98, at 10:40 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Eccles, Chairman Ransom, Vice Chairman Szymc2ak McKee Davis Draper Mr. Morrill, Secretary Mr. Bethea, Assistant Secretary Mr. Carpenter, Assistant Secretary Mr. Clayton, Assistant to the Chairman Mr. Thurston, Special Assistant to the Chairman Mr. Wyatt, General Counsel Mr. Paulger, Chief of the Division of Examinations Mr. Smead, Chief of the Division of Bank Operations Mr. Goldenweiser, Director of the Division of Research and Statistics Mr. Parry, Chief of the Division of Security Loans Mr. Dreibelbis, Assistant General Counsel Mr. Vest, Assistant General Counsel Mr. Leonard, Assistant Chief of the Division of Examinations Messrs. Thomas M. Steele, Winthrop W. Aldrich, Howard A. Loeb, Lewis B. Williams, Robert M. Hanes, Edward E. Brown, Walter W. Smith, John Crosby, C. Q. Chandler, R. E. Harding and Paul S. Dick, Members of the Federal Advisory Council representing the First, Second, Third, Fourth, Fifth, Seventh, Eighth, Ninth, Tenth, Eleventh and Twelfth Federal Reserve Districts, respectively. Mr. Walter Lichtenstein, Secretary of the Federal Advisory Council 544 MN38 -2At the request of Mr. Smith, Mr. Lichtenstein read the following "ent prepared by the Federal Advisory Council in response to topics " "matted by the Board in its letter of February 3, 1938, for considerabY the Council: "Under date of February 3, 1938, the Board of Governors 5 the Federal Reserve System requested the' Federal Advisory uouncil to give consideration to the following topics: "1. (a) WHAT IS THE FUNCTION OF ThE FEDERAL ADVISORY COUNCIL AS A PART OF THE FEDERAL RESERVE SYSTEM. (b) HOW ESSENTIAL AND IMPORTANT IS THIS FUNCTION AND HOW MIGHT IT BE IMPROVED. WHAT TYPES OF TOPICS SHOULD BE DISCUSSED BY THE COUNCIL WITH THE BOARD FROM TIME TO TIME. "The Federal Adviscry Council welcomes the opportunity to Present to the Board of Governors of the Federal Reserve System its views upon these subjects. "1. (a) WHAT IS THE FUNCTION OF THE FEDERAL ADVISORY COUNCIL AS A PART OF THE FEDERAL RESERVE SYSTEM. "Section 12 of the Federal Reserve Act, which after prong for the formation of the Council, states that it is the power by itself or through its officers: "(1) to confer directly with the Federal Reserve Board on general business conditions "(2) to make oral or written representations concerning matters within the jurisdiction of said Board "(3) to call for information and to make recommendations in regard to discount rates, rebusiness, note issues, reserve conditions in the various districts, the purchase and sale of gold or securities by reserve banks, and the general operations by said banks and the general affairs of the reserve banking system. Altho clazen.,1 , 1Igh the Federal Reserve Act of 1913 has been amended freor tr-Y, no change has been made in Section 12. The functions Act."e Council, therefore, are those originally stated in the 545 S/17/38 -3- "1. (b) HOW ESSToNTIAL AND IMPORTANT IS THIS FUNCTION AND HOW MIGHT IT BE IMPROVED. "The importance of the Council in the Federal Reserve SYatem was actively discussed in Congress at the time the Federal Reserve Act was being considered. It vas most ably ( rated in the following report on the bill filed by Senator , wen in November 1913, on behalf of himself and six other oehators: 'It is believed that the Federal Reserve Board itself, consisting entirely of officers of the government might be made more efficient if it had the advice freely available of the Federal advisory council. Moreover, the operations of the Federal reserve board would in this way be subject to greater publicity and enable the banks of the country to have a greater measure of confidence in all the operations of the Federal reserve board. It was further believed that the banks of the country which are invited or required to contribute a very large sum to the Federal reserve banks, would be more content by having an easy and convenient means provided by law of frequent conferences with the Federal reserve board and the opportunity to advise the board with reference to the financial, commercial and industrial needs of the country.' (Volume I, Senate Reports, 63rd Congress, 1st session 1913, Report 133, Part I and Part 2). "The Council believes that Senator Owen's report is an ;Xcellent summary of the general understanding in Congress as EZItha functions of the Council at the time of its creation is admirably suggestive of the general purposes which the and Council should seek to serve in their relations with each other. "A review of the activities of the Council since its in• ce ej tion does not reveal a consistent program of interpretation ea its functions. From time to time the Council has formulatth Ilseolutions for reference to the Board upon subjects within it ,scope of Section 12 of the Federal Reserve Act. On its own it48-tiative or at the suggestion of the Board, it has presented geejiswa on banking legislation to the Board, and has made sugIt8 °48 and recommendations to the Board in relation thereto. enmembers have appeared before committees of Congress considIke legislation affecting the banking system. It has given 546 5/17/38 -4- consideration to and has made reports to the Board on topSubmitted by the Board. Despite these activities, with the exception of a short period in the early history of the Federal Reserve System, no definite program of cooperation between the Board and the Council responsive to the duties imposed upon the Council by Section 12 of the Act and the interpretation of the functions of the Council, as outlined by Senator Owen hereinbefore referred to, has been followed. This may be accounted for by reason of changing points of view due to changes in personnel in the Board as well as in the Council. It may also be due in large measure to the comparatively short life of the Federal Reserve System, which, together with the fact that its entire existence covers three convulsive periods in the affairs of the nation - war, reconstruction and depression - did not permit of the development of a traditional relationship between the Board and the Council. If that be the case, it may account for the absence of that close relationship and cooperation between the Board and the Council that was contemplated in the Act and in the discussions in Congress surrounding its enactment. "The Council very definitely feels that a closer and more intimate relationship with the Board should be developed. It realizes that it is merely an advisory body, but it is of the °Pinion that composed as it is of a representative from each tc_le the twelve Federal reserve banks, its intimate knowledge of b usiness and banking throughout the nation could be of greater alUs to the Board in the solution of problems confronting it. The Council feels that it should be consulted much more freely "all in the past and that ample time should be given to study problems submitted to it. While the Council holds four statu!?rY meetings each year, its services and those of its Executive Commi ttee have always been available to the Board whenever !ought. It would appear obvious that if a program of close co2ersti0n between the Board and the Council were developed, more traquent meetings of the Council would be required. The Council alizes the vast importance of the problems with which the tiel'd is confronted, involving economic as well as social quesarc rns, and affecting not only national but also international airs. More frequent meetings would enable the Council to cf7s the benefit of the views of the Board and would enable the sòrcil to aid more intelligently and sympathetically in the tio,.1,ti°n of the various problems, and in interpreting the actions the Board to the member banks and the public. If constructive results are to be achieved, a closer workrelationship between the Board and the Council must be brought itsit The Council calls attention to the fact that throughout ehA IstorY its members generally have been men of long banking busi tricts nsas experience and of standing in their. respective dis' Many of them have been experienced in the study of social Z 4 547 5/17/38 -.5- economic problems in their respective areas and have aided in the solution of such problems. They, therefore, have been and are now in a position to be of considerable aid to the Board. It may be argued that the Council's approach is along district or sectional lines. However, as the Council is composed of a member from each Federal Reserve District, the Board receives in effect a nation-wide expression. On the other hand, the members of the Council, if.more active consultation were had, would receive the benOf the information and of the opinions of the Board, wuich in turn might alter the attitude of the Council. The Council believes that as a result of a closer relationship 11•11 the Board it could be of considerable assistance in ilj allging about a better understanding of the actions of the ,"rd upon the part of member banks of the Federal Reserve ?Yatem and a more effective cooperation. There have been instances in the history of the Council to justify this con- 7 " "2. WHAT TYPES OF TOPICS SHOULD BE DISCUSSED BY THE COUNCIL WITH THE BOARD FROM TIME TO TIME th "This question may be answered in a general way that B e tYPes of topics to be discussed by the Council with the are those mentioned in Section 12, together with those 2erdrel uu thereto that arise out of amendments to the Federal crerve Act. More specifically, but not necessarily all inppUsive, and in so far as they have a relation to the Federal 'I: s serve System, the following are suggested as matters that ,loUld be discussed: 1. Monetary policies and actions 2. Fiscal policies and actions 3. Banking legislation and kindred legislation Which may have a bearing upon the financial, industrial, commercial and agricultural life of the country 4. Reserve policies and actions 5. Rediscount policies and actions 6. Open Market policies and actions 7. Regulations promulgated from time to time by the Board of Governors of the Federal Reserve System 8. Relaticnship of the Board with the Federal Reserve Banks 9. Operations of the Federal Reserve Banks 10. Member banks' relationship with the Board and With the Federal Reserve Banks 548 -6"11. 12. 13. 14. Gold policy Silver policy Bank examinations In addition, obviously, the Board will be confronted with problems arising out of the operations of other bureaus of covernment which affect the Federal Reserve System. In this field, the Council feels that it could be helpful to the Board. "While the Council has outlined in a broad way the types Of topics that might be discussed with the Board, the Council desires to impress upon the Board that it has no way of ascertaining the questions that the Board may be considering from , 'Inle to time and that the Council is therefore obliged to dePend upon the Board for information as to what topics are under ! onsideration. The Council should have sufficient time to rake tile necessary studies end replies. There have been instances tt.1 the past when the Council had no knowledge of important cuesthat were being considered by the Board until action was taken, resulting in controversies that in all likelihood could cuve been avoided. r "The Council in presenting this memorandum to the Board trli.7es that there may be some matters included therein that t e Board will wish to discuss with the Council. In an effort ° ley a foundation upon which a traditional relationship between the Board and the Council may be built that will inure m the benefit of the Federal Reserve System, the Council sub'Juts this reply, and will be glad to discuss it with the Board. "The Council is attaching to this memorandum e copy of an address mr made in November 1935 by one of its present members, tos, Thomas M. Steele, at a time when he believed that he was succeeded by a new appointee. The Council believes that 4 13'01s address presents views that may be of interest to the and that they may lead to a closer working relationship between the Board and the Council." (A copy of Mr. Steele's adhas been placed in the Board's files.) Witil re ?ecl It was understood that if the Board desired to offer any comments 8Pect to the statement they would be sent to the members of the q. A4 '''orY Council and discussed at the next meeting with the Council. dte Mr. L ichtenstein then read the following letter which had been adb Y him under date of May 17, 1938, to Chairman Eccles: 549 -7"At the joint meeting of the Board of Governors of the Federal Reserve System and the Federal Advisory Council held in December, 1937, the Board asked the Council to make a rePort on the following question: 'How can the Federal Reserve System increase the value or scope of its services to member banks in practicable or desirable ways?' The Federal Advis017 Council requested its members to address the member banks in their respective districts and ask for criticisms or sugestions to enable it to furnish the Board of Governors of the Federal Reserve System with comprehensive material. ApproxiIrlately a thousand member banks were addressed, and confiden!iel . replies were received from about six hundred. Somewhat more than half of these offered suggestions; the rest merely expressed general or particular satisfaction with the present o perations of the System. t, "The report herewith filed by the Council is a compilemade by a committee of the Council based on 333 replies "'Rich contained some criticisms or suggestions. "The Federal Advisory Council concluded that it would be best for it not to express any opinions of its own members but ! inaPlY to let the Board have the result of an inquiry which represents a fair cross-section of the expressed views of the membership of the System both geographically and by size of benks. "It is obvious that the members of the Council assume no res Ponsibility for any of the suggestions made, and submit this 13°It in the hope that it may be of service to the Board of /r17 : rn°rs, its staff, and to the regional Federal reserve banks. 'be Board desires the Council in any way to pursue this study ,,rither or to amplify it, the Council will be glad to comply With the request of the Board." 4 The report referred to in the above letter, a copy of which has been placed in the Board's files, summarized the comrents received by mem°f the Council with respect to the collection services of the Federal .4eell/e banks, competition of Federal reserve banks with member banks, and investment advice by Federal reserve banks, the easy money pol— c'S' or the Federal Reserve System, educational and supervisory service of thle S/Ttem, examinations, greater autonomy for Federal reserve banks in 550 5/17/38 -8_ their respective districts, political control of the Federal Reserve System, reserve requirements, simplification and standardization of reports arid statements, and miscellaneous comments. The report also contained excerpts taken from letters received by the members of the Federal AdviscrY Council with respect to each of the subjects above referred to. In submitting the report Mr. Smith stated that, because of the c°4flicting opinions of member bsnks in the respective Federal reserve districts, the members of the Council felt that, instead of expressing Individual opinions as to how the Federal Reserve System could increase the value and scope of its services to member banks, it would be more sati8fectory to give the Board of Governors a cross-section of expressions received from the banks in the respective districts. It was also stated that'the requests sent by the members of the Federal Advisory Council to he member banks had stated that the replies would be regarded as confidential and Mr. Smith pointed out that in preparing the report the names °t the replying banks were not mentioned and were known only to members ot the Council. Mr. Smith added that, in the absence of objection by the /33ard, it was understood that the menbers of the Council would transxnit c°13ies of the report to the presidents of the respective Federal re- ser°e banks for their confidential information. It was indicated that the '''oerd would have no objection to this procedure. After a discussion, it was stated that the report would be reviewed the Board and that it might desire at a later date to discuss the matter wIth the Federal Advisory Council and to have the advice of the Council with 1434 t to connection, specific suggestions contained in the report. In this c- 551 S/17/38 -9- President Smith stated that the report had just been submitted to the C011nci1 and that some of the members had not had an opportunity to read it in its entirety. Mr. McKee inquired whether the members of the Federal Advisory 00114,., / 1 4.11" felt that many of the criticisms referred to in the report could be el, 4Minated by proper public relations activities by the Federal reser"banks, to which President Smith replied in the affirmative and stated that it - was felt that the services of the members of the Council could b eUs 6d to good advantage in this connection in presenting the national " 13 of view in each district. (I' the View Mr. Harding suggested that each member Council discuss the report with his Federal reserve bank with the o meeting some of the criticisms referred to in the report and bring- ab°-ut a better understanding of the regulations and requirements im- 134:42" °A member banks. Mr. Smith stated that some of the members of the 1 hed suggested that if the Board desired to submit a questionnaire t° the - Members of the Council based on the report it be submitted before th -e ebm_ -"wler vacations begin in order that the members may have ample time to eive it consideration. Mr. Lichtenstein then read the following statement, which had been 4r°176d at the meeting of the Federal Advisory Council just prior to this nleetille, as a basis for the discussion with the Board of the question of on of banks: pri„ "While the Federal Advisory Council believes that the tx'sent designation of 'slow' as used by the National Bank it,Ikrlillers might well be changed to a more appropriate title, yeliaves that in all examinations not only 'loss' end 552 -10" doubtful, loans should be separately listed and totaled, but that substandard or noncurrent loans of a type which a bank would and should not currently make, should also be listed and totaled. "It believes that the listing and totaling of this type Of loan is necessary if directors of banks generally, and the officers of the banks in a great many cases, are to learn from the examiners' reports the true condition and tendency of the bank. "The Council also believes that the entire investment Portfolio of all banks should be listed, priced, and totaled , . EInd that this information is necessary if the directors of uanks generally are to have an adequate picture of the bank's ! ondition. This is particularly true since at the present bilme the investment portfolio of the average bank represents a large percentage of its total assets. "The Council also feels that the difference between market value and carrying value in the case of all defaulted bonds, stocks, and non-defaulted bonds of low grade should be set up loss or doubtful. Unless the market value of the total inportfolio is in excess of carrying value, the bank Should be required either to set up adequate reserves to cover depreciation on such 'items, or to charge it off. "The Council does not believe that market depreciation in Securities of high grade should be set up as 'loss' or 'doubts , vY the examiners. It does believe, however, that where v market depreciation exists, that unless the total market va;" of the investment portfolio is in excess of its carrying ba; . ! 11_e, the examiners should use their influence to have the tl,fc set up reserves sufficient to bring the carrying value of si71 investment portfolio down to the market value. The bank lad be given amply reasonable time to create such reserves. re "The Council believes that the Comptroller's regulations warding marketability and character of investment securities reg4 a bank can purchase should be liberalized and that all from.ence to classification by manuals should be omitted there- ;;VI "The Council would further favor an amendment of the law • msj s to remove the requirement of marketability from investsecurities which a bank could purchase. The Council bethe examiners could and should see that banks in • ta4 tng investments do not acquire an undue percentage of nonca,,!tabls investments in relation to their total assets and funds." 15441t 1411• Smith stated that several phases of the general question of • "lination were discussed by the Council and, since the Council was 553 5/17/38 -11.- awnre that the matter was under active consideration by the Board with the Federal Deposit Insurance Corporation, the office of the Comptroller Of the Currency and the Treasury, it was felt that some expression from the Council was desirable. At this point Messrs. Aldrich and Lichtenstein left the meeting. McKee stated that he had hoped that out of the discussions which were taking place with respect to examination policy there would bed."eloped a procedure that would prevent the pressure for liquidation 14 rutlire periods of depression and that would provide a means of placing before the members of the boardsof directors of banks, without the neceseitY of the directors reading an entire report of examination, a statement °Baling attention to assets and conditions in the bank requiring attention viblch would be kept before the directors until the matters referred to in ttle etstement had been satisfactorily provided for. Be also expressed the 411140 fl that profits on securities sold should be earmarked as reserves to flItIlre depreciation in the investment account rather than paid out as 644 as had been done in some cases in the past, leaving the bank ithout ' W adequate provision for possible depreciation in securities. C hairman Eccles stated that he felt that the policy of bank exam111"1°4 14 the United States had resulted in pressure on the banks for lithLidatioll of assets and in difficulties for the banks which were not exDerierteed 11 Other countries where banks are not examined by supervisory : 41 4elltleei that the policy had not resulted in a sounder banking system 4 -ell it wes not effective in counteracting an inflationary trend or in 554 5/17/38 -12- 13reventing a deflationary situation, but on the contrary accentuated such sitiletione, and that he would like to see the current discussions develop €klal°1iCY which would place emphasis on soundness of assets rather than on and which would encourage banks to recognize that it is not now Iftaible to find employment for all of their funds in short-term assets alld that, therefore, they should place some of their funds in the longer term rield in an endeavor to meet the credit needs of the community and thile _ 01.1.11teract the increasing demand for the creation of Government agent° furnish credit. He pointed out that banks can no longer operate °4 the theory that their assets must be so invested as to enable them to 1111Y Off all of their deposits on demand, that in times of stress when there ia.no satisfactory Market for bank assets the rediscount privilege at the Pederal reserve banks must be relied upon to furnish liquidity, and that, th erefore, the banks should look to the soundness of their assets tather than to their marketability. In the discussion of the general question which followed some of the Illetibers of the Council expressed the opinion that experience had dem- °48t1 tad that the assets classified as doubtful or loss generally had been classified by the examiners as slow and that, therefore, the e*egetion of such assets was desirable. Other members stated that the gll'qity end value of examinations had improved very materially during re4rit years Reference was made to the difficulties that had been encountered d41111E t 1lUmerous discussions of the slow classification in reports of 555 5/17/38 -13- alelninations in attempting to find a term or classification that would adequately describe the assets which have been placed in the slow col12431 'and to possible methods that might be used to bring such assets to the at of the boardsof directors of the banks if the present practies of listing these assets as slow were discontinued. It was agreed by everyone present that the term "slow" was not a properly descriptive term and should be abandoned. It was suggested that it would be helpful if the Council were acciliElitsd with the position taken by Mr. Paulger in his discussions with ritatives of the Federal Deposit Insurance Corporation, the office Ot the Comptroller of the Currency, and the Treasury on the question of the t l*estftent of depreciation in securities and the classification of asaats other than securities in reports of examination. Mr. Paulger stated thEtt 4 such discussions he had taken the position: (1) (2) That the column now known as "slow" should be eliminated from the pages upon which it now appears and that provisions should be made elsewhere in the report, under a heading "loans listed for information or comment" or other suitable heading, for listing with appropriate comment, not totaled and not included in any recapitulati on, such loans as the examiner feels should be set out for the information of the directors and proper officers of the bank, with the clear understanding that such loans are not being classified as doubtful or loss and are not necessari1Y to be regarded as criticized assets. (s) That only depreciation in stocks and defaulted bonds should be classified as estimated loss and that securities in these groups should be listed and priced in the report of examination. 556 5/17/38 -14(b) That securities in groups I and II should not be priced and preferably should not be listed in the report of examination. A complete list of all securities, however, should be attached to the report of examination sent to the supervisory authorities. (c) That depreciation other than in stocks and defaulted bonds should not be taken into consideration in computing "net sound capital". On the other hand, it could not be affirmatively stated that depreciation in any securities constitutes sound capital. Therefore it was felt that the schedules showing a computation of net sound capital should be eliminated from the reports of examination. (d) That unrealized appreciation should not be allowed. (e) That any premium on bonds purchased should be amortized. Mr. Paulger outlined the reasons for his position as follows: The position with respect to the elimination of the "slow" classification is taken in the belief - 1. That it would not weaken the effectiveness of examination procedure or ignore facts, but, on the contrary, would make for a. better report of examination. 2. That it would eliminate a deflationary influence and would remove an obstacle to the expansion of bank credit on a sound basis. tiolisThe position taken is based upon the following considera- 1. Loans classified as "sloe are commonly regarded by bankers as criticized loans; they are listed on the same page as loans classified as doubtful and estimated loss, and the recapitulation of the examiner's classification includes the totals of loans classified as: (a) Slow, (b) Doubtful, (c) Estimated Loss. The banker 557 5/17/38 -15feels that he is upon the defensive for having "slow" loans in the bank and that loans so classified should be collected or reduced. Classification as "slow" of new or comparatively new loans is regarded, in the absence of any unfavorable developments since the making of the loan, as a criticism for having granted the credit in the first instance. 2. There have been strong claims that because of such classification banks have refrained from making sound loans and have insisted upon collections of sound loans. 3. To the extent that such criticisms are justified, the causes therefor should be eliminated. Whether the claims are justified or not, however, is not the most important matter at this point. So long as the claims are made the psychological effect will be bad and the cause or excuse for such claims should be eliminated, if that can be done without weakening the effectiveness of examination. 4. Regulation A was designed to encourage banks to expand sound loans of all types. This encouragement is offset by the extent to which the slow classification is regarded as a criticism of sound loans. To this extent the term is deflationary and should be abandoned. 5. The "slow" classification is a misnomer, as logically it would indicate that the sole basis for classification was the time of repayment. Such is not the case, however, as the classification does not cover all loans with longer maturity and on the other hand some loans are so classified because of a tinge of doubt as to whether they will ever be collected in full, although the doubtful elements are not so strong as to Justify a classification of "doubtful". 6. The slow classification has seemed incapable of exact definition which could be uniformly interpreted by bankers and examiners. 558 5/17/38 -167. A logical basis for classification of loans in reports of examination is from the point of view of whether payment will be collected in full or whether some loss will be sustained. This seems to be adequately covered by classifications of "doubtful" and "estimated loss". a. All the food, that is accomplished by the slow Classification can be retained by the use of another schedule under a heading "Loans listed for information or comment", or other suitable caption. In such schedule the examiner should list, with appropriate comment, all loans which he feels should be called to the attention of the directors and proper officers of the bank. Without attempting to give a complete catalogue of the types of loans which might be so listed, the following are some examples of the type of loans which might be listed: (a) Loans with inadequate or uncurrent credit information; (b) Loans with inadequate or thin margin of collateral; . (c) Collateral loans (stock and bond collateral) with unhealthy concentrations in the collateral; (a) Loans in connection with which there are collateral exceptions, such as defects in assignments, missing insurance policies, etc.; (e) "Work-out" loans, i.e., loans in which loss is not anticipated but which require special attention of the management; (f) Loans which are not being properly amortized in accordance with the ap,reement or sound banking practice; (6) Loans listed for record purposes. 559 -179. The schedule referred to above should not be on the same page as the loans classified as "doubtful" or "estimated loss", as a mere change in title would not be sufficient to eliminate the impression that loans so listed are loans subject to the same criticism, although to a lesser degree, as loans classified as doubtful or estimated loss. 10. The loans in the schedule should not be totaled as they are listed for varying reasons and the total would be without significance or even misleading. By the same token, no amount of such loans should be included in the "Recapitulation of classified assets". 11. The examiner, of course, should feel free to comment upon the loaning policy of the bank and upon any unsound concentrations or excessive holdings of any type of loans whether the individual loans are classified as doubtful or estimated loss, listed in the schedule of "Loans listed for information or comment", or not listed in any place in the report. The position with respect to depreciation in securities is en, In the belief 1. That in a sound investment policy for banks, emphasis should be on reasonable income and safety of principal, rather than on trading profits. 2, That, regardless of whether security prices be high or low, it is sound and desirable to get away to as greet an extent as possible from market quotations. 3. That a program with respect to depreciation in securities should be based upon (a) Amortization of all premiums - on U. S. Government and other exempted issues as well as on nonexempted issues. (b Write-down to market of all stocks and defaulted bonds. 560 -18(c) Provision of adequate reserve to take care of future defaults. (d) 4. Impounding of securities profits until an adequate reserve has been provided thus preventing the treatment of such profits as regular - rather than as nonrecurring - income available for dividends, salary increases, and regular operating expenses. That the time to make such a policy effective is when security prices are low and profits can be anticipated rather than at a time when security prices are high and losses, rather thanIrofits can be anticipated. During Mr. Paulger's statement Messrs. Szymczak and Hanes left the room. Mr. Smith stated that the Council would meet again this after004 tor the purpose of giving the matter of bank examination further consiz ' "ration in the light of the discussion at this meeting. Mr. Brown referred to Bill S. 2171, introduced in the Senate on 15, 1937, by Senator Byrnes, for the purpose of eliminating from the assessment base used in determining the amount of insurance assesstent to be paid by an insured bank to the Federal Deposit Insurance Cork'lYtion, the liability of such insured bank for deposits made by anoth"blank (other than deposits of trust funds made by another insured bank). 111'. Brown said that it was understood that the bill might receive favorl'able consideration by the Senate Committee on Banking and Currency were it ot for opposition by the Board of Governors. Mr. Ransom stated that toard had been requested by the Senate Banking and Currency Committee 561 5/17/3 to -19- Phil, -timit a report on the bill and that under date of January 25, 1938, the °ard had expressed the opinion that to exempt from assessment for Pc)sit insurance purposes balances due to other banks would relieve in thc financial centers of some of the cost of accepting such deposits ra-ld that it was reasonable to expect that such action would 11"e the effEct of encouraging the further concentration of interbank 4nces in such financial centers. During the ensuing discussion et- ett On was directed to the point that if interbank balances were elimited from the assessment base it right result in a revival of a, dete A that interest be paid on such interbank balances and a reopening o the question of a change in the existing law. At the conclusion of the discussion the meeting adjourned.
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