The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
May 18, 1959.
The attached set of minutes of the
meeting of the Board of Governors of the Federal
Reserve System on May 18, 1959, which you have
previously initialed, has been amended at the
request of Governor Mills to revise the comments
attributed to him on pages 9 and 10 of the
minutes as originally written.
These comments
now appear on pages 9 and 11, respectively.
If you approve these minutes as amended,
please initial below.
Governor Szymczak
Minutes for May 18, 1959.
To:
Members of the Board
From:
Office of the Secretary
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.
Chin. Martin
Gov. Szymczak
Gov. Mills
Gov. Robertson
Gov. Balderston
Gov. Shepardson
Gov. King
Minutes of the Board of Governors of the Federal Reserve System
Ott Monday, May 18, 1959. The Board met in the Board Room at 10:00 a.m.
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.
Sherman, Secretary
Kenyon, Assistant Secretary
Thomas, Economic Adviser to the Board
Farrell, Director, Division of Bank
Operations
Shay, Legislative Counsel
Solomon, Assistant General Counsel
Hexter, Assistant General Counsel
Hostrup, Assistant Director, Division
of Examinations
Nelson, Assistant Director, Division
of Examinations
Benner, Assistant Director, Division
of Examinations
Conkling, Assistant Director, Division
of Bank Operations
Daniels, Assistant Director, Division
of Bank Operations
Hill, Assistant to the Secretary
Davis, Assistant Counsel
Fidelity Bank and Trust Company (Item No. 1). At the meeting
°II
May 13, 1959, the Board deferred action on an application of the
hdelity Bank and
Trust Company, Indianapolis, Indiana, to establish
11 branch in
Speedway, pending further study by the staff in the light
a report that the applicant bank intended to merge with a national
bank
Mr. Nelson reported that he and Mr. Hexter had discussed the
Inatter with the Comptroller's Office and were advised that the proposed
5/18/59
-2-
merger had been discussed with the banks involved and the Comptroller's
Office was aware of Fidelity Bank's application for a branch in Speedway.
Mr* Nelson stated that the Comptroller's Office would have no objection
to the Board's approving this application, particularly in light of the
fact that the subject bank would like to open the branch -within 45 days
and
consummation of the merger was not planned until about the first
Of S
epteMber.
It was indicated that the existence of this branch mould
have no bearing on consideration of the merger.
Thereupon, a letter to the Fidelity Bank and Trust Company
al3Pr°Ying the branch application, a copy of which is attached as
Ite
RA
was approved unanimously for transmittal through the Federal
e Bank of Chicago.
Items 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
lananimously:
Item No.
.1.01,'IsItter to The Union Commerce Bank, Cleveland,
i„,1°) extending the time to establish a branch
MaYfield Heights. (For transmittal
througe
Federal Reserve Bank of Cleveland)
utter to the Federal Reserve Bank of Dallas
oeRarding the status under the Bank Holding
_
sh-vcillY Act of the Employees Deferred Profit
ring Plan of the First National Bank in
seo, Cisco, Texas, and the Consumers
‘*eePtance Company, also of Cisco.
2
5/18/59
-3Messrs. Hexter and Davis then withdrew from the meeting.
Reports of condition (Item No. 4).
At the meeting on March
17, 1959, the Board authorized the staff to take the necessary steps
to obtain the agreement of the other bank supervisory agencies to
certain changes in the loan schedule of the call report of condition,
in connection with proposed revisions in the weekly reporting member
bank series.
Under date of May 14, 1959, there had been distributed
to the Board a memorandum from the Division of Bank Operations Which
stated that agreement had been reached with the Comptroller's Office
and the Federal Deposit Insurance Corporation on the addition of a
"I./ item in the call report covering loans to financial institutions.
It 1018 noted that the other agencies did not approve changes in the
instructions whereby real estate mortgages acquired under repurchase
alld similar arrangements would be included in loans to financial
institutions and construction loans secured by mortgages would be
included in commercial and industrial loans.
Rather than delay
Nrther the revision of the call report and weekly report of condition,
it las recommended that the Board approve letters to the Presidents of
411 'Federal Reserve Banks transmitting the midyear call report forms,
iticluding a reconciliation slip-sheet form, and memoranda covering
the call report revision and the weekly reporting member bank revisions.
5/18/59
In comment on the revisions, Mr. Conkling stated that the
recommendation today would put into effect the proposals presented
last March with the exceptions noted in the memorandum of May 14.
It
4as also recommended that a new weekly subseries, Which would cover
'
80-called "money market" banks, be approved on an experimental basis,
'with distribution limited to Board and Reserve Bank use until its
an
alytical value could receive further study.
It was noted that the
series had been approved by the System Research Advisory Committee and
the hope was expressed that it might eventually be substituted for the
Present central reserve city or entire weekly reporting series.
Unanimous approval was then given to (1) the proposed changes
it the loan
schedule of the call report of condition and in the report
fcirla of the *weekly reporting member bank series; (2) a new "money
4erkeV aubseries of the weekly reporting member bank series; and (3)
e letter
to the Presidents of all Federal Reserve Banks transmitting
the midyear call report forms and memoranda covering the foregoing
Isevieions and additions, with the understanding that the necessary
clearance would be obtained from the Bureau of the Budget.
the letter is
attached hereto as Item No.
A copy of
4.
Messrs. Nelson and Conkling then withdrew from the meeting.
Reserve requirement legislation.
The Board had before it a
illeM°randum from Messrs. Hackley and Shay dated May 14, 1959, regarding
8etate amendment to the reserve requirement bill, S. 1120, Which would
5/18/59
-5-
require only one of several holding company affiliates of the same
banks to maintain the reserves of readily marketable assets required
by section 5144 of the Revised Statutes.
After comments by Mr. Shay, it was noted that the matter had
been placed on the agenda simply to keep the Board informed and no
action was required.
Mr. Shay then withdrew from the meeting.
Rebate of unearned interest on prepaid borrowings (Item No. 5).
At the
February 1958 meeting of the Presidents' Conference, a question
/gas raised regarding the appropriate rate of rebate of prepaid interest
0n member bank borrowings
in the event of a discount rate change.
Discussion at that meeting revealed that eleven Reserve Banks followed
the practice of rebating at the rate at which the advance or discount
Igas made, provided
such rate was not higher than the discount rate
13revailing at the time of the rebate, in which event the rebate was
Wade at the rate
then prevailing.
While the consensus of the Presidents
Igas that there was
no need for uniformity, it was decided to request
the Board to
consider the question and possibly issue an up-to-date
1111ing on the subject so that it might be apparent to inquiring member
batik8 that
the matter has been the subject of decision on a current
basis.
In a letter to the Chairman of the Presidents' Conference dated
December 17,
1958, the Board stated that it was inclined to believe a
5/18/59
-6-
uniform policy of rebating of interest on prepaid borrowings from Federal
Reserve Banks after a rate change would be desirable and that it would
be prepared(1) to reaffirm the position taken by the Governors' Conference
1923
and 1930 to rebate at the lesser of the rate at which the
discount was made or the current rate, or (2) to adopt a new policy
Of rebating
after a reduction in the discount rate at the rate in
effect when the discount was made, provided that subseqient borrowings
in equivalent or lesser amount prior to the original maturity of the
Prepaid discount would be at the rate of the prepaid discount.
The
134)ardts letter was discussed at a special session of the Presidents'
Conference on January 6, 1959, at which time the Presidents continued
to be
Board,
of
the opinion there was no need for uniformity. Should the
insist on uniformity, a majority of the Presidents would accept
alt
ernative (1), but the Presidents were unanimously opposed to
alternative (2).
Subsequently, two Banks, in letters to the Board expressed the
11°Pe that neither alternative would be adopted.
Both favored rebating
t the
original rate and one would favor even more extending the benefit
Of a rate reduction to all borrowers.
During a discussion of the subject at a meeting of the Board
on F
ebruary 11, 1959, question was raised whether the policy now
r°110wed by 11 of the 12 Banks was appropriate since it penalized a
5/18/59
-7-
member bank for prepayment at the time of a rate change designed to
give borrowers the benefit of a lower interest cost.
It was suggested
that consideration be given to a policy that would provide for adjustment
Of charges on all outstanding loans when the discount rate was increased
or decreased.
It was then agreed that the staff should prepare a letter
to the Presidents of all Federal Reserve Banks reflecting this suggestion
together with a memorandum regarding discount rate policy and a rebate
Of interest along the lines of the discussion at this meeting.
A draft
letter that had now been prepared and circulated to the Board stated
that, while the Board would not insist on a uniform policy in the
1-112mediate future, the Board believed it would be desirable to move
tWard a policy whereby interest on borrowings would be charged at
the discount rate or rates prevailing during the period of the borrowing.
4 suPporting memorandum, to be enclosed with the letter, was also
sUbmitted.
The letter suggested that the topic be discussed at the
next regular meeting of the Conference of Presidents.
During discussion, it was pointed out that the policy proposed
14 the draft letter constituted a new approach to the question originally
raised by the Presidents.
In the Board's letter of December17, 1958,
the emphasis was on uniformity of rebate rate practice and two alternative
P°1icies were suggested, Whereas the current approach recommended a
5/18/59
-8-
single new policy of borrowing charges without insisting on uniformity
tn the immediate future.
At the conclusion of the discussion, during Which it was agreed
that the draft material circulated to the Board reflected the consensus
reached at the Board meeting on February 11, 1959, unanimous approval
8 given to the proposed letter to the Presidents of all Federal
Reserve Banks and the memorandum to be enclosed with the letter.
Cc/Pies of the letter and memorandum are attached hereto as Item No. 5.
In this connection it was reported that interest had been
displayed at one Reserve Bank in holding another conference of Reserve
Bank discount officers, and the view was expressed that such a conference,
if desired and requested by the Banks, would seem worth while under
Present circumstances.
Messrs. Thomas and Daniels then withdrew from the meeting.
Continental Bank and Trust Company (Item No.
6). There had
been circulated to the Board a memorandum from the Division of Examinations
dated April 27, 1959, reviewing the exchange of correspondence between
the Federal Reserve Bank of San Francisco and The Continental Bank and
4148t Company, Salt Lake City, Utah, which resulted from the Board's
letter of March 27, 1959, requesting the Reserve Bank to advise
e°11tinental that loans to President Cosgriff's wife and mother totaling
382/000 and $427,000, respectively, should be removed or placed in
5/18/59
-9-
a condition beyond adverse criticism.
The memorandum noted that a
simultaneous examination of Continental and its affiliates was to be
conducted in the near future, and there was submitted a draft of letter
to the San Francisco Bank requesting information as to the condition
ct the loans in question as soon as possible after the start of the
examination.
The draft letter also requested the Reserve Bank's
recommendation as to What action should be taken to bring about
correction if it were found that the earlier request had not been
comPlisd with.
Governor Mills said that he would have no objection to sending
the Proposed letter, in the circumstances as they stood at this time,
because
he thought it was desirable for the Board to have information
regarding the status of the loans to President Cosgriffis wife and
roother
in view of the demand made on Continental that the loans be
ram°vad or placed in bankable condition.
However, a principle was
4vo1ved that he considered an important one. He then referred to
the sending _
of Federal Reserve bank examiners into banks that were
not t
hemselves subject to examination for the purpose of inquiring
illto the
personal affairs of an individual whose bank was the subject
Of
a section 9 proceeding. Mr. Cosgriff had already charged that the
Ped._
-4-al Reserve was damaging his personal credit and raising doubts
about --a
hi
standing in the financial community.
He (Governor Mills)
-10-
5/18/59
had a Very unhappy feeling with regard to that sort of thing and the
se
Illence of events that had brought it about. As he had said, however,
in the present circumstances he felt that the information to be requested
in the proposed letter with regard to the condition of the loans to
14r. Cosgriff's wife and mother was information that the Board should
obtain.
After further discussion, unanimous approval was given to the
Proposed letter, a copy of which is attached hereto as Item No.
Pan American Bank.
6.
Mr. Benner reviewed a memorandum which had
been distributed for the purpose of keeping the Board up to date on
dVe1cprnents relating to the Pan American Bank of Miami, Miami, Florida.
Amu:41g other things, he reported that representatives of the bank were
understood to be meeting with Glore, Forgan and Co. in New York this
111°Tning concerning the proposed stock issue of South Dade Farms, Inc.,
t11Zcugh
which the bank would be furnished $1,000,000 additional capital.
On the basis of Mr. Benner's report, no action was indicated
at this time.
However, it was understood that as soon as information
aeveloPed through the forthcoming examination of Pan American was
vailable, it would be presented to the Board for discussion.
exe.inatio
This
was to be conducted by State authorities, but it would
s credit investigation by Federal Reserve personnel.
5/18/59
Governor Robertson expressed the opinion that not enough
Progress had been made in working out the problems of this bank.
He
said that he had talked several times with President Bryan of the
Pederal Reserve Bank of Atlanta and that apparently not much could be
dote until
after the forthcoming examination.
Governor Mills stated that as he appraised the situation,
the attempt to introduce new capital into Pan American through public
Sale of the stock of South Dade Farms vas subsidiary to another
l'esPonsibility of the Board, namely, to recognize the public interest
48 Paramount. As he understood the law and the practices of the bank
811Pervis0ry agencies, the public interest was clear.
tained that there
Having ascer-
re losses in Pan American's portfolio of loans,
the Board was under a mandate to regaire that the losses be charged
°I4t irrespective of any capitalization program.
However, since an
examination of the bank was about to be conducted, and the examiners
reassess the qaality of the bank's assets, the Board then could
410Ve
4
4-mmediately on the basis of the report of that examination.
Dna.
--,r these
circumstances he felt that the Board was within its
a1
lth°11tY in deferring any action for the present.
The meeting then adjourned.
5/18/59
-12Secretary's Note: Pursuant to recommendations
contained in memoranda from appropriate individuals concerned, Governor Shepardson today
approved on behalf of the Board the transfer of
the following persons on the Board's staff,
effective May 18, 1959:
Doreen Dippre, from the position of Secretary in the Office of
u4!ense Planning to the position of Secretary in the Board Members'
es, with an increase in her basic annual salary from $5,730 to
$61'1
,.40.
Margaret L. Wolfe, from the position of Secretary in the Office
or -,, fense
Loans to the position of Secretary in the Office of Defense
rlanni
4.11g, with no change in her basic annual salary at the rate of
6
880.
+5)
, Iola B. Morgan from the position of Secretary in the Board
mettibers' Offices to the position of Secretary in the Office of
tense Loans, with no change in her basic annual salary at the
l'ate of $5,390.
)
Secretary
'Amulimmil r
BOARD OF GOVERNORS
OF THE
Item No. 1
5/18/59
FEDERAL RESERVE SYSTEM
WASHINGTON 25, D. C.
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
.lay 18, 1959.
Board of Directors,
Fidelity Bank & Trust Company,
Indianapolis, Indiana.
Gentlemen:
Pursuant to your request submitted through
the Federal Reserve Bank of Chicago, the Board of
Governors of the Federal Reserve System approves the
establishment of a branch at the intersection of West
16th Street and Lynhurst Road, Speedway, Indiana, by
Fidelity Bank & Trust Company, Indianapolis, Indiana,
provided the branch is established within six months
from the date of this letter, and the approval of the
State authorities is in effect at the time of the
establishment of the branch.
Very truly yours,
(Signed) Kenneth A. Kenyon
Kenneth A. Kenyon,
Assistant Secretary.
BOARD OF GOVERNORS
OF THE
Item No. 2
5/18/59
FEDERAL RESERVE SYSTEM
WASHINGTON 25. D. C.
ADDRESS OFFICIAL. CORRESPONDENCE
TO THE BOARD
May 18, 1959.
Board of Directors,
The Union Commerce Bank,
Cleveland, Ohio.
Gentlenent
Pursuant to your request submitted through the
Federal Reserve Bank of Cleveland, the Board of Governors
further extends to October 22, 1959, the time within Which
The Union Commerce Bank may, under the authority granted
in the Boardts letter of NoverLer 20, 1957, establish a
branch on the south side of Mayfield Road, west of S0V1
Center Road, Mayfield Heights, Ohio.
Very truly yours,
(Signed) Kenneth A. Kenyon
Kenneth A. Kenyon,
Assistant Secretary.
BOARD OF GOVERNORS
eowQ,00,%
a
OF THE
Th.
Item No. 3
FEDERAL RESERVE SYSTEM
5/18/59
WASHINGTON 25. D. C.
"
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
et.4
*:14(tteri
4***-
May 18, 1959.
MI% L. G. Pondrom, Vice President,
Federal Reserve Bank of Dallas,
Dallas 2, Texas.
Dear Mr. Pondrom:
This
1,1nder the Bank
r°fit Sharing
Texas, and
the
refers to your inquiries relating to the status,
Holding Company Act, of the Employees Deferred
Plan of the First National Bank in Cisco, Cisco,
Consumers Acceptance Company, Cisco, Texas.
1. With respect to the Employees Deferred Profit Sharing
lan (the "Plan"). - As indicated in its report to Congress of
MaY
nr11,1 1, 195 , containing recommendations for amendments to the Bank
Comoany Act, it is the Board's position that profit-sharing
T'ans and pension trusts do not fall within the definition of
j.,,rPanY" in section 2(b) of the Act. Accordingly, in the Board's
s'Tion, the Deferred Profit Sharing Plan of the First National
anic in Cisco is not a bank holding company.
2. With respect to Consumers Accontance Comnany ("Consumers").
bir
ectly and throw-ill subsidiarieTtSunland Insurance Company ("Sunland")
d C onsolidated Bankers Life Insurance Company), Consumers owns or
s6Zntrois only 5.2 per cent of the shares of First National Bank in
c se° ("First National") and .66 per cent of the shares of Grayson
43untY State Bank ("Grayson"). However, the Plan directly owns
Per cent of the shares of First National and 24.775 per cent of
tr shares of Grayson. Accordingly, if Consumers indirectly controls
c e shares owned by the Plan, Consumers would be a "bank holding
tilt/IN-TV", since it would directly or indirectly own or control more
25 per cent of the voting shares of two banks. The questions,
there
rcre, are whether on either of the grounds referred to in the
st,?ing Paragraphs, Consumers either controls the shares of bank
„.
:
4eK mined by the Plan or, through its relationship to the Plan,
"-ontrols the election of a majority of the directors of the two banks.
n
a. The same individuals constitute a majority of the
Boardi1 of Directors of Sunland and a majority of the Board of Directors
First
National. In the Board's opinion, this circumstance is not
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. L. G. Pondrom.
-2-
suf.'ficient, either alone or in combination with the surrounding
. ircumstances, to support a conclusion that Consumers controls the
arik shares owned by the Plan or controls the election of a majority
of the directors of the two banks.
b. The Plan is administered by eight advisors, two
Of whom are appointed by the directors of Consumers and another two
.?_7 the directors of Sunland, Consumers' subsidiary corporation. In
Board's opinion, the fact that the directors of Consumers and
tt8 subsidiary appoint four of these eight advisors, and that another
two advisors
are appointed by the directors of First National (a
!ajorit,y of whom constitute a majority of the directors of Sunland),
nad not justify a conclusion that Consumers either (a) controls the
bank shares owned by the Plan or (b) controls the election of a majorOf the directors of the two banks.
Accordingly, it is the Board's conclusion, on the facts
Presented, that Consumers Acceptance Company is not a "bank holding
c/111PanY" as defined in section 2(a) of the Act.
Very truly yours,
(Signed) Merritt Sherman
Merritt Sherman,
Secretary.
BOARD OF GOVERNORS
OF THE
Item No. 4
FEDERAL RESERVE SYSTEM
5/18/59
WASHINGTON 25, D. C.
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
Dear Sir:
The indicated number of copies of the following forms are
forwarded to your Bank under separate cover for use of State
xber banks and their affiliates in submitting reports as of the
e t call date. A copy of each form is attached.
bet
ng
r
44rIlber of
Form P.R. 105 (Call No. 152), Report of condition
of State member banks.
Form F.R. 105A.4, Announcement of a new item in the
schedule for loans and discounts and reconciliation
between present and revised schedules. (Supply will
be printed and forwarded following receipt of Budget
Bureau number.)
Form F.R. 105e (Revised November 1955), Publisher's
copy of report of condition of State member banks.
Form F.R. 105e-1 (Revised November 1955), Publisher's
copy of report of condition of State member banks.
Form F.R. 105e-2 (Revised November 1955), Publisher's
copy supplement.
Form F.R. 220 (Revised March 1952), Report of affiliate
or holding company affiliate.
Form F.R. 220a (Revised March 1952), Publisher's copy
of report of affiliate or holding company affiliate.
the
With the exception of form F.R. 105A.41 all of the forms are
same as those used on March 12, 1959.
The new form F.R. 105A.4 is an announcement of the new item
ct loans to financial institutions other than banks in the loan schedule
(Schedule A) and is the slip sheet reconciliation between present and
l'evised schedules which was mentioned in the March 13 memorandum forwarded to the Reserve Banks on March 19, 1959.
It will be used only at the forthcoming call, and it is under8 00d that similar forms will be used by the Office of the Comptroller
,2!,the Currency and by
Federal Deposit Insurance Corporation. This
"4-1-1 provide comparative data on both bases for one date for all insured
commercial
banks.
Enclosed are two memoranda setting forth the changes in the
we
reporting member bank series and in Schedule A of the call report
!_f: condition. They are in accordance with the Board's letter of March 19
:(1, one exception and one addition. It was originally proposed that
,`118 instructions, relating to real estate loans whereby real estate
mrtgages are acquired under repurchase agreements: would be revised
alld that these
mortgage loans would be removed from the present real
?tate loans category and classified against the new item of loans to
ilnancial institutions. Following negotiations with the other agencies
l':'e',was decided that there would be no change in the present instructions;
111;J- estate mortgage loans purchased under resale or similar agreements
continue to be classified as real estate loans. As mentioned in
the weekly
series memorandum, the Board has approved a new "money market"
ne series on an experimental basis. There will be no publication of the
w subseries outside of the Board and the Reserve Banks until the experilent has
received further study.
Please telegraph the number of forms F.R. 416(CT) that your
will need for the one-date rnconciliation; this form is derlefibed
tillellhe attached memorandum on the revision of the weekly reporting
pZr bank seres. The Dudget ureau number of the reyIeed form
' 1116 will be telegraphed ihon reeeived.
It is suz,gested thet the respondent banks be informed of the
reas,,
ranfl
'
"for the revisions being made. These 3re outlined in the memoth,'11112 and letter accompanying the Board's letter of March 19 and in
bac; attached memorandum on the revision of the weekly reporting member
zik ser1es.
As yet there has been no decision on a fall call or, if there
ilevi e, whether it will emit the loan schedule or include it on the
Revised instructions for the preparation of reports of
is on
condition .
will be distributed prior to the year-end and your suggestions
'eCarding revisions in the form or related instructions will be appreciated.
Very truly
rum,
nod) Merritt Sherman
Merri.tt Sherman)
Secretary.
Enclosures
LESID'ENTS OF ALL FEDERAL RESLP.VE BANKS
BOARD OF GOVERNORS
OF THE
Item No. 5
FEDERAL RESERVE SYSTEM
5/18/59
WASHINGTON 25. D. C.
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
May 18, 1959.
Dear Sir:
At the special session of the Presidents' Conference on Janu,
6) 1959, the Presidents discussed the Board's letter of December 23;
on the subject of rebate of unearned interest on prepaid borrowings from a Reserve Bank after a rate change. The minutes of the
conference state that:
After discussion, it was agreed that the Chairman of the
Conference would advise the Board that the Presidents continued to be of the opinion that there was no need for
uniformity; that they were unanimously of the view that each
Reserve Bank should determine its own policy; and that they
urged the Board of Governors to approve this disposition of
the matter. If the Board should insist on a uniform policy,
however, none of the Presidents would favor alternative (2),
but a majority would favor alternative (1).
The Board has again reviewed the matter and will not insist on
a lirtp
uatorm
policy with respect to rebate of unearned interest by the Fed—t
Jai Reserve Banks
an
in the immediate future. However, the Board believes
b
it would be desirable to move toward a policy whereby interest on
'
:
1 01,Tings would be charged at the discount rate or rates prevailing
d°1
the period of the borrowing. Borrowing banks would receive the
benefit of a reduction in the discount rate and at the same time would
_e aubject to an increased charge when the rate is raised. Enclosed is
a memorandum
outlining the Board's position.
It is suggested that the topic be discussed at the next regular
Meeting
of the Conference of Presidents.
Very truly yours,
OP
0.T
4ncicaure
Merritt (alb- an,
Secretary.
T° THE PRESIDENTS OF ALL FEDERAL RESERVE BANKS
it•
Should have read December 17, 1958.
FEDERAL RESERVE BANK DISCOUNT RATE POLICY
AND REBATE OF UNEARNED INTEREST
I8zisEaa/21
Federal Reserve Banks have always permitted prepayment of
borrowings by member banks and have rebated unearned discount.
When the Banks had different rates of discount for paper of
different maturities, the rebate of interest was computed at the rate
of discount for paper with a maturity corresponding most closely to
the unexpired term of the prepaid paper (October 1915 Bulletin;
F.R.L.S. #5662).
Since the rate was lower for the shorter maturities, this
Policy resulted in a discount charge for the period the borrowing was
fl effect
at a rate somewhat higher than the rate originally charged.
r,or xample, if 90-day paper rediscounted at 5 per cent was paid after
DO days and the discount rate was 4 per cent for 30-day paper, the
rebate would be made at 4 per cent and the effective rate charged for
the 60 days the borrowing was in effect would have been 5.5 per cent.
By 1923, the Banks no longer had different rates for different maturities of rediscounted paper. Under these circumstances, no
Penalty resulted from prepayment of borrowings since the rebate would
Qe made at the same rate at which the discount was made.
The policy of granting rebates of discount and the rate at
;Pia'
should be made was discussed by the Governors of the
rserve Banks at their March 1923 Conference. At that time, the Con'
erence adopted the policy now followed by 11 of the Banks whereby
1:ebates
are granted at the original rate unless the discount rate has
b
:een reduced in the meantime, in which case it is made at the prevailIng (lower) rate. After a rate reduction, this method results in an
affecttve rate for the period of the borrowing higher than the rate
at which the discount was made.
During the past year the Board and the Conference of Presiden+
vs have given consideration to the question of rebate of interest
Prepaid borrowings after a rate reduction. In a letter to the
tairman of the Presidents' Conference dated December 17, 1958, the
2,ard stated it was inclined to believe a uniform policy of rebating
;
4 interest on prepaid borrowings from Federal Reserve Banks after a
rate change would be desirable and that it would be prepared (1) to
17
9 ffirm the position taken by the Governors' Conference in 1923 and
0 to rebate at the lesser of the rate at which the discount was
or the current rate or (2) to adopt a new policy of rebating
diter a reduction in the discount rate at the rate in effect when the
02ocunt was made, provided that subsequent borrowings in equivalent
lesser amount prior to the original maturity of the prepaid discount
i
-2would be at the rate of the prepaid discount. After discussion of
the Board's letter at a special session of the Presidents' Conference
on January 6, 1959, the Presidents continued to be of the opinion there
was no need for uniformity. Should the Board insist on uniformity,
they were unanimously opposed to alternative (2) but would accept
alternative (1).
In a letter dated January 9, 1959, President Deming of the
Federal Reserve Bank of Minneapolis stated that he hoped the Board
1.7?uld not decide to adopt either of the alternatives and that he con.1,
a,/;,11elr to favor the policy or rebating unearned interest at the original
the current practice at the Minneapolis Bank. President Johns
of the Federal Reserve Bank of
St. Louis, in a letter dated January 12,
959
'expressed similar sentiments but indicated that the St. Louis
'dank would favor even more extending the benefit of a rate reduction
to all borrowers.
1
tE22psed Solution
At a recent meeting of the Board it was agreed that in the
light of long-time emphasis on decentralization, the Board would not
1-nsist on a uniform policy with respect to rebate of unearned interest,
ln the immediate future. Nevertheless, it was felt that the Banks
should work toward a uniform policy whereby Federal Reserve loan agreements would provide that the interest on borrowings would be figured
:
tat the discount rate or rates prevailing during the period of the
?orrowing. Borrowing banks would receive the benefit of a reduction
the discount rate and would be subject to an increased charge when
6ne rate is raised regardless of the maturity of the discounted paper.
This would be an equitable procedure and would not favor only
articular banks which under the present majority procedure benefit
!
-1"0111 long-term borrowings in case of a rate increase, or under the
im)ethod followed by the Minneapolis Bank, benefit from prepayment of
,
°rrowings after a rate reduction. There would be no penalty for pre-
During the discussion, it was questioned whether the policy
now
, followed by 11 of the 12 Banks was the most appropriate in the light
the purpose of changes in the discount rate; that is, if, after a
177-300unt rate reduction, a borrowing bank that prepaid its obligation
bere to receive a rebate of interest figured at the lower rate, the
rank tended to be penalized for making the prepayment, whereas the rate
truction would have been made with the general objective of reducing
aese cost of borrowing. This benefit should apply to current, as well
Q to future,
borrowers.
BOARD OF GOVERNORS
4001411,,,,),
OF THE
e tOW tig
Item No. 6
FEDERAL RESERVE SYSTEM
04
t•
\
5/18/59
WASHINGTON 25. D. C.
ADDRESS OFFICIAL CORRESPONOENCE
TO THE BOARD
May 18, 1959.
Mr. H. N. Mangels, President,
Federal Reserve Bank of San Francisco,
San Francisco 20, California.
Dear Mr. Mangels:
This will acknowledge receipt of letters from
Mr. Millard of April 20 and April 24, 1959, with enclo,
sures, regarding The Continental Bank and Trust Company
Salt Lake City, Utah.
ion
It will be appreciated if you will send informat
examiive
prospect
the
of
as soon as possible after the start
f
nation as to the condition of loans to Mildred D. Cosgrif
of
ively,
respect
and Enid B. Cosgriff, mother and wife,
President Cosgriff.
If it is found that the loans have not been
criticism,
removed or placed in a condition beyond adverse
to what
as
dation
recommen
the Board would appreciate your
of the
on
correcti
a
about
action should be taken to bring
unsatisfactory condition.
Very truly yours,
(Signed) Merritt Sherman
Merritt Sherman,
Secretary.
@FedFRASER