The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
111 609
Minutes for
To:
Members of the Board
From:
Office of the Secretary
May 19, 1966
Attached is a copy of the minutes of the
Board of Governors of the Federal Reserve System on
the above date.
It is not proposed to include a statement
with respect to any of the entries in this set of
minutes in the record of policy actions required to
be maintained pursuant to section 10 of the Federal
Reserve Act.
Should you have any question with regard to
the minutes, it will be appreciated if you will advise
the Secretary's Office. Otherwise, please initial
below. If you were present at the meeting, your
initials will indicate approval of the minutes. If
you were not present, your initials will ind*cate
only that you have seen the minutes.
Chm. Martin
Gov. Robertson
Gov. Shepardson
Gov. Mitchell
Gov. Daane
Gov. Maisel
Gov. Brimmer
e ,f
Minutes of the Board of Governors of the Federal Reserve System
on Thursday, May 19, 1966.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
The Board met in the Board Room at 10:00 a.m.
Robertson, Vice Chairman
Shepardson
Mitchell
Maisel
Brimmer
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Sherman, Secretary
Kenyon, Assistant Secretary
Broida, Assistant Secretary
Holland, Adviser to the Board
Molony, Assistant to the Board
Fauver, Assistant to the Board
Hackley, General Counsel
Brill, Director, Division of Research and
Statistics
Mr. Solomon, Director, Division of Examinations
Mr. Hexter, Associate General Counsel
Mr. O'Connell, Assistant General Counsel
Mr. Koch, Deputy Director, Division of Research
and Statistics
Mr. Partee, Associate Director, Division of
Research and Statistics
Mr. Williams, Adviser, Division of Research and
Statistics
Mr. Axilrod, Associate Adviser, Division of
Research and Statistics
Mr. Gramley, Associate Adviser, Division of
Research and Statistics
Mr. Sammons, Associate Director, Division of
International Finance
Leavitt, Assistant Director,Mr.Division of
Examinations
Miss Wolcott, Technical Assistant, Office of
the Secretary
Mr. Forrestal, Senior Attorney, Legal Division
Messrs. Eckert, Ettin, Fisher, Gehman, Keir,
Rosenblatt, and Trueblood of the Division
of Research and Statistics
Messrs. Burton, Egertson, Kline, and Poundstone
of the Division of Examinations
Approved items.
The following items were approved unanimously
after consideration of background information that had been made
5/19/66
available to the Board.
-2Copies are attached under the respective num-
bers indicated.
Item No.
Letter to Security Trust Company of Rochester,
Rochester, New York, approving the establishment of a branch in the Town of Irondequoit and
commenting on the bank's capital position.
1
Letter to The Provident Bank, Cincinnati, Ohio,
approving an extension of time to establish a
branch at Vine and Seventh Streets coincident
with the relocation of the bank's main office.
2
Letter to The Company for Investing Abroad,
Philadelphia, Pennsylvania, granting permission to purchase shares of Greyhound Financial
and Leasing Corporation A. G., Zug, Switzerland.
3
Telegram to the Federal Reserve Agent at
Minneapolis authorizing the issuance to
Bancorporation of Montana, Great Falls,
Montana, of a general voting permit covering its stock of (1) Central Bank of Montana,
Great Falls, Montana, (2) Citizens Bank of
Montana, Havre, Montana, and (3) Liberty Bank
of Montana, Chester, Montana.
4
Letter to the Chairman of the House Committee
On Ways and Means reporting favorably on
H.R. 11257, a bill relating to income tax
treatment of distributions by companies that
might become subject to the Bank Holding
Company Act of 1956 by reason of enactment
Of H.R. 7371.
5
With respect to Item No. 3, it was understood, pursuant to Vice
Chairman Robertson's suggestion, that Mr. Sammons would check into
certain circumstances surrounding this investment in terms of applicant's
adherence to the guidelines of the voluntary foreign credit restraint
5/19/66
-3-
program.
The question related to the fact that applicant's parent
bank had agreed to make available to the Swiss corporation a commitment to issue standby letters of credit up to $2 million to guarantee
Payment of the corporation's short-term obligations.
Mr. Sammons
subsequently arranged for the Federal Reserve Bank of Philadelphia
to be in touch with applicant and its parent bank to make sure they
understood the application of the guidelines to this kind of situation, particularly if the standby letters of credit were drawn upon.
Ruling on "hypothecated deposits" (Items 6 and 7).
There had
been distributed a memorandum dated May 13, 1966, from the Legal
Division relating to a request from the Federal Reserve Bank of
Cleveland that the Board review its unpublished 1928 ruling requiring member banks to maintain reserves, in accordance with Regulation D,
Reserves of Member Banks, against so-called "hypothecated deposits"
created by payments on instalment loans.
In reviewing the memorandum, Mr. Forrestal pointed out that
this ruling posed a problem for member banks in a few States, including
Ohio and Texas, where by law the books of commercial banks showed as
"deposits" the funds paid by a borrower on an instalment loan until the
loan was paid in full.
When banks received a payment on such a loan,
the outstanding amount of the loan was not reduced; rather, the payment
as held by the bank until the sum accumulated was sufficient to repay
the entire amount of principal and interest, at which time appropriate
5/19/66
-4-
accounting entries were made to eliminate the loan and the deposit
account.
In the meantime, the bank commingled the funds with its
other cash assets, but it did not pay any interest on the hypothecated
accounts.
The contracts between the banks and their customers were
drafted in such a way as to insure that the funds in the accounts
could not be reached by the "depositors" or third parties.
The
benefit the banks derived from this procedure was that interest could
be collected in advance and the payments spread over a specific number of months, thus permitting a greater rate of return than the rate
of simple interest permissible under State law.
While most other States had laws permitting commercial banks
to obtain the same return on instalment loans as that permitted in
Ohio, they did not require payments on the loans to be carried on
the banks' books as deposits.
The legal question involved was whether the payments were
deposits for purposes of Regulation D.
The Cleveland Bank argued
that to qualify as deposits, funds must be placed with a bank and
the person placing such funds must have the right to withdraw them.
The funds in question, however, were commingled with other cash assets
and were not used immediately to reduce the amount of debt.
quently, they might be regarded as payments.
Conse-
On the other hand, the
term "deposits" could be more widely interpreted, as in the Federal
5/19/66
-5-
Deposit Insurance Act where they were defined in part as "funds held
as security for an obligation due to banks or others
The
Board, of course, had authority under section 19 of the Federal Reserve
Act to define demand, time, and savings deposits for purposes of
reserve requirements, and it had previously held these hypothecated
funds to be deposits.
The Legal Division now recommended that the Board reverse its
1928 ruling (and certain subsequent interpretations) and declare that
funds placed in a bank clearly beyond the reach of the borrower and
third parties were not deposits regardless of the terms used in
relevant State statutes or in the bank's accounting procedures and,
therefore, were not subject to the reserve requirements of Regulation D.
A draft of letter to the Federal Reserve Bank of Cleveland reflected
this recommendation.
The Legal Division further recommended that the interpretation
be published in the Federal Register and in the Federal Reserve Bulletin.
At the conclusion of Mr. Forrestal's summary, Mr. Hackley stated
that he was in complete agreement with the recommendation.
It seemed
to him the significant factor was that the bank had no obligation or
liability to repay these funds.
Mr. Koch noted that there was the question whether reversal of
the 1928 ruling might result in more widespread use of the device,
With resultant distortion of consumer credit statistics and, in some
5/19/66
-6-
cases, possible evasion of State usury laws.
In final analysis, however,
the Research Division felt there was little or no justification from the
economic or monetary policy point of view for continuing the previous
ruling.
Consequently, he agreed with the recommendation of the Legal
Division.
Mr. Solomon also indicated agreement with the recommendation,
noting that the proposed reversal would eliminate an inequity, in certain States, between member and nonmember banks and between banks and
nonbank lenders.
In the ensuing discussion members of the Board explored a number
of questions directly and indirectly related to the problem under consideration, including the effective rates of return on instalment loans
in Ohio and other States, the extent to which member banks in Ohio and
Other States having similar laws were subjected to higher reserve requirements on the basis of "real" deposits, the possibility of encouraging
a voidance of State usury laws, bookkeeping mechanics involved in the
"hypothecated deposits" plan, and similarities and dissimilarities
between the use of these "deposits" and the technique of requiring
c°1uPensating balances.
At the conclusion of the discussion the recommendation of the
Legal Division was approved, Governor Mitchell dissenting,
along with
the letter to the Federal Reserve Bank of Cleveland (copy in the form
aPProved attached as Item No. 6), with the understanding that an
I
5/19/66
-7-
interpretation based thereon would be published in the Federal Register.
Attached as Item No. 7 is a copy of a letter sent to the Federal Reserve
Banks in this regard.
Governor Mitchell, in dissenting, noted that the issue was a
relatively minor one, centered primarily in one or two States, whereas
a reversal of the Board's earlier position might tend to encourage a
Spreading use of the device, through adaptation of compensating balance
practices, in order to avoid the impact of reserve requirements.
He
also observed that this was not the time to be releasing reserves.
Application of Baystate Corporation (Items 8 and 9).
There had
been distributed drafts of an order and statement reflecting the Board's
approval on April 13, 1966, of the application of Baystate Corporation,
Boston, Massachusetts, to acquire shares of Lynn Safe Deposit and Trust
Company, Lynn, Massachusetts.
The issuance of the order and statement was authorized.
Copies
of the documents, as issued, are attached as Items 8 and 9.
Messrs. Burton, Egertson, Kline, and Poundstone then withdrew
from the meeting.
Recommendations of Home Builders Association.
Governor Brimmer
brought to the attention of the Board a letter to Chairman Martin dated
May 16, 1966, from Mr. Larry Blackmon, President of the National Association of Home Builders, with which Mr. Blackmon enclosed copies of a
letter to the President of May 12 and various other papers expressing
the Association's concern about "a most serious problem with respect
5/19/66
to mortgage credit and the home building industry of the United States."
Certain recommendations were made with respect to actions that might
be taken, both in the area of monetary policy and otherwise, to alleviate
the situation.
Governor Brimmer said he understood that the letter to the President was receiving attention in certain other agencies.
The letter to
the Board requested comments, and it might be that some response should
be made as a matter of courtesy.
However, agencies within the Executive
Branch would no doubt be responding to the President about the points
in the May 12 letter that were within their purview.
Governor Maisel noted that he had attended a meeting of certain
Government officials with Mr. Blackmon.
He had sent to the other members
of the Board a memorandum of that meeting, and he would be sending them
today a memorandum of a meeting he had yesterday with Mr. Duesenberry of
the Council of Economic Advisers and Mr. Sternlight of the Treasury at
Which the discussion ranged over the problems and possible policies
raised by restricted flows of money to savings and loan associations
and the mortgage market.
Without doubt, he said, this area was hit
harder by a restrictive monetary policy than other sectors of the
economy.
The Board's reaction, he thought, almost had to be one of
a greeing that there was a problem, and that it was up to the Administration and the Congress to do something about the problem if they
w anted.
He agreed with the view that the position of the Home Builders
o
t,
5/19/66
-9-
Association was basically one of special pleading.
But the Association
was right in the sense that if a restrictive monetary policy was used,
this was one of the costs.
Preparation for hearings.
By way of general preparation for the
House Banking and Currency Committee hearings on H.R. 14026, a bill to
Prohibit issuance by insured banks of negotiable certificates of deposits
and other similar negotiable instruments, and H.R. 14422, a bill to
Prohibit insured banks from issuing time deposits in denominations of
less than $15,000,a staff economic and financial review was presented.
Mr. Gehman spoke on production and prices, Mr. Trueblood on GNP and
the labor market, Mr. Keir on savings flows, and Mr. Fisher on mortgage
market and construction activity.
It was understood that copies of their
s tatements would be distributed to the members of the Board to augment
the supporting charts and tables distributed at this meeting.
There ensued a general discussion during which it was understood
that a revised draft of statement to be presented before the Committee
by Vice Chairman Robertson, on behalf of the Board, next Tuesday would
be prepared by the staff after the scope of Secretary Fowler's testimony
today had become known, the draft then to be reviewed by the Board.
(The Secretary was expected to include in his testimony a proposal for
an amendment to the law that would authorize the imposition of lower
interest rate ceilings on the portions of time and savings deposits
that were under the maximum amount eligible for deposit insurance.)
_4
I
5/19/66
I
-10-
The Vice Chairman also expressed the view that there would appear no
need, in the light of developments, for the Board to send a letter to
the Committee Chairman reporting on H.R. 14026 and H.R. 14422, since
the Board's position would be made known in the statement presented
next Tuesday, and there was general agreement with this view.
In the course of the discussion Governor Shepardson reported
that following the Board meeting on Tuesday, and after talking long
distance with Chairman Martin, he (Governor Shepardson) called Under
Secretary of the Treasury Barr and told him that (1) the Board had
no objection to a revision of the hearing schedule whereby Secretary
Fowler would appear on May 19, the date formerly set for the Board;
(2) the Board would not offer objection to the Treasury proposal, as
presented to the Board, nor would it take a position of sponsoring
the proposal; and (3) the Board was not committing itself, if the
a mendment should be enacted, as to any form of implementation of the
authority.
Under Secretary Barr, he said, agreed that this was an
a ppropriate position for the Board to take.
Governor Brimmer said that in conversations with Under Secretary
Barr and Mr. Sternlight he had indicated that although the Board had
adopted essentially a neutral position with respect to the Treasury
Proposal, he was quite certain that individual Board members, if asked
at
the hearing, might well express a view that the proposed amendment
81.
-11-
5/19/66
was not the best way in which to deal with the problem and that they
would prefer alternatives, which they might or might not specify.
The
fact that the Board was not opposing the proposal did not mean that
individual members would necessarily remain silent and fail to express
their personal views.
Governor Shepardson stated that he had also called to Mr. Barr's
attention the fact that the proposed amendment, in the form presented
to the Board, appeared to indicate that the lower interest rate would
apply to the total amount of time deposits of $10,000 or over.
Mr.
Barr, he said, stated that this was not the intent and that the proposal
would be amended to make the lower rate applicable only to the insured
Portion of a deposit.
Foreign travel.
Mr. Reynolds, Adviser in the Division of Inter-
national Finance, was authorized to travel to Paris, France, to attend
a meeting of Working Party 2 of the OECD, to be held on May 25-27, 1966,
With per diem at the rates prescribed in the Standardized Government
Travel Regulations.
Composition of delegations.
Earlier this year Chairman Martin
accepted on behalf of the Federal Reserve System an invitation from
President Elizalde of the Central Bank of the Argentine Republic to
send a delegation to participate in the Eighth Meeting of Technicians
of Central Banks of the American Continent and the Ninth Operating
Meeting of CEMLA, which would be held in Buenos Aires in November 1966.
-12-
5/19/66
Mr. Sammons, in a memorandum dated May 16, 1966, now recommended that
the composition of the delegations be as follows:
(1) for the Tech-
nicians' Meeting--three representatives of the Board, including, as
head of the delegation, the Director or Associate Director of the
Division of International Finance, and three Bank representatives
(one each from the Federal Reserve Banks of New York, San Francisco,
and Cleveland); and (2) for the Operating Meeting--the Director or
Associate Director of the Division of International Finance as head
of the delegation, two representatives from the Federal Reserve Bank
of New York, and one each from the Federal Reserve Banks of Dallas
and Minneapolis.
Following discussion, agreement was expressed with the recommended composition of the delegations.
The meeting then adjourned.
Secretary's Note: Governor Shepardson
today approved on behalf of the Board
memoranda recommending the following
actions relating to the Board's staff:
APPointments, effective the respective
242tes of entrance upon duty
Division of Personnel Administration
Name and title
Prances Eva Burton, Clerk-Typist
Ladonia Ann Dressler, Stenographer
Diane Dzik, Stenographer
Susan K. Huffman, Stenographer
Vickie Mae Hulteen, Stenographer
Basic annual salary
$3,814
4,149
4,149
4,797
4,149
178.;
5/19/66
-13-
Appointments, effective the respective
dates of entrance upon duty (continued)
Division of Personnel Administration
Name and title
Donna Ann Jameson, Clerk-Typist
Suzanne Marie MacDonald, Stenographer
Lynn Marie Ottem, Stenographer
Sudie Gay Phillips, Stenographer
Patricia Ann Russell, Stenographer
Barbara Jane Sawyer, Stenographer
Nancy Lee White, Stenographer
Basic annual salary
$3,814
4,797
4,149
4,149
4,149
4,149
4,149
Secretary_.)
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Item No. 1
5/19/66
INASI-HNGTON, D. C. 20551
ADDRESS
OFFICIAL
CORRESPONDENCE
TO THE BOARD
May 19, 1966
Board of Directors,
Security Trust Company
of Rochester,
Rochester, New York.
Gentlemen:
The Board of Governors of the Federal Reserve System
approves the establishment by Security Trust Company of Rochester,
Rochester, New York of a branch in Stutson Bridge Plaza, located
approximately 750 feet east of the intersection of Pattonwood
Drive and Thomas Avenue, Town of Irondequoit (unincorporated area)
Monroe County, New York, provided the branch is established within
six months from the date of this letter.
The Board notes that the most recent examination of your
bank reveals a somewhat less than satisfactory capital position and
concurs in the Reserve Bank's suggestion that consideration be
given to the raising of additional capital funds.
Very truly yours,
(Signed) Karl E. Bakke
Karl E. Bakke,
Assistant Secretary.
(The letter to the Reserve Bank stated that the
Board also had approved a six-month extension
Of the period allowed to establish the branch;
and that if an extension should be requested,
the procedure prescribed in the Board's letter
°f November 9, 1962 (S-1846), should be followed.)
85
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Item No. 2
5/19/66
WASHINGTON, D. C. 20551
ADDRESS orraciAL CORRESPONDENCE
TO THE BOARD
May 19, 1966
Board of Directors,
The Provident Bank,
Cincinnati, Ohio.
Gentlemen:
The Board of Governors of the Federal Reserve
System extends to December 27, 1967, the time within which
The Provident Bank, Cincinnati, Ohio, may establish a
branch at the southeast corner of Vine and Seventh Streets,
Cincinnati, Ohio, coincident with the relocation of The
Provident Bank's main office from that location to the
southeast corner of Vine and Fourth Streets, Cincinnati,
Ohio.
Very truly yours,
(Signed) Karl E. Bakke
Karl E. Bakke,
Assistant Secretary.
1 78(
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Item No. 3
5/19/66
WASHINGTON, D. C. 20551
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
May 19, 1966.
The Company for Investing Abroad,
Fidelity-Philadelphia Trust Building,
Philadelphia, Pennsylvania. 19109
Gentlemen:
As requested in your letter of April 27, 1966, the Board
of Governors grants consent for your Corporation to purchase and
hold 272 Class "B" shares of Greyhound Financial and Leasing
Corporation A.G. ("GAG"), Zug, Switzerland, at a cost of approximately
US$326,400, provided such stock is acquired within one year from the
date of this letter. In this connection, the Board also approves
the purchase and holding of such shares in excess of 10 per cent of
Your Corporation's capital and surplus.
The foregoing consent is being given with the understanding
that the investment now being approved, combined with other foreign
loans and investments of your Corporation and Fidelity-Philadelphia
Trust Company will not cause the total of such loans and investments
to exceed the guidelines established under the voluntary foreign
credit restraint effort now in effect and that due consideration is
being given to the priorities contained therein. The Board considers
that compliance with the priorities expressed in Guideline 4 would
require that total nonexport credits to developed countries in
Continental Western Europe not exceed the amount of such loans and
investments as of the end of 1965, unless this can be done without
inhibiting the bank's ability to meet all reasonable requests for
Priority credits within the over-all target.
Very truly yours,
(Signed) Karl E. Bakke
Karl E. Bakke,
Assistant Secretary.
I
TELEGRAM
LEASED WIRE SERVICE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON
Item No. 4
5/19/66
May 19, 1966.
BEMIS - MINNEAPOLIS
KELE
A. Bancorporation of Montana, Great Falls, Montana
B. Central Bank of Montana, Great Falls, Montana
Citizens Bank of Montana, Havre, Montana
Liberty Bank of Montana, Chester, Montana
C.
Prior to issuance of permit authorized herein, Applicant shall
execute and deliver to you, in duplicate, an agreement in form
accompanying, Board's letter S-964 (F.R.L.S. #7190).
(Signed) Karl E. Bakke
BAIUCE
Definition of KEBJE
The Board authorizes the issuance of a
general voting permit, under
the provisions of section 5144 of the Revised Statutes of the
United States, to the holding company affiliate named below
after the letter "Au, entitling such organization to vote the
stook which it owns or controls of the bank(s) named below
after the letter "Bn at all meetings of shareholders of such •
bank(s), subject to the condition(s) stated below after the
letter 40". The period within which a permit may be issued
pursuant to this authorization is limited to thirty days from
the date of this telegram unless an extension of time is granted
by the Board. Please proceed in accordance with the instruc—
tions contained in the Board's letter of March 10, 1947,
(8•.964).
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Item No. 5
5/19/66
WASHINGTON
OFFICE OF THE VICE CHAIRMAN
May 19, 1966
The Honorable Wilbur D. Mills,
Chairman,
Committee on Ways and Means,
Rouse of Representatives,
20515
Washington, D. C.
Dear Mr. Chairman:
This is in reply to Mr. Irwin's letter of May 12, 1966,
s
concerning H.R. 11257, relating to distributions by companie
1956
of
Act
Company
that may become subject to the Bank Holding
by reason of enactment of H.R. 7371.
The Bank Holding Company Act of 1956 prohibits any
bank holding company from engaging in any nonbanking business
or acquiring more than 5 per cent of the voting shares of any
such business, and requires bank holding companies to divest
any such interests previously acquired. As enacted in 1956, the
Act includes provisions designed to make sure that those who are
requireforced to dispose of property because of this divestiture
ment will not suffer unfavorable tax consequences. The Board
ures
believes that this same principle should apply to divestit
ation.
consider
under
now
ts
amendmen
the
of
required as a result
lWhile we are not competent to comment on the technica
by
drafted
ities of H.R. 11257, we understand that it has been
tatives
Represen
of
House
the
of
Counsel
the Office of Legislative
e
objectiv
the
with
nt
Departme
in consultation with the Treasury
pending
the
by
covered
s
Of providing for holding companie
provided in 1956. On
amendments tax treatment similar to that
be able to act
will
e
this basis, we hope that your Committe
Promptly and favorably on H.R. 11257.
Sincerely,
(Signed) J. L. Robertson
J. L. Robertson.
1789
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON. D. C. 20501
Item No. 6
5/19/66
.
AOOPIES• OrrICHAL 0011101ESPONOICHOIC
TO THE BOARD
May 25, 1966
Hr. W. Braddock Hickman, President,
Federal Reserve Bank of Cleveland,
Cleveland, Ohio. 44101
Dear Hr. Hickman:
This is in reply to your letter of December 3, 1965,
requesting the Board to re-examine its 1928 ruling that member banks
must maintain reserves, in accordance with Regulation D, against
hypothecated "deposits" created by payments on installment loans.
It is understood that in Ohio, where a majority of these
accounts are held, the books of commercial banks show as "deposits"
the funds that are paid by a borrower on an installment loan, until
the loan is paid in full. The amounts received are not immediately
used to reduce the unpaid balance due on the note, but are held by
the bank until the sum of the payments equals the entire amount of
principal and interest. It is further understood that the banks
commingle the funds received in repayment of such installment loans
with their other cash assets, but do not pay any interest on these
hypothecated accounts. The contracts between certain banks in Ohio
and their customers are drafted in such a way as to insure that the
funds in the accounts cannot be reached by the depositor or third
parties. According to the material submitted with your letter,
8ection.1115.10 of the Ohio Revised Code requires payments on installment loans to be denominated as "deposits" if interest at the
maximum rate permitted by law is to be collected in advance, and
payments on the full amount of the loan are to be made over a predetermined number of months.
In 1928, the Board first ruled that member banks must
maintain reserves against such hypothecated deposits. An interpretation to that effect was published in 1931 (1931 Fed. Res.
Bull. 538), and the Board has continued to adhere to that position.
The Board has reconsidered its earlier rulings and has
decided that where the agreement between the bank and borrower is
1,790
Mr. W. Braddock Hickman
such that installment payments on loans are irrevocably assigned to
the bank and cannot be reached by the depositor or his creditors,
such payments are not "deposits" regardless of the terms used in
relevant State statutes or in the bank's books and records and,
therefore, are not subject to the reserve requirements of
Regulation D.
The Board's earlier rulings on this subject are superseded
to the extent that they conflict with the conclusion expressed herein.
Very truly yours,
(Signed) Merritt Sherman
Merritt Sherman,
Secretary.
f
Item No. 7
5/19/66
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
S-1994
WASHINGTON, D. C. 20551
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARO
May 25, 1966.
Dear Sir:
Enclosed is a copy of an interpretation of the Board
regarding reserves against funds received by member banks in
connection with instalment loans. This interpretation will be
published shortly in the Federal Register and the Federal Reserve
Bulletin; however, it is assumed that the Reserve Banks concerned
will wish to send copies of the interpretation to member banks
for their information at once.
The interpretation is to be applied effective with
reserve computation periods beginning June 9, 1966.
Very truly yours
Merritt ShermAn,
Secretary,.
Enclosure
TO THE PRESIDENTS OF ALL FEDERAL RESERVE BANKS.
S- 1994-a
Reserves Against Funds Received by Member Banks
In Connection with Instalment Loans
The Board of Governors has been asked to re-examine its 1928
ruling that member banks must maintain reserves, in accordance with
Federal Reserve Regulation D (12 CFR 204), against hypothecated
"deposits" created by payments on instalment loans.
It appears that in some States the books of commercial banks
Show as "deposits" the funds that are paid by a borrower on an instalment loan, until the loan is paid in full.
The amounts received are
not immediately used to reduce the unpaid balance due on the note, but
are held by the bank until the sum of the payments equals the entire
amount of principal and interest.
terms of the agreement
It is understood that under the
between the banks and their customers the
funds so received are assigned to the bank and cannot be reached by
the borrower or his creditors.
It' 1928, the Board first ruled that member banks must maintain
reserves against such hypothecated deposits.
An interpretation to that
effect was published in 1931 (1931 Fed. nes. Bulletin 538), and the
Board has continued to adhere to that position.
The Board has reconsidered its earlier rulings and has
decided that where the agreement between the bank and borrower is such
that instalment payments on loans are irrevocably assigned to the
bank and cannot be reached by the borrower or his creditors, such payare not "deposits" regardless of the terms used in relevant State
statutes or in the bank's books and records and, therefore, are not
subject to the reserve requirements of Regulation D.
1793
5-1994-a
The Board's earlier rulings on this subject are superseded
to the extent that they conflict with the conclusion expressed herein.
Board of Governors of the
Federal Reserve System.
May 25, 1966.
1794
Item No. 8
5/19/66
UNITED STATES OF AMERICA
BEFORE THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON, D. C.
IND
In the Matter of the Application of
BAYSTATE
CORPORATION,
BOSTON, MASSACHUSETTS,
lOr approval of the acquisiti
on of
v°ting shares of Lynn Safe Deposit
and Trust Company, Lynn, Massachusetts.
alb
ORDER APPROVING APPLICATION
UNDER BANK HOLDING COMPANY ACT
There has come before the Board of Goveruors, pursuant
tcs section 3(a)(2) of the Bank Holding
Company Act of 1956
(12 U.S.C. 1842(a)(2)) and section 222.4(a)(2) of Federal Reserve
4gulation Y (12 CFR 222.4(a)(2)),
an application by Baystate
C°tPoration, Boston, Massachusetts, a registere
d bank holding
"alPanY, for the Board's prior approval of the acquisition of
Up
to 100 per cent
of the outstanding voting shares of Lynn Safe
Posit and Trust Company, Lynn, Massachus
etts.
As required by section 3(b) of the Act, notice of receipt
°E t,
1*:?- application was given to, and views and recommendation
of, the Commissioner of Banks for the State of Massachusetts.
-2-
1795
The Commissioner advised the Board that, pursuant to State law, a
Board
petition had been filed by Applicant with the Massachusetts
tion,
Of Bank Incorporation for prior approval of the proposed acquisi
and a hearing would be held thereon.
The Massachusetts Board sub-
was
sequently approved the acquisition, and the Board of Governors
So notified.
ed in
Notice of receipt of the application was publish
the Federal Register on January 28, 1966 (31 Federal Register 1167),
comments
Providing an opportunity for interested persons to submit
and views with respect to the proposed acquisition.
The time for
d
filing such comments and views has expired, and all those receive
have been considered by the Board.
the
IT IS HEREBY ORDERED, for the reasons set forth in
and hereby
Board's Statement of this date, that said application be
is approved, provided that the acquisition so approved shall not
be consummated (a) within seven calendar days after the date of this
Order or (b) later than three months after said date.
1966.
Dated at Washington, D. C., this 19th day of May,
By order of the Board of Governors.
Voting for this action: Chairman Martin, and
and Brimmer.
Governors Shepardson, Mitchell, Daane, Maisel,
Absent and not voting:
Governor Robertson.
(Signed)
Merritt Sherman
Merritt Sherman,
Secretary.
(sEAL)
Item No. 9
5/19/66
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
APPLICATION BY BAYSTATE CORPORATION, BOSTON, MASSACHUSETTS,
FOR APPROVAL OF THE ACQUISITION OF VOTING SHARES OF
LYNN SAFE DEPOSIT AND TRUST COMPANY, LYNN, MASSACHUSETTS
STATEMENT
Baystate Corporation, Boston, Massachusetts ("Applicant")
a registered bank holding
company, has applied to the Board of
Governors under the Bank Holding Company Act of
1956 ("the Act'),
for
Permission to acquire up to 100 per cent of the outstanding
"ting shares of Lynn Safe Deposit and Trust Company, Lynn,
ssachusetts ("Bank").
is
Applicant's bank holding company system
1/
comprised of ten subsidiary banks which, at June 30, 1965,-
°Aerated 130 banking
offices and held deposits of about $650 million.
Acquisition of Bank would add one banking office to Applicant's
4stem and about $6 million in deposits.
Views and recommendation
of supervisory authority. - As
equired by section 3(h) of the Act, the Board notified
the Commissioner
f /Ianks for the State of Massachusetts of receipt of the
application
444 requested his views and recommendation thereon.
The Commissioner
Plied that,pursuant to State law, a petition had also been
filed
r
:
li I ae7
s-S otherwise indicated, all banking data noted are as of
"18 date.
1797
-2-
by Applicant for a hearing before the Massachusetts Board of Bank
Incorporation with respect to the same matter.
The Massachusetts
Board subsequently approved the acquisition, and the Board of Governors
was so notified.
Statutory factors. - Section 3(c) of the Act requires the
Board to take into consideration the following five factors: (1) the
financial history and condition of the holding company and the banks
concerned; (2) their prospects; (3) the character of their management;
(4) the convenience, needs, and welfare of the communities and the
area concerned; and (5) whether or not the effect of the proposed
acquisition would be to expand the size or extent of the bank
holding company system involved beyond limits consistent with adequate
and sound banking, the public interest, and the preservation of
e'ftpetition in the field of banking.
Financial history and condition, prospects, and management
-9.4-.11pPlicant and Bank. - The financial history and coadition of
APPlicant are satisfactory, its prospects appear favorable, and its
Illanagement is regarded as capable and experienced.
ate
These conclusions
based in part on the sound financial history and condition and
the satisfactory deposit and earnings growth evidenced with respect
t0 APplicant's subsidiary banks.
Bank, chartered in 1887, also has a history of sound
°Perations and good earnings
4iIt'e regarded as satisfactory.
and its present condition and prospects
Bank's management is competent and
-3-
experienced, although somewhat conservative as evidenced by Bank's
relatively slow deposit growth in recent years.
Applicant asserts
that Bank is faced with a management succession problem in that
none of Bank's present staff is qualified to replace the president
and another senior officer, who are,respectively, 60 and 59 years
°f age.
Any problem with respect to management succession is made
less immediate by the fact that the two officers mentioned have
agreed to remain with the bank for a least another 16 months,
assuming approval of Applicant's proposal.
Thus Applicant's pro-
Posed assistance with respect to providing qualified first and
8eoond line management, while consistent with approval of the
aPPlication, offers little affirmative basis therefor.
Convenience, needs, and welfare of the communities and area
S-12aStKatst. - Bank's primary service area, from which it derives about
84 per cent of its deposits of individuals, partnerships, and corporati°fls ("IPC deposits"), consists of the City of Lynn and the adjointown of Swampscott.
1°7,000.
The 1965 population of this area was nearly
Lynn, which is about 11 miles northeast of Boston, is
highlY industrialized.
Nearly 23,000 persons are employed by some
"
2 manufacturing firms in Lynn, the largest of which is General
lectric Company.
In addition, nearly 800 wholesale and retail trade
°Iltlets in the city employ more than 7,000 persons.
Swampscott, about
47° miles east-northeast of Lynn, is primarily a residential suburb
"
4 summer resort with limited commercial and industrial development.
1799
-4-
A large number of Swampscott residents work in Boston and daily travel
some thirteen miles between the two locations.
Swampscott is charac-
terized by Applicant as a rather stable community with a large number
Of relatively high income families.
The record in this matter fails to establish that there are
Presently any unserved major banking needs in Bank's service area, nor
is it contended that Bank, operating as a subsidiary of Applicant, will
Provide services that are not presently available through it and the
Other banks serving the area.
Rather, the thrust of Applicant's pro-
Posal is to furnish for or make available to Bank, as Applicant states
it has done for its present subsidiary banks, a number of operating
4nd management services, chief among which are data processing, invest°lent analysis, and administration of group life insurance, pension,and
Pro
fit-sharing plans.
Applicant asserts that the proposed services will
tesult in more aggressive operational policies within Bank with the
el4)ectation that Bank will bewme a stronger competitor within its
trade
area, and thus help improve generally the quantity and quality
°f banking services therein.
It is reasonably concluded that Applicant's
Pr°Posed assistance will aid Bank in making more efficient its own
°Perations, thus ultimately affording improved
services to its
customers.
As to Applicant's proposal to make available through Bank
tertain direct customer services, the principal such service would
be
the referral by Bank of certain credit demands, asserted by
MOO
APPlicant not usually met by commercial banks, to a small business
investment corporation which is wholly owned by nine of Applicant's
ten subsidiary banks.
While the prospect of this credit rendition
is a consideration weighing somewhat toward approval of the application, the fact is that the volume of loan business presently being
handled by this small business investment subsidiary is so relatively
small as compared with the loan business done by Applicant's banks
that its contribution to Bank's lending ability appears minimal.
On the basis of the evidence presented bearing on the
convenience, needs, and welfare of the communities and area involved,
the Board concludes that such evidence is consistent with approval
of the application.
Effect of proposed acquisition on adequate and sound banking,
Itt—P.M.121is_ipterest, and banking competition. - Applicant's ten
subsidiary banks operate 18 per cent of the State's commercial banking
qfices and hold about 10 per cent of the deposits of such commercial
banks; comparable percentages with respect to commercial and mutual
eslangs banks in the State are 13 and 4, respectively.
The two bank
41ding companies operating in Massachusetts control about 21 per
cent of the commercial bank deposits and nine per cent of all bank
clePosits in the State.
Bank is located in Essex County and under State law is
not Permitted to establish branches outside that county.
Its deposits
($s million of IPC deposits and $6 million of total deposits) account
-6-
18W
for less than two per cent of the IPC and total deposits held by the
24 commercial banks in the county, and only about one-half of one per
cent of such deposits held by the 47 commercial and mutual savings
banks located there.
Applicant presently has two subsidiary banks
in Essex County, operating 21 per cent of the county's commercial
banking offices and 14 per cent of the offices of all banks.
The
h70 subsidiary banks hold about 11 per cent of the IPC and total
Posits of commercial banks, and three per cent of such deposits of
all banks, located in the county.
Approximately seven per cent of the
IPC and total deposits of commercial banks, and two per cent of such
dePosits of all banks, located in the county are held by a subsidiary
of Shawmut Association, Inc., the State's other registered bank holding
e°111Pany.
Because of the relatively small size of Bank, and in view of
the large number of alternative banking sources available, including
the 23 savings banks located in the county that hold in the aggregate
°I/er twice the total deposits held by all commercial banks, the
4e4uisition of Bank by Applicant would not, in the Board's judgment,
l'esult in an undue concentration of banking resources under the control
°f APplicant's holding company system in either Essex County or the
State of Massachusetts.
A similar conclusion applies with respect to
LInk's primary service area (wherein there are presently no subsidi41sies of bank holding companies) inasmuch as Bank's IPC and total
leP°aits constitute only about seven per cent of such deposits of
-7-
1802
commercial banks and only about two per cent of such deposits of all
banks headquartered in that area.
The offices of Applicant's subsidiaries which are nearest
to Bank are the main office and a branch of Beverly Trust Company
situated, respectively, nine miles and five miles from Bank.
There
are a number of offices of other banks located in the areas separating
Ilenk from these two offices, and the intervening areas appear to be
heavily populated.
These two offices of Beverly Trust Company
combined derive only about $60,000 of IPC deposits, or about one per
cent of their total IPC deposits, from Bank's primary service area.
48 before noted, Bank derives only about 16 per cent of its IPC
deposits from all areas outside its primary service area.
Thus, in
iew of the generally local nature of Bank's business, the small
ernount of deposits which Applicant's banks presently derive from
Bank's primary service area, and the large number of alternative
°utlets available in the area concerned, the Board concludes that
there would be no significant competition eliminated or foreclosed
4 a result of consummation of this proposal.
As to the probable effect of Applicant's proposal on the comPetitive position of other banks serving the area, within Bank's service
°tea it is in direct competition with the following banking offices:
six
°Qices of Essex County Bank and Trust Company, with $48 million of
deposits; three offices of Security-Danvers National Bank, with $38 million
°f deposits; one office of North Shore Bank and Banking Company,
-8-
1 Si
2/
a $3 million institution which was formerly a Morris Plan Bank;— and
e total of five offices of two mutual savings banks each of which
bank has deposits in excess of $90 million.
Thus, within its primary
service area, bank competes with four substantially larger banks,
and one smaller bank with limited lending activities.
Applicant's
subsidiary banks located in Essex County, with deposits of $30 million
and $12 million, respectively, are each smaller in terms of total
'Posits than four of the five competing banks located in Bank's
Primary service area; and the only banking institution situated in
that service area which is smaller than Bank and also smaller than
each of Applicant's Essex County subsidiaries is not competing
generally for all types of business as are the other banking institutions.
On the basis of the foregoing, it is the Board's opinion
that Applicant's acquisition of Bank will not adversely affect the
P°sition of any of the other banks located and competing in the
LYnn-Swampscott area.
Rather, in view of the apparent lack of
a2
-gressiveness evidenced by Bank's failure to increase significantly
its deposit size in recent years, it is reasonably concluded that
ilank's operation under Applicant's control may provide an element
Of
increased competition that will benefit Bank and its present and
11(3aPective customers.
bank's operations are limited in that, although it holds both
'
Illand and time deposits, it engages only in instalment lending.
-9-
1804
Consideration has also been given to the probable effect of
APPlicant's acquisition of Bank on correspondent bank relationships
that potentially could be affected by the acquisition.
has no subsidiary bank situated in Boston
Applicant
to which business from
its subsidiaries, principal
ly credit overlines, might be directed.
Censequently, the institutions competing with Bank in its primary
service area would have no reason to shift correspondent accounts
in Boston to avoid giving business to an affiliate of a local
ceNaotitor, nor would Bank's customers be relegated to but a single
source of correspondent bank service.
It appears to the Board that
"nsummation of Applicant's proposal will have no measurable impact
°II existing correspondent bank relationships.
In the light of the foregoing considerations and all the
E4cts in the record, the Board concludes that consummation of the
aubject proposal would not increase Applicant's size or extent beyond
limits consistent with adequate and sound banking, the public interest,
and the
preservation of competition in the field of banking.
On the basis of the entire record before the Board, and in
the light of the factors set forth in section 3(c) of the Act, it is
the Board's judgment that the proposed acquisition would be consistent
Ilith the public interest and that the application should therefore
be
Pproved.
111Y 19, 1966.
@FedFRASER