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1.!--4,t1(b Minutes of actions taken by the Board of Governors of the Pederal Reserve System on Monday, November 3, 1952. The Board met in the Board Room at 10:00 a.m. PRESENT: Mr. Mr. Mr. Mr. Martin, Chairman Evans Mills Robertson Mr. Mr. Mr. Mr. Mr. Carpenter, Secretary Kenyon, Assistant Secretary Thurston, Assistant to the Board Solomon, Assistant General Counsel Chase, Assistant Solicitor Before this meeting the attention of the members of the Board who 1/el'e in their offices had been called to a further letter addressed to the lIcard under date of October 21, 1952, by Mr. C. F. 1,ente, President of of iuuerica National Trust and Savings A.,sociation, San Francisco, California, acknowledging receipt of the Board's letter of October 15, 1952, /lith respect to participation by the bank in the forthcoming nomination and election of Class A and R directors of the Federal Reserve Rank of San 4ancisco. Mr. INente's letter stated that the Board appeared to have denied the bank's request that it re-examine the situation with respect to the "filiation between the bank and Transamerica Corporation on the ground tb u, since the Clayton tl.ct proceeding against the corporation was pending 1. the courts, the Board was unwilling at this time to consider events that aken place since the closing of the record in that case. It also stated that in addition to the new developments referred to in Mr. Wente's letter of 1857 11/3/52 -2- September 27, 1952, Transamerica Corporation had sold to the general public tlle balance of its former stock interest in Bank of America National Trust extd Savings Association. The letter contained the further statements that ta the circumstances, the position taken in the Board's letter of October 15 seemed to be completely inconsistent with the Board's statutory responsibility to determine the issue of affiliation for the purposes of section 4 of the Pederal Reserve Act and that this issue involved different questions and /las Presented in different circumstances from those considered in the Board's Prior determination in the Clayton Act proceeding. Consideration had been given to the question whether the letter celled for reply and it had been suggested that, since the election polls 1/0111d not open until November 10, the Board should reply. Accordingly, the tollowing draft of reply had been prepared: "The Board has received and carefully considered your letter of October 21, 1952. However, it does not believe the additional fact and arguments contained therein warrant any change in its position." During a discussion of the question whether a reply should be made, it was stated that although articles had appeared in the press before the 4te of the Board's letter of October lj to the effect that Transamerica N'Poration had disposed of its stock holdings in Bank of America National and Savings Association, this development had not been mentioned in /14'. Wente's letter of September 27 nor had the Board been advised to that 11/3/52 -3- effect officially by the holding company affiliate or the national bank arid, therefore, no reference to that development had been made in the Board's letter. In the course of the discussion, Mr. Solomon referred to the Portion of the Administrative Procedures Act which states that anyone who ' 411ea a request of a Gcvernment agency and who is denied that request °All be entitled to be notified of such denial. At the conclusion of the discussion, the proposed reply to Mr. Wente was approved unanimously, for transmittal through Mr. Wilbur, Chairman of the Federal Reserve Bank. of San Francisco. Chairman Martin referred to a memorandum addressed to him under °ate of October 27, 1952, by Mr. Thurston, Assistant to the Board, in hiell Mr. Thurston stated that pursuant to the request of the Board at tlie rieeting on October 20, 1952, he had considered the replies which 010 lad be made to two letters received by Mr. Sprecher, Assistant Director, 4"-s/on of Personnel Administration, from officials of the Congress of /t Ustrial Organizations and the American Friends Service Committee, re- electively. With regard,to the first letter, Mr. Thurston favored comply- with the request for two copies of the Board's procedures with respect to air employment practices. T41,3tcm With regard to the second letter, Mr. felt that an appreciative acknowledgment would suffice, and his itielaorandum suggested that, since both letters were addressed to Mr. 1859 11/3/52 Sprecher, it would be appropriate for Mr. Sprecher to reply over his own s ignature. Chairman Martin then suggested that the incoming letters, together 'with Mr. Thurston's memorandum, be circulated among all of the members of the Board and that in the absence of any objection, replies of the type 811Zeested by Mr. Thurston be sent by Mr. Sprecher. This suggestion was approved unanimously. At this point, all of the members of the stal'f except Messrs. 411:enter and Kenyon withdrew from the meeting and the following additional ctions were taken by the Board: Minutes of actions taken by the Board of Governors of the Federal Ileserve system on October 31, 1952, were approved unanimously. Letter to Mr. F. J. Sudekum, Chairman, Sub-Committee of Bank ManageCommittee to Study Capital Structures and Ratios, Missouri Bankers 488°ciat1on„ c/o First National Bank in St. Louis, St. Louis, Missouri, 1141 ng as follows: "Your letter of August 12, 1952, addressed to the Federal Reserve Bank of St. Louis, and marked for the attention of Mr. Peterson, Vice President in charge of bank examinations, has been referred to the Board of Governors for reply as your inquiry relates to System practice. "The Board of Governors is Interested to learn that the Bank Management Committee of the Missouri Bankers Association has formed a new Sub-Committee to study capital structures and ratios. It is noted that this action was due to the fact that many banks throughout the State of Missouri have received 11/3/72 -5- requests from various supervisory authorities to increase their capital accounts. "You have inquired what formula or basis the Federal Reserve uses in determining the adequacy of bank capital. "The Board recognizes that it would be convenient and administratively desirable to have a 'yardstick' which could be applied to every situation, but feels that the matter of the capital adequacy of an individual institution may he determined only after careful analysis of all the relevant facts and circumstances Involved in the particular case. Ratios are not a determinant of capital adequacy, and sound judgment must be exercised in decidinz whether, in the light Of all the circurestances, a bank has adequate capital in relation to the volume, character, and condition of its assets and its responsibilities. "In view of the foregoing, it is not possible to give categorical replies to your questions numbered 2, 3, 4, and 5. However, it may be helpful to mention certain aspects a: the matter. "As part of a sound judgment on the aclequacy of a particular bank's capital, the Board believes that it is appropriate to take into account the extent to which reserves for contingencies or reserves -or losses are available to lessen the risks that might otherwise be expected to fall Upon ordinary capital accounts. The Board also eons5ders it proper, as part of such a judgment, to recognize that some assets entail little if any risk of lees. Yoreover, such would include assets ether than cash and Governments which are usually deducted in arriving at the so-called 'Risk Asset' ratio. "As a labor saving device for making preliminary selection of those banks requiring mere detailed analysis, the Reserve Bank and the Board of Governors use various ratios for 'screening out' banks for further study. Nevertheless, such ratios are recognized as being very rough bench-marks even for screening purposes and the review analysts are aware of other factors affecting the institution under review which would indicate the need or lack of need for further analysis. These factors are sought even in institutions whose ratios are far superior to the ratios generally accepted as minima. "It should be emphasized that any calculations of ratios are purely preliminary ones for the purpose cf determining 1861 11/3/52 -6- "whether to give further consideration to a particular bank. Furthermore, it must be borne in mind that It often is not in the public Interest or to the best interest of a Particular bank for it to attempt to rely on apparent safety of assets as a substitute for sufficient capital. "With respect to your inquiry regarding the issuance of different types of capital, the Board of Governors feels that common stock is the most desirable form of capital for banks. The Board is not disposed to favor the issuance of capital in any form other than common stock because of the longrange implications regarding capital if any other course is Pursued. The Board also feels that capital notes and debentures should not ordinarily be considered a suitable form of capital for the protection of depositors. "With reference to your query relative to the attitude of the Federal Reserve regarding insistence that banks needing additional capital provide such capital, it is the view Of the Board of Governors that member banks which clearly need additional capital, in addition to conserving earnings and decreasing or discontinuing dividends if necessary, should exhaust every means at their disposal to -yrovide such capital. if new capital cannot be provided the only alternative would be to reduce the volume of earnin, assets, eliminating first those which contain the highest degree of risk. "it may be of some interest to you to know that the subject of the adequacy of bank capital is urdcr contInuous study here at the Board. Accordingly, the Board ap-)reciates the importance of the subject to whic'o, your Sub-CoAmitteo is addressing itself and would like to receive a copy of your rePort when completed, together with any conclusions reached and recommendations made by your Sub-Cooimi tte a." Approved unanimously, with a -nt, copy to Mr Peterson, Vice Pre St.oui of BInk Reserve Federal • - , r Pd
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