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1938 A meeting of the Board of Governors of the Federal Reserve Systel4wa2 held in Washington on Saturday, October 3, 1942, at 12:15 p.m. PRESENT: Mr. Eccles, Chairman Mr. Ransom, Vice Chairman Mr. McKee Yr. Draper Mr. Evans Mr. Morrill, Secretary Mr. Carpenter, Assistant Secretary The action stated with respect to each of the matters herein"ter re ferred to was taken by the Board: The minutes of the meeting of the Board of Governors of the ?eaerel Reserve System held on October 2, 1942, were approved unanimously. Memorandum dated October 3, 1942, from Mr. Morrill, submitting the r esignation of Miss Mary L. Welsh as a clerk in the Secretary's Oftteei t0 become effective as of the close of business on September 17, 1942, recommending that the resignation be accepted as of that date. The resignation was accepted. Letter to the board of directors of the "Union Rank and Trust C°14Dati " 1 , Bowling Green, Virginia, stating that, subject to conditions "rilentb el*shiP numbered 1 to 3 contained in the Board's Regulation H, the tOar A Reeel.ve approves the bank's application for membership in the Federal SYstem and for the appropriate amount of stock in the Federal 6 Bank of Richmond. The letter also contained the following Special comment: 1_939 1013/42 -9- "It appears that, while the bank is authorized to ereise fiduciary powers, actually it is doing so only 4° a limited extent. At the time of the examination as 15, 1942, Tilde in connection with the application for membership, only a few small accounts were being ilinistered, it is said that no additional business is eint,', accepted and that it is the management's intention to dispose of the present accounts as soon as practicable. ,1 the circumstances, the application has been approved on "e same basis as if fiduciary powers were not being exercised. It appe2rs also that the bank possesses certain Powers which are not being exercised and which are not necessarily required in the conduct of a banking business, such as the power to guarantee the payment of bonds. Attention is called to the fact that if the bank should desire in the future to exercise fiduciary powers beyond the extent cesserY in connection with the few accounts now being administered or to exercise any other powers not actually axercised at the time of admission to membership, it will be esesary under condition of membership numbered 1 to obtain the Permission of the Board before exercising them. In this ernection, the Board understands that there has been no 11 . 1Tge in the scope of the corporate powers exercised by the ' 111 since the date of its application for membership." n Aua.ust r J 7 j Approved unanimously, together with a letter to Mr. Leach, President of the Federal Reserve Bank of Richmond, reading as follows: a ITMPhe Board of Governors of the Federal Reserve System I3Proves the application of the 'Union Bank and Trust ConCowling Green, Virginia, for membership in the FedReserve System, subject to the conditions prescribed he enclosed letter which you are requested to forward he Board of Directors of the institution. Two copies 14 such letter are also enclosed, one of which is for your t4les and the other of which you are requested to forward vo i the Commissioner of Banking for the Commonwealth of rginia for his information. "Since the amount of estimated losses shown in the 13°1't of examination for membership is relatively small, t; l'e Usual condition of membership regarding elimination of ! t sses has not been prescribed. It has been noted, however, 1t the management intends to charge off the amount claslfied and it is assumed that this will be done. 02 7 1940 1013/42 -3- "In his memorandum with reference to the application, Counsel for the Reserve Bank makes reference to a need for review and revision of the bank's by-laws and, on page 16-(1) °! the report of examination for membership several sugges"-ons are made for improvement and proper maintenance of . It is assumed that the Reserve Bank will follow 1!cord8 vue matter of effecting the needed corrections." Letter to Mr. Clerk, First Vice President of the Federal Reserve B enk of San Francisco, reading as follows: "This refers to your telegram of September 26, 1942, raisi '-ng certain questions in connection with the discount noteS representing guaranteed loans in view of the recent ndment to Regulation A and the Board's letter of September 21, 1942: (8-554). "You refer first to the possibility that, following the ;Lsoount of a nonnegotiable note, the discounting bank may 1, 1-1, and the Federal Reserve Bank may receive from the bora°wer in settlement of the note only the remaining balance : le on the note, less any claims which the borrower may have ggainst the suspended bank. "It is appreciated that the discount of a nonnegotiable aote 4 b, IrlaY cause the Federal Reserve Bank to be subject to eqies existing in favor of the maker of the note against he Original holder, and it is for the purpose of avoiding iss risk that Regulation A contains the general requirement that notes, drafts, and bills offered for discount shall be ,!g°tiable. However, it is believed that the need for the °tection of the Federal Reserve Bank, in so far as such Ilities may exist against the original holder, is greatly j :ullimized in the case of a note evidencing a guaranteed loan, rticularly where the discounting Federal Reserve Bank has and executed the guarantee agreement on behalf of arrangedtl Goverment and is fully conversant with the details of Cthe loan agreement between the financing institution and the cin°wer. It was with this in mind that the Board deemed it tfaslrable to except notes evidencing guaranteed loans from ore eligibility requirement of Regulation A. In any event, course, the fact that a note may be eligible for discount 88 riot necessarily mean that such note is acceptable for ecount from a credit viewpoint. "In the second place, you suggest that there is some cloubt as to whether a Federal Reserve Bank may not be under 111 obligation to extend or renew a note evidencing a guarteed loan, or to accept other notes in lieu thereof, where r 4 Z1 1941 10/3/42 "such notes are issued under a loan agreement providing for a revolving credit. On this point, it is our view !hat whera the financing institution is obligated by -Gbe loan agreement, upon the maturity of a note executed thereunder, to lend the same amount on the execution of new note, this obligation is confined to the financing 4nstitution and does not extend to a Federal Reserve Bank with which the note may be discounted. Although such a by its terms may be 'subject to' the loan agreement, .°te I "at acreement provides for a renewal or extension of credit only by the financing institution named therein. 'Tour final question has reference to the statement in the Board's letter of September 21, 1942, that notes ell°uld not be acquired by a Federal Reserve Bank under section 13 of the Federal Reserve Act if, when such notes al'e offered, the Reserve Bank 'has reason to believe' that aucellations amounting to one-fourth of the borrower's E ar Production contracts are imminent. You ask whether ,Federal Reserve Bank will have any feasible means of ' etermining the imminence of such cancellation. 'It is, of course, possible that in many instances can cellations of all or a part of a borrower's war pro' Contracts may occur without previous warning, or 0." a Federal Reserve Bank, at the time of its discount notes evidencinf, a guaranteed loan, may have no means d etermining whether such cancellations are to be excted. On the other hand, a Federal Reserve Bank which " e executed a guarantee agreement on behalf of the Govmay often be in such a position as to be acquaint' b with the extent to which the borrower's contracts have neen cancelled. It was the intention of the sentence in on, not that a Reserve Bank will be expected to make c specific investigation of the status of the borrower's (1°Iltracts, but only that a Federal Reserve Bank will not eiscount notes if, at the time they are offered for dist°114t, it has reason to believe that extensive cancella,'°ns of the borrower's war contracts, amounting to at 1:?ast one-fourth of the total of such contracts, are IkelY to occur in the near future." r Approved, together with letters to the War and Navy Departments and the United States Maritime Commission transmitting copies of the incoming telegram and the above reply. MT. Ransom did not vote on the foregoing action ir view of the fact that when the amendment to Regulation A, referred to in the above letter, was approved by the Board he requested that he be recorded as not voting. 1942 10/3/42 -5Telegram to Mr. Stroud, First Vice President of the Federal Re- ar of Dallas, reading as follows: 7 ePlying your telegram October 1 concerning Regulation it is Board's opinion that loan for flying lessons "°uld be considered for bona fide educational purposes urlder present circumstances." Approved unanimously. Telegram to Mr. Davis, President of the Federal Reserve Bank or St. Loui,, reading as follows: . "Petel, if any State member bank inquires there is no °Nection to advising it that no call for condition rePorts is contemplated at this time." Approved unanimously. Thereupon the meeting adjourned.
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