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1314 A meeting of the Board of Governors of the Federal Reserve Systern was held in Washington on Tuesday, September 17, 1946, at 10:30 a.m. PRESENT: Mr. Ransom, Vice Chairman Mr. Draper Mr. Carpenter, Secretary As stated in the minutes of September 16, 1946, Mr. Vardaman 'as absent on official business. The action stated with respect to each of the matters hereinafter referred to was taken by the Board: Memorandum dated September 12, 1946, from Mr. Thomas, Director 01' the Division of Research and Statistics, submitting the resignation of Mr. Lloyd A. Metzler, an economist in that Division, and recommending that it be accepted to become effective, in accordance with his l'equest, at the close of business September 13, 1946, with the underetanding that a lump sum payment would be made for any annual leave remaining to his credit as of that date. Approved unanimously. Letters to the "State Bank of Chrisman", Chrisman, Illinois, and the "State Bank of Edmore", Edmore, Michigan, reading as follows: "The Board is glad to learn that you have completed all arrangements for the admission of your bank to membership in the Federal Reserve System and takes pleasure in transmitting herewith a formal certificate of your membership. "It will be appreciated if you will acknowledge receipt of this certificate." Approved unanimously. 1315 -2- 9/17/46 Letter to Mr. Clark, Vice President of the Federal Reserve Bank of Atlanta, reading as follows: "In view of the recommendation contained in your letter of September 14, 1946, the Board of Governors extends to November 1, 1946, the time within which the 'North Shore Bank', Miami Beach, Florida, may accomplish membership." Approved unanimously. Letter to the Honorable P. L. Goldsborough, Director of the Federal Deposit Insurance Corporation, Washington, D. C., reading as follows: "In accordance with the request contained in your letter of September 9, 1946, the Board of Governors of the Federal Reserve System hereby grants written consent, pursuant to the provisions of subsection (k)(2) of Section 12B of the Federal Reerve Act, for examiners for the Federal Deposit Insurance Corporation to make an examination of the 'Bank of Sturgeon Bay', Sturgeon Bay, Wisconsin, in connection with its application for continuance of insurance after vvithdrawal from membership in the Federal Reserve System. "There are no unfulfilled conditions nor incomplete corrective programs with respect to the member bank in connection with which the Board would suggest incorporation of conditions for continuing its status as an insured bank." Approved unanimously. Letter to Mr. DeMoss, Vice President of the Federal Reserve Bank of Dallas, reading as follows: "This refers to your letter of August 3 recommending that republication be waived of the June 29, 1946 report on Form F. R. 220 of East Texas Building, Loan, and Savings Association, an affiliate of Tyler State Bank and Trust Company, Tyler, Texas. 1316 9/17/46 -3- "It is understood from your letter that the report of the affiliate showed borrowings from affiliated bank as 'None', whereas in fact the affiliate owed $20,000 to the subject bank on the date of the report; that there was an error in the heading of the report and an erroneous answer regarding the manner of affiliation; that the published statement of the affiliate contained the same errors; that the errors were called to the attention of the bank by correspondence but that this did not result in a clear understanding on the part of the bank's management; and that the matter would be explained to the bank at the time of the next examination thereof. It is understood from the Board's records that the subject bank has recently been examined by examiners of your Bank; that the affiliation between the bank and the East Texas Building, Loan, and Savings Association apparently was discovered when the bank was examined as of October 3, 1945; that it results from the fact that six of the eleven directors of the East Texas Building, Loan, and Savings Association are also directors of the subject bank; and that the bank apparently should have but did not submit a report of the affiliate as of December 31, 1945. A copy of your letter of January 18, 1946 to the subject bank indicates that failure to submit a report as of December 31, 1945 was called to the bank's attention, but we have no additional correspondence to indicate that a report as of that date was finally submitted. "The fact that the affiliate report and published statement showed borrowings as 'None' when actually the affiliate actually was borrowing $20,0-0 from the subject bank constitutes a substantial error, even though doubtless an inadvertence, which might well have misled readers of the published statement. In view, however, of your recommendation, and since another call for reports will be made in the near future and the bank and its affiliate presumably now understand and will observe the affiliate report requirements, it does not appear that any lf,orth while purpose would be served by requiring republication of the June 29, 1946 report of the affiliate at this time." Approved unanimously. Letter to Mr. V:hittemore, President of the Federal Reserve Bank °f Boston, reading as follows: "This refers to Mr. McRae's letter of July 5 with enclosures and to subsecuent conversations and correspondence, 1317 9/17/46 -4- "including the copy of the letter from the office of the Commissioner of Banks of the Commonwealth of Massachusetts which Mr. McRae left with us while in Washington, relating to the proposed form for joint publication of condition reports rendered by State member banks to the Commissioner of Banks and to your Bank. "It is noted that all differences of any substance betv:een the State form and the Board's requirements have been harmonized satisfactorily and in a manner consistent with the general instructions governing publication appearing on page 3 of form F. R. 105a; that 'Other public funds' in the savings department statement will be changed to read 'Obligations of States and political subdivisions' to coincide with the wording used in the combined statement; and that with respect to the item 'Obligations subordinated to claims of depositors and other creditors not included in liabilities' this item is now inapplicable and the office of the Commissioner will insert this type of liability at such time as it becomes applicable to State member banks in Massachusetts. No change need be made in the item of loans and discounts as shown on the proposed form. "It is understood from our conversations with Mr. McRae that the office of the Commissioner of Banks will agree to change the liability item pertaining to borrowings in the State form to read: 'Bills payable and other liabilities (except rediscounts) for borrowed money'. "Under the foregoing conditions the Board will interpose no objection to the acceptance, until further notice, of the publication of condition reports of Massachusetts State member banks in accordance with the draft of the proposed form submitted with Mr. McRae's letter of July 5 and the amendments described above." Approved unanimously. Letter to Mr. Wallace, Counsel of the Federal Reserve Bank of Richmond, reading as follows: "This refers to your letter of September 9, 1946, regarding an inquiry received by you from a member bank as to thether a note of a finance company given to a member bank, the proceeds of which are to be used by the finance company in making advances to the purchasers of various articles, is eligible for rediscount under section 13 of the Federal Reserve Act. 1318 9/17/46 -5- "As indicated in your letter, the question would be sufficiently answered by previous rulings of the Board if the entire proceeds of such a note were to be used by the finance company for the purpose of making advances to persons purchasing articles for personal or domestic use or to business concerns purchasing equipment or machinery the useful life of which is short. It is understood, however, that in the present case it is contemplated that a portion of the proceeds of the note may be used by the finance company for advances intended to facilitate the purchase of articles of machinery or other articles which must be regarded as 'permanent or fixed investments', that is, capital assets. With that possibility in mind, you ask to be advised as to what standard should be applied in determining whether or not all notes of the finance company given to a member bank in such circumstances are to be considered eligible for rediscount and, if all are not eligible, what proportion of the notes should be so regarded. "A similar question was presented to the Board in December 1937, shortly after the publication of the Board's ruling in 1937 Bulletin 1190. In its reply, the Board stated: 'You also refer to the fact that there are many finance companies which, in addition to the business of financing the purchase and sale of goods which would give rise to eligible paper, are engaged in the business of making personal loans on chattels, endorsements or guaranties. You point out that in many instances the proceeds of such personal loans are not used for eligible purposes, and you inquire as to how to determine whether the notes of such finance companies engaged in various types of business represent borrowing to finance eligible or ineligible transactions. The Board appreciates the difficulty of this problem, hut does not feel that it should attempt to make any general statement or ruling regarding it at this time. Here again it is not possible to give any categorical answer to the question, as the matter is one which can be determined definitely only in the light of the facts of specific cases as they may arise, bearing in mind the intention of the statute and the regulations that the proceeds of paper which is discounted should be used for commercial or ag- 1319 9/17/46 -6- 'ricultural transactions. Bv this it is not meant that the Board will not consider a question of this kind until a note of a finance company has actually been presented for discount at a Federal Reserve bank. If there is reason to feel that circumstances may arise in which the paper of a particular finance company may be offered for discount by a member bank at some later date and the member bank or the finance company itself desires to know in advance whether the nature of the business of the company is such that its paper might be considered as issued for an eligible purpose, the Board will be glad to give consideration to the question upon receipt of full information as to the facts in accordance with the Board's letter of October 251 19371 5-39.1 "As indicated in your letter, it is believed that it would be difficult to apply any rule under which a certain portion of the notes of the finance company 14ould be considered as eligible for rediscount in a ratio comparable to the ratio of the amount of loans made to purchasers whose obligations would of themselves be eligible for rediscount to the total amount of loans made by the finance company. "As you know, Regulation A provides that 'a Federal Reserve Bank shall take such steps as may be necessary to satisfy itself as to the eligibility of any paper offered for discount', and, accordingly, the question whether any such note is eligible, including the sufficiency of the evidence of its eligibility, is one for the determination of the Federal Reserve Bank in the light of the circumstances of each case as it arises. It would seem, for example, that the Federal Reserve Bank would be justified in regarding a note of a finance company as eligible if accompanied by a certificate obtained from the finance company that the proceeds of the note have been used or are to be used for some commercial purpose. "With respect to the question raised in the last paragraph of your letter as to the eligibility for rediscount of notes of small loan companies given to member banks, it is believed, as suggested in your letter, that the situation is essentially the same as that with respect to the eligibility of notes of finance companies. Generally speaking, it seems likely that a large portion of the loans made by small loan companies, like those made by credit unions, would not 1320 9/17/46 -7- "be considered as loans made for commercial purposes so as to make notes of such loan companies eligible for rediscount; and in this connection, your attention is called to a ruling of the Board regarding the eligibility of credit union notes published in 1939 Bulletin 361 (F.R.L.8. #4630). As stated in that ruling, however, it is possible that there may be e cases in which the notes of a credit union would be eligibl loan for rediscount; and, similarly, notes given by a small a company might likewise be eligible if, under the facts of particular case, it should appear that their proceeds are to be used for advances for commercial purposes. "As to both questions, it is believed that where it is impossible to determine whether any part of the proceeds of a note of a finance company or small loan company is to be used for the purpose of making advances to persons purchasing fixed investments or capital assets, the question of eligibility should be determined by the Reserve Bank on the basis of the facts of the specific case but from a liberal point of view. In its 1937 revision of Regulation A and in the rulings which have been issued since that time, it has been the purpose of the Board to interpret the law on the question of eligibility in as liberal a manner as seemed to be justifiable and practical." Approved unanimously. Letter to Mr. Peterson, Vice President of the Federal Reserve Bank of St. Louis, reading as follows: "This refers to your letter of September 10, 1946, regarding a question presented by the Liberty National Bank and Trust Company, Louisville, Kentucky, under Regulation U. "The question concerns collateral that is not required by the Regulation, but that a bank obtains for its own protection as a result of market declines. The bank wishes to know, in effect, whether such additional collateral must be subject to the withdrawal restrictions of the regulation. In other words, it asks whether there is any arrangement by which it could later be free to permit the release of the extra collateral. "As you have advised the bank, section 3(n) provides a procedure by which such collateral may be excluded from the withdrawal restrictions even though it secures the loan. This is done by appropriate identification of collateral, 1321 9/17/46 -8- "and the section provides that 'such identification may be made by any reasonable method'. In the circumstances, this would seem to be the natural way to solve the problem. "There is the further question, which you mention, of whether similar results might be reached under section 3(i). This permits a bank to take action 'necessary in good faith for its own protection'. As indicated in the Board's letter 5-37 of October 19, 1937 (F.R.L.S. #8184), this provision is necessarily flexible. "However, it seems doubtful that this provision adds anything to section 3(n) in the present situation. If there is to be some understanding with the customer when the collateral is brought in, it would involve some sort of identification of collateral. Presumably, it would be much the same as the identification described in section 3(n). "Since section 3(n) already provides a specific solution for the bank's problem, it is difficult to see how it could be said to be 'necessary' to act under the general provisions of section 3(i). The actual result is essentially the same in any event, but the Board is inclined to feel that section 3(n) should be considered the controlling provision." Approved unanimously. Letter to the Presidents of all the Federal Reserve Banks, reading as follows: "Reference is made to the Board's letters of October 27 and December 27, 1944 (S-804 and S-819; F.R.L.S. #9670). "Beginning September 30, 1946, it will not be necessary to submit reports of applications for guarantees of Regulation V loans, Form F. R. 581, each month. Reports need be submitted only if there has been some change during the current month in the figures shown on the reports last submitted. However, it will be appreciated if a copy of the form or a letter is submitted each month stating that there have been no changes." Approved unanimously. 1322 9/17/46 -9Letter to Mr. Eduardo Villasenor, Director General of the Banco de Mexico, Mexico, D.F., Mexico, reading as follows: "In the absence of Chairman Eccles from Washington, I wish to acknowledge receipt of your letter of September 5 regarding the meeting of Experts on Central Banking Problems of the American Continent. The Board is glad to have received this report of the meeting from you. Our representatives also reported a successful meeting and we all appreciate the opportunity of bringing about closer relationships between the Federal Reserve System and the central banks of other countries of this hemisphere." Approved unanimously. Thereupon the meeting adjour4a. Secretary. APProved: J41?iCieLiwa4=W4 Chairman. Vi
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