Full text of Minutes of the Board of Governors of the Federal Reserve System : Meeting Minutes, September 27, 1966, Volume 53, Part 9

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Minutes for September 27, 1966
To:
From:

Members of the Board
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 proposed to place in the record of policy actions
required to be kept under the provisions of section 10 of the
!!deral Reserve Act an entry covering the item in this set of
:4-1,1.utes commencing on the page and dealing with the subject
'-eterred to below:

Page 3

Increase in maximum permissible interest rate
on loans made pursuant to Regulation V, Loan
Guarantees for Defense Production.

Should you have any question with regard to the minutes,
it will
Othe, be appreciated if you will advise the Secretary's Office.
laleet:wise, please initial below. If you were present at the
you lng, your initials will indicate approval of the minutes. If
havewere not present, your initials will indicate only that you
seen the minutes.

Chairman Martin
Governor Robertson
Governor Shepardson
Governor Mitchell
Governor Daane
Governor Maisel
Governor Brimmer


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Federal Reserve Bank of St. Louis

'

Minutes of the Board of Governors of the Federal Reserve
System on Tuesday, September 27, 1966.

The Board met in the Board

Room at 10:00 a.m.
PRESENT:

Mr.
Mr.
Mr.
Mr.
Mr.
Mr.

Martin, Chairman
Robertson, Vice Chairman
Shepardson
Mitchell
Maisel
Brimmer
Sherman, Secretary
Kenyon, Assistant Secretary
Bakke, Assistant Secretary
Cardon, Legislative Counsel
Fauver, Assistant to the Board
Brill, Director, Division of Research and
Statistics
Mr. Solomon, Director, Division of Examinations
Mr. Harris, Coordinator of Defense Planning
Mr. Hexter, Associate General Counsel
Mr. O'Connell, Assistant General Counsel
Mr. Hooff, Assistant General Counsel
Mr. Smith, Associate Adviser, Division of Research
and Statistics
Mr. Kiley, Assistant Director, Division of Bank
Operations
Mr. Leavitt, Assistant Director, Division of
Examinations
Messrs. Forrestal, Sanders, and Via, Senior
Attorneys, Legal Division
Messrs. Eckert, Chief, Banking Section, and Golden,
Senior Economist, Division of Research and
Statistics
Messrs. Egertson and McClintock, Supervisory Review
Examiners, and Harris, Assistant Review Examiner,
Division of Examinations
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.

Approved letters.

The following letters, copies of which are

attached under the respective item numbers indicated, were approved
1411411i1flously
after consideration of background material that had been
111(le available to the members of the Board:


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Federal Reserve Bank of St. Louis

9/27/66

-2Item No.

Letter to Wachovia Bank and Trust Company,
Wlnston-Salem, North Carolina, approving the
estab lishment of a branch in Charlotte.

1

Letter to Commercial and Farmers Bank, Ellicott
ltY, Maryland, approving an investment in bank
Premises.

2

Letter to First State Bank, Bandera, Texas,
aPProving an investment in bank premises.

3

Application of Upper Main Line Bank.

There had been distributed

a Memorandum from the Division of Examinations dated September 15, 1966,
regarding an application by Upper Main Line Bank, Paoli, Pennsylvania,

f°r Permission to merge with Farmers Bank of Parkesburg, Parkesburg,
eansylvania, under the charter of the former and with the new name of
Community Bank and Trust Company.
Following summary comments by Mr. Egertson based upon the
1)Ivi8

ion's memorandum, the application was approved unanimously, with

he understanding that an order and statement reflecting this action
14°uld be prepared for the Board's consideration.
Application of Brazil Trust Company.

There had been distributed

am.

—411°randum from the Division of Examinations dated September 15, 1966,

l'agardi-ng an
application by The Brazil Trust Company, Brazil, Indiana,
for
Permission to merge with Farmers and Merchants Bank, Clay City,
ana, under the charter of the former and with the new name of First

Barik
and Trust Company of Clay County, Indiana.


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Federal Reserve Bank of St. Louis

9/27/66
Following summary comments by Mr. Egertson based upon the
Division's memorandum, the application was approved unanimously, with
the

understanding that an order and statement reflecting this action

would be prepared for the Board's consideration.
Maximum rate of interest on V-loans (Items 4-6).

The Defense

?r°duction Act of 1950 provided that agencies engaged in procurement
lOr

national defense may be authorized by the President to guarantee

loans by financial institutions to persons engaged in any activity
deemed by the agency to be necessary to expedite production and delivery
or services under Government contracts.
designated ten such agencies.

Implementing executive orders

The Federal Reserve Banks were named, as

1.8cal agents of the United States, to act on behalf of the guaranteeing
agencies in making contracts of guarantee and in carrying out certain
°tiler functions, subject to the Board's supervision.

Authority was

vested in the Board (after consultation by the Board with the guaranteeing agencies) to promulgate necessary regulations and to prescribe,
eith
er specifically or by maximum limits or otherwise, rates of interest,
guarantee and commitment fees, and other charges applicable to
guaranteed loans.
hoard

This regulatory authority was implemented by the

in its Regulation V (Loan Guarantees for Defense Production).
In June 1966 the Board requested the heads of the guaranteeing

ag
'es, as well as the Reserve Banks, for their views on whether the
6 Per

cent maximum rate of interest on guaranteed loans should be increas A
eu. Comment also was invited concerning whether the guaranteeing


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agencies, which receive a percentage of the interest on the guaranteed
Portion of a loan, should share in the proceeds of loan rates in excess
of 6 per cent if the ceiling were to be raised.
Responses indicated a consensus that an increase in the maximum
rate of

interest on V-loans to 7-1/2 per cent would be desirable, with

the guarantee fee continuing to be computed as though the loan rate was
6 Per cent in cases where the borrowing carried a higher rate of interest.
The Defense Department's response also suggested a revision in the schedule
°f fees charged by the agencies to increase such fees on loans with guarantees

of between 50 and 90 per cent, as an inducement for borrowers to

Seal( lower percentages of guarantee.

The effect of the suggested revision

was doubted by
the Board's staff.
At the Board meeting on August 11 the foregoing views were
tePo
rted and it was agreed, following discussion, that before taking
acti

cln the guaranteeing agencies and the Federal Reserve Banks should
be
.
quvised of the Board's intention to raise the V-loan ceiling to
7.1/1
4 Per cent (while retaining 6 per cent as the maximum rate for com-

Putati°4 of guarantee fees) and their comments requested on the revision
in 0„
buarantee fees recommended by the Defense Department.
There had now been distributed a memorandum from the Legal
iiviS.
dated September 23 in which it was reported that:

(1) the

1)ePari-lnent of Commerce and General Services Administration felt the

aehed

tile of guarantee fees should not be changed; (2) other agencies


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had deferred to the Defense Department because of insufficient experience
under the V
-loan program; (3) the Department of Defense had advised
informally
that it would not object to maintaining the existing schedule
of guarantee fees; and (4) the Reserve Bank comments received generally
favored no change in the fee structure.
Attached to the memorandum were:

(1) a draft of telegram to the

Federal Reserve Banks advising that the Board had authorized an increase
In the
permissible interest rate ceiling on V-loans from 6 per cent to
7-1/2 per cent, that guarantee fees would continue to be computed on
the

'asis of a maximum 6 per cent loan rate, and that no change was being

made in the maximum commitment fee of 1/2 of one per cent or in the schedule of guarantee fees; (2) a draft of letter for transmittal to the guaranteeing agencies containing similar advice; and (3) a draft of press
t'alease announcing this action.
Governor Brinuner observed that while he recognized the reason
fOr

Increasing the maximum permissible rate of interest on V-loans,
rlaelY, to improve the ability of defense contractors to obtain bank
fih
.Lenc,
'ng, he felt the timing was unfortunate because of the attention
ilrl'entlY being focused on interest rate levels and the administrative
steps
taken last week, pursuant to recently-enacted legislation, to
avoid

further escalation of rates on time deposits and share accounts.

In th

e circumstances, he believed that the press release should be prePared
carefully to explain adequately the justification for this move
71th
espect to V-loan rates.


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Federal Reserve Bank of St. Louis

9/27/66

-6Governor Robertson noted that the justification was clear.

Since the present 6 per cent ceiling was unrealistic in present-day
circumstances, an increase in the maximum permissible rate was necessary
to

encourage banks to participate in the V-loan program.

On the other

hand, he wondered whether a press release was necessary.
Mr. Fauver reported that a representative of the financial press
had inquired several weeks ago about the possibility that the V-loan
ceiling rate might be raised, thus indicating that the press would be
alert for
any action by the Board in this direction.

Mr. Harris (Defense

Planning) added that last summer the Office of Emergency Planning had
tequested that it be kept advised of developments, the question having
"rne UP in Congressional hearings whether defense contractors were being
adequately financed.

He felt that an appropriate press release would

'
ve to make certain that the underlying motives for the V-loan action
clearly understood.
Governor Brimmer couunented that the foregoing observations
stre

ngthened his conviction that a press release should be issued explainInllY the Board's rationale in this matter.
An increase in the maximum permissible rate of interest on V-loans

fro,. ,
° Per cent to 7-1/2 per cent was thereupon approved unanimously,
ffect*lye
immediately, with retention of the present ceiling of 6 per cent
for
PurPoaes of calculating guarantee fees. Transmittal of advice of the
attion
- by telegram to the Reserve Banks and by letter to the guaranteeing


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Federal Reserve Bank of St. Louis

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-7-

agencies was authorized.

It was understood that the staff would prepare

s Press statement announcing the action and explaining the reasons theretaking into account the comments made during today's discussion,
and

release of such a statement was also authorized.

Copies of the

telegram sent to the Reserve Banks, the letter to one of the guaranteeing
agencies,
are

and the statement released to the press on September 29, 1966,

attached as Items 4, 5, and 6, respectively.
Cease and desist bill _Item No. 7).

s draft

There had been distributed

of response to a request by Chairman Patman of the House Banking

aild Currency Committee in a letter dated September 19, 1966, for answers
to 72 questions concerning subjects in the field of banking and credit,
for the
stated reason that such answers were needed by his Committee in
c"flection with consideration of S. 3158, the so-called "cease and desist"

Prior to consideration of the draft response, Governor Robertson
tePorted on a meeting of representatives of the Federal bank supervisory
agencies,
the Home Loan Bank Board, and the Treasury Department that was
held Yesterday to discuss the pending legislation.

He noted that the

4118e bill reported by the Banking and Currency Committee in lieu of the
passed version would authorize the agencies to exercise the cease
and desist procedures for a period of about 18 months only, a provision
that h
ad been
inserted by the Committee at Congressman Multer's request
'444 the concurrence of Under Secretary of the Treasury Barr. Governor
110berts _ n
° had pointed out at the meeting that that limitation would


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seriously
hamper the ability of the supervisory agencies to utilize the
authority granted in the bill, and Under Secretary Barr had agreed to
discuss the matter further with Chairman Patman.
It was also understood that Congressman Multer planned to offer
a floor amendment to the reported bill to provide for something of a
de novo

hearing on the facts by the appellate court in lieu of judicial

review of agency action thereunder.

Governor Robertson commented that

"unsel for the supervisory agencies were collaborating in drafting
lan
guage for Congressman Multer, to be submitted under cover of a letter
Pressing the view that the judicial review procedures specified in the
"
Administrative Procedure Act, now under review by the Congress, would
be in

appropriate.
Finally, Governor Robertson observed that a provision to increase

the Federal insurance on deposit and share accounts from $10,000 to
o00 had been written into the House bill. The sentiment at yester$15
'
day l s .
interagency meeting seemed favorable. However, if the 18-month
limitation on the supervisory powers in the bill were retained, it would
seem that the increased insurance coverage should also be limited to that
Pet'iod of
time, since the broadened supervisory authority had been advanced
as a
J ustification for the insurance increase.
Discussion then turned to the draft of letter to Chairman Patman,
duting the course of which several suggested revisions were adopted.
Unanizous
approval was given to the transmittal of a letter in the form
attached as
Item No. 7.


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Federal Reserve Bank of St. Louis

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9/27/66

-9Interpretation of action on time deposits (Item No. 8).

There had

been distributed a memorandum from the Legal Division dated September 26,
1966, presenting the question whether under the amendment to the Supplement to Regulation Q (Payment of Interest on Deposits) adopted effective
September 26, 1966, a member bank must reduce the interest rate on existing
time deposits, if in excess of the new maximum, if the deposit contract
reserved the bank's right to reduce the interest in the event the Board
should

lower the maximum permissible rate below the contract rate.
Section 217.3(b) of Regulation Q provides that "No certificate

4)f deposit or other contract shall be renewed or extended unless it be
m°dified to conform to the provisions of this part, and every member bank
84411 take such action as may be necessary, as soon as possible consistentlY with its contractual obligations, to bring all of its outstanding
certificates of deposit or other contracts into conformity with the
Ptovisions of this part."
Mr. Sanders noted that when the Board reduced the maximum perInissible rate of interest on multiple maturity time deposits in July,

the Supplement to Regulation Q adopted at that time made the new rates
efIective with respect to such a deposit "received on or after July 20,
1966," thus waiving the provisions of section 217.3(b) with respect to
illedification of outstanding contracts.

However, the language of the

81141ement issued effective September 26, 1966, coupled with the provisiorls
of section 217.3(b), would require a member bank to exercise any


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right that it might have to reduce the rate of interest on outstanding
time deposits under $100,000 in order to conform to the maximum rates
effective on or after September 26.

The question presented was whether

the Board wished to except such deposits from the new rate ceiling, as
it had done at the time of the July action.
Mr. Sanders suggested that four alternative courses were open
to the Board:
1. On the basis of a literal interpretation of Regulation Q and the current Supplement thereto, the Board might
rule that a bank that had the right to conform its existing
time deposit contracts, whether single or multiple maturity,
to changes in the maximum permissible rates of interest
Should take whatever steps were necessary to do so beginning
September 26.
2. The Board might continue its July policy of not
enforcing the modification-of-contract requirement against
outstanding multiple maturity time deposits that had been
made before July 20, but enforce the requirements of section 217.3(b) against single maturity time deposits effective
September 26.
3. The Board could announce that the new maximum rates
would not apply to multiple maturity time deposits made before
July 20, or to single maturity time deposits under $100,000
that were outstanding before September 26, thereby following
the position taken by the Federal Deposit Insurance Corporation in announcing the applicability of its complementary
regulatory action to deposits of nonmember insured banks.
4. The Board could amend Regulation Q to eliminate or
,
111°dify section 217.3(b). The effect of that section on a
uePosit contract containing an automatic renewal clause but
no clause permitting modification to conform to subsequent
teductions in interest rate ceilings was not entirely clear.
Furthermore, a member bank could now, consistent with the
Provisions of section 217.3(b), enter into a deposit contract
with a single maturity of several years at the current applicable maximum permissible rate and, by not including a provision in the contract for conforming the rate to the Board's
i
regulation, be obligated to pay the contract rate the entire
ife of the contract, even if interest rate levels and the
maximums prescribed by Regulation Q should drop greatly.

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Mr. Sanders recalled that a recommendation along the lines of

the fourth alternative had been submitted to the Board in 1964 in connection with a proposed general revision of Regulation Q.

It

as now

submitted again, both as a reasonable resolution of the questions that
had arisen currently and as a change in Regulation Q that was considered
desirable in any event.
Attached to the memorandum were drafts of press releases appro14‘late for announcing an interpretation embodying any one of the first
thre
e alternatives, and a draft of notice of proposed rule making suitle for
publication in the Federal Register if the Board chose to amend
section 217.30) of Regulation Q.
Governor Robertson stated that he would favor adopting the
sPProach set forth in the third alternative and exempt time deposits

that

were outstanding before September 26 from the lower interest rate

ceil.
lng-

That would be consistent with the Board's action in July and

ccriforU1 to
the FDIC position. From the long-run point of view, however,
he f
elt that it would be desirable to amend section 217.3(b) of RegulattoT

Q, and he suggested that further consideration be given to this
Possib.
11xty at a subsequent time.
Mr. Fauver commented that it appeared that the general understam.
'Ling by the press of the Board's current action was consistent with

the
that

nterpretation proposed by Governor Robertson.

He thought, therefore,

confusion might be minimized if the interpretation were simply to


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be sent to the Reserve Banks for use in responding to inquiries from
member banks, rather than to issue a press release on the subject.
There followed discussion of the Board's intent when the recent
action was under consideration.

Governor Robertson recalled having made

the statement at that time that the action should not apply to outstanding
contracts, and he understood the Board's conclusion to have been in that
direction, which was consistent with the position taken in July with
respect to multiple maturity time deposits.

However, some member banks,

uP°n reading the Board's press release, had been raising questions with

the.

Reserve Banks, and it would seem desirable to confirm to the Reserve

Banks-nnd through them to member banks--that the 5 per cent ceiling on
ttal
e deposits under $100,000 did not apply to contracts entered into before
SePtember 26.
It was the consensus that no press release need be issued and

that ,
tne questions that had been raised could be dealt with by a couatiuilication to the Reserve Banks.

When some concern was expressed that

utiless the interpretation was sent to all member banks there could be
lack °f uniformity in their procedures, it was noted that the Reserve
84nits

could be requested to inform member banks in such manner as they

believed appropriate.
Accordingly, the interpretation suggested in the third alternative
8

=1.°P..tts! unanimously,

with the understanding that appropriate advice

be transmitted to the Reserve Banks.

A copy of the wire subse-

clUentlY
sent to the Banks is attached as Item No. 8.


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9/27/66

-13All members of the staff except Mr. Shelman then withdrew from

the meeting and Messrs. Kelleher, Director, Division of Administrative
services; Kakalec, Controller; and Smith, Assistant to the Director,
Division of Administrative Services, entered the room.
Utilization of outside space.

Governor Shepardson presented to

the Board alternative possibilities for the utilization by elements of
the

Board's staff of certain space outside the Federal Reserve Building

if it should
become available on a leased basis.

The various possibil-

'ties were discussed, and it was understood that they would be explored
in light of the comments made, with a view to further consideration of
the
matter by the Board at a subsequent meeting.
Messrs. Kelleher, Kakalec, and Smith then withdrew from the

meeting.
Consumer credit (Item No. 9).

Governor Robertson presented

teak:11s why it appeared desirable to obtain through the Federal Reserve
8411ks

certain current information with respect to consumer credit prac-

tice n
and the Board then authorized the sending of a telegram to the
leder

et Reserve Banks in the form attached as Item No. 9.
The meeting then adjourned.
Secretary's Notes: Attached as Item No. 10
is a copy of a letter that was sent today to
the Federal Reserve Bank of St. Louis approving a special Grade 16 maximum of $21,500 in
the salary structure applicable to the head
office, as requested in the Bank's letter of
September 19, 1966. The letter was sent
pursuant to the authorization given to the
Secretary at the Board meeting on June 29,
1966.


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-14Governor Shepardson today approved on behalf
of the Board the following items:

Letter to the Federal Reserve Bank of Cleveland (copy attached as
N
-47.----__2114_11) approving the designation of 25 employees as special assis-Lant examiners, as requested in the Bank's letter of September 21, 1966.
Letter to the Federal Reserve Bank of Richmond (copy attached as
N
authorizing the Bank to pay to the Retirement System of the
etal Reserve Banks the amount necessary to fund the cost of an increase
4a1 the survivor annuity of Mrs. Irene H. Flagg, widow of Maurice P. Flagg.

It

Memoranda recommending the following actions relating to the Board's
staff:
A
intments
co
Richard A. Williams as Chief, Equipment Operations and Production
_Iltrol Section, Division of Data Processing, with basic annual salary
qL the
rate of $17,721, effective the date of entrance upon duty.
FtocePaul Goldstein as Production Control Supervisor, Division of Data
ssing, with basic annual salary at the rate of $11,306, effective
th
e date of
entrance upon duty.
h

Agnes L. A. Zahra as Statistical Clerk, Division of Data Processwith basic annual salary at the rate of $5,096, effective the date
-4- e
ntrance upon duty.

II'snsfer
posit.MsrY P. Barlow, from the position of Statistical Assistant to the
a/1 i'l°n of Documentation Assistant, Division of Data Processing, with
Oct ,
rlcreese in basic annual salary from $7,055 to $7,516, effective
er 9, 1966.
A
'
lance
resi nations
'lye J°hn A. Marlin, Economist, Division of International Finance, effecOctober 7, 1966.
G Hayes, Economist, Division of International Finance, effective
nbDavid
er 14,C.
(kt_
1966.
effecSusan Herron, Clerk-Typist, Division of Research and Statistics,
Ive the close of business November 11, 1966.


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Federal Reserve Bank of St. Louis

Secretary

3605
BOARD OF GOVERNORS

Item No. 1
9/27/66

OF THE

FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS OFFICIAL. CORRESPONDENCE
TO THE BOARD

September 27, 1966

Board of Directors,
Wachovia Bank and Trust Company,
Winston-Salem, North Carolina.
Gentlemen:
. The Board of Governors of the Federal
Reserve System approves the establishment by
Wachovia Bank and Trust Company, Winston-Salem,
North Carolina, of a branch on Sharon Road near
its intersection with the planned Belk-Ivey Road,
Charlotte, North Carolina, provided the branch is
established within one year from the date of this
letter.
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
of November 9, 1962 (S-1846), should be followed.)


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Federal Reserve Bank of St. Louis

BOARD OF GOVERNORS

Item No. 2
9/27/66

OF THE

FEDERAL RESERVE SYSTEM
WASHINGTON, O. C. 20551
ADDRESS orroctAd. CORRESPONDENCE
TO THE BOARD

September 27, 1966

Board of Directors,
Commercial and Farmers Bank,
Ellicott City, Maryland.
Gentlemen:
Pursuant to the provisions of Section 24A of
the Federal Reserve Act, the Board of Governors of the
Federal Reserve System approves an additional investment in bank premises of not to exceed $320,000 by
Commercial and Farmers Bank, Ellicott City, Maryland,
for the purpose of constructing a new head office
building. The approved expenditure is understood to
include $50,000 for unforeseen costs and $20,000 for
architect's fee.
Very truly yours,
(Signed) Karl E. Bakke
Karl E. Bakke,
Assistant Secretary.


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Federal Reserve Bank of St. Louis

BOARD OF GOVERNORS

Item No. 3
9/27/66

OF THE

FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS ornciAL CORRESPONDENCE
TO THE BOARD

September 27, 1966

Board of Directors,
First State Bank,
Bandera, Texas.
Gentlemen:
Pursuant to the provisions of Section
24A of the Federal Reserve Act, the Board of
Governors of the Federal Reserve System approves
an investment in bank premises of not to exceed
$119,000 by First State Bank, Bandera, Texas, for
the purpose of constructing a new head office
building.
Very truly yours,
(Signed) Karl E. Bakke

Karl E. Bakke,
Assistant Secretary.


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Federal Reserve Bank of St. Louis

Item No. 4

9/27/66

AM
TELEGR
WIRE SERVICE
LEASED

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON

September 29, 1966.

To the Presidents of all Federal Reserve Banks
teeing agencies,
The Board, after consultation with the guaran
interest
has authorized an increase in the maximum permissible rate of

on V-loanf; from 6 to 7-1/2 per cent effective immediately. No change
one per
was made in the present maximum commitment fee of one-half of
cent or in the schedule of guarantee fees now in effect.

In those

tee fee
cases where the loan rate exceeds 6 per cent, the guaran
cent.
nevertheless is to be computed as though the loan rate was 6 per
institutions
It iS suggested that you advise the interested financing

in your District of the Board's action.
to the Press the
In this connection, the Board is handing
following statemPnt regarding the change:
HERE COPY "A".
(Signed) Merritt Sherman
Sherman


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Federal Reserve Bank of St. Louis

6()!-)
Item No. 5
9/27/66

BOARD OF GOVERNORS
.
'
.

•

OF THE

FEDERAL RESERVE SYSTEM

4trrrr'..WASHINGTON
OFFICE

or THE

CHAIRMAN

September 29, 1966.

The Honorable J. M. Malloy,
Deputy Assistant Secretary of Defense
(Procurement),
Department of Defense,
Washington, D. C. 20301
Dear Mr. Malloy:
This refers co the Board's letters of June 10 and
August 15, 1966, relating to a possible increase in the maximum
!ate of interest on so-called "V-loans", i.e., loans by commercial
uanks tc) defense production contractors guaranteed by certain
agencies of the Government.
In the light of responses received from the guaranteeing
agencies, the Board has authorized an increase in the maximum rate
?f interest on such loans from 6 per cent to 7-1/2 per cent effective
,4:mmediately, with no change to be made in the maximum permissible
!ftmitment fee of one-half of one per cent or in the guarantee fees
;7 charged by the guaranteeing agencies. The Board's action also
th°vided that, in cases where the loan rate is in excess of 6 per cent;
e guarantee fee should nevertheless be computed as though the loan
rate was 6 per cent.
Sincerely yours,
(Signed) Wm. McC. Martin, Jr.
Wm. McC. Martin, Jr.


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Federal Reserve Bank of St. Louis

L()
Item No. 6
9/27/66

Pox. immediate release.

September 29, 1966,

The Board of Governors of the Federal Reserve System,
after consultation with the Department of Defense and other Governrtent agencies that guarantee loans made by private financing institutions for the financing of defense contracts, has acted to raise the
maximum rate of interest that may be charged for these special
guaranteed loans (V-loans) authorized under the Defense Production
Act.
No change was made in the existing schedule of guarantee
fees. The Board's action also provided that in those cases where the
interest rate on a loan is in excess of 6 per cent, the guarantee fee
rMist continue to be computed as though the interest rate were 6 per
cent.
The new maximum rate on V-loans is 7-1/2 per cent,
but the net
return to a lending institution is governed by the proportier of the loan that is guaranteed by the Government agency whose
defense contract is being financed, For example, if a loan is 100
Per

cent guaranteed, the maximum net return to the lending

l Istitutio
'
n will be 4.5 per cent after deducting the guarantee fee
114Yabie to the Government agency. A 90 per cent guaranteed loan
Will Yield 5,9 per cent and a 75 per cent guaranteed loan will yield


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Federal Reserve Bank of St. Louis

8 per cent to the lending institution after guarantee fees have been
deducted. Before this change, the maximum interest rate was
6 P'
cent, but after deducting the guarantee fee payable to the
C
"Ivernrnent agency, a 100 per cent guaranteed loan netted a lending
bank °Illy a maximum 3 per cent; a 90 per cent guaranteed loan, 4.4
Per cent; and a 75 per cent guaranteed loan yielded 5. 3 per cent.
The action of the Board is designed to bring the net return
t° financing institutions on V-loar.s under this program more in line
With current
lending and money market rates and thus help to assure
firtarleing from commercial sources for contractors and subcontractors
tlgaged in defense work.
Information received by the Board from the Federal Reserve
844kS

showed that the former ceiling rate, which had been in effect

eillee 19571 provided a net return to financing institutions that had
beeft
'rile increasingly noncompetitive with alternative loan and invest41ent o
Pportunities. As a result, the amounts disbursed under
44th°z'ized V-loans dropped from $152 million in fiscal year 1964 to
$119 znillion. in fiscal year 1965, and $78 million in the year ending
Juine
30, 1966, notwithstanding a substantial increase in military
"
c elbent,
Although originally a World V. ar II measure, the V -loan
Ptogt
alb

was revived by the Defense Production Act of 1950. From


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Federal Reserve Bank of St. Louis

-3-

3b

September 1950 through June 1966 a total of 1,633 loans had been
authorized amounting to $3.5 billion. Most of these loans were made
d tiring the Korean War period. The loans average approximately

SZ Million,

sized defense
and are primarily used by small and medium

contractors having fewer than 500 employees. The income to the
Government from the guarantee fees on authorized loans, after
de

duction of established and foreseeable losses, is in excess of

$37 million.
1950,
Under provisions of the Defense Production Act of
and implementing Executive Orders, designated procurement agencies
cornthS Government1
--/ are authorized to guarantee loans made by
tnercial banks and other private financial institutions to finance and
"Pedite production for national defense and to finance contractors
Ind subcontractors in connection with, or in contemplation of, the
,
ter
``sulation of their defense contracts. The Federal Reserve Banks
a" ae

fiscal Agents of the guaranteeing agencies in receiving appli-

118 for such credits and in the making of guarantee contracts.
-0-

1/ The authorized guaranteeing agencies are the Departments
the AAgency, the
trnY, Navy and Air Force, the Defense Supply
4Jepa
aer -rtrnents of Commerce, Interior and Agriculture, General
the
Na
8 Administration, the Atomic Energy Commission, and
t1°11a1 Aeronautics and ..ipace Administration.

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Federal Reserve Bank of St. Louis

Item No. 7
9/27/66

BOARD OF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551

OFFICE OF THE CHAIRMAN

September 28, 1966.

The Honorable Wright Patman,
hairman,
'141mittee
tee on Banking and Currency,
lb
of Representatives,
14shington,
20515
D. C.

2

bear lir. Chairman:
The following answers are furnished in response to the 72
questions enclosed with your letter of September 19, 1966, to which
.
You
consideration
of
ndicated a prompt reply is needed in connection with
S. 3158.
-4141....92.Eation of Credit"

n1. Under our fractional reserve monetary system
our commercial banks create
the nation's money supply.
enjoy a virtual monopoly on
money and the allocation of
this mechanism.

the vast bulk of
Commercial banks
the creation of
credit through

What mechanism exists, if any, to insure
prudent, effective and nondiscriminatory
operation of this privately controlled
system?"
primary reliance
Answer: In allocating credit in our economy,
banking
'
u eed on competitive enterprise operating through a
etj
with each
competing
banks
of
thousands
othecture that features many
keritt, with other financial institutions, and with the money and capital
supervisory agencies help to ensure sound
°Perets. Federal and State
competition can spur
t4oreati°ns and to maintain a structure in which
endeavors
to f effective banking services. The Federal Reserve System
credit
arld "ter credit conditions under which the overall supply of
capacity
111"eY can sustain economic growth without straining the

is


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Federal Reserve Bank of St. Louis

3614
The Honorable
Wright Patman

-2-

()
if the economy. Allocation of that credit among particular borrowers
rse best accomplished by market forces, we believe, although we
die°gnize that at times special efforts are needed to prevent a
Proportionate share of total bank credit from flowing into one
.Tlcular
P
channel or another, e.g., business loans today, as
icated by the enclosed press release of September 1.
"2.

What public controls exist by law or regulation
to prevent undue concentration of credit
channeled to large corporate customers of
commercial banks which have close ties to
such banks through interlocking directorships
or other means?"

Answer: The Bank Merger Act and the Bank Holding Company Act
aci4tehe
established under them are designed to preserve
thet it3ition among banks and prevent undue banking concentration,
e Y guarding against undue concentration of credit. Other provisions
airaed
by ba Primarily at maintaining sound banks, such as the limits on loans
cori„ nks to any one borrower, may incidentally also work against such
-en
tration.
"3.

On the other hand, what guarantees exist either
through law or regulation that the credit needs
of small business are met by commercial banks?"

borrow
Answer: No law or regulation guarantees that any particular
are
er) large or small, will get a loan f,-om a bank. Since most banks .
1flia1l, they lend only to relatively small businesses. In recognition
Of 6
diffie fact that smaller businesses may at times, however, have greater
has eeultY in obtaining funds than do larger businesses, the Congress
help stablished special arrangements under the Small Business Act to
as bymeet the credit needs of small businesses, by direct loans as well
bustri encouraging loans to small business by commercial banks and small
'88 investment
companies.


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Federal Reserve Bank of St. Louis

Honorable Wright Patman

"4.

-3-

Since the power to create money is sovereign-a prerogative of the public--what rights of
appeal, if any, does a person have who is denied
credit by a bank?"

Answer: No legal right of appeal exists, although a practical
°tie fl
"vas--the right to go to alternative sources of funds.
n5.

Furnish the Committee whatever information
available concerning the contention that large
borrowers have a large portion of the available
credit allocated to them."

a the ... nswer: One source of detailed information on this subject
ktl addi'uuY made by the Board in 1958, a copy of which is enclosed.
Nvor"tion, the Quarterly Financial Reports for Manufacturing
stIciEcns prepared by the Federal Trade Commission and the Securities
bariliteange Commission contain information on outstanding loans from
it 811 bY asset size of corporation. Over the current business upswing,
busialould be
observed, smaller banks, which lend primarily to smaller
tucth:
8as , have increased their commercial and industrial loans at a
8
1960 'aster
rate than large banks. For example, between December 31,
cityrd December 31, 1965, these loans rose 59.5 per cent at reserve
eent Et tik8 compared with 73.5 per cent at country banks and 94.3 per
- nonmember
banks.
"6.

Also furnish the Committee copies of all complaints from small business and individual
borrowers you have received over the last five
years."

Allgwer• While we have received letters commenting on the
111(let, `'clve effects of monetary policy, incoming mail indicates a
"ncern about developing inflationary pressures.


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Federal Reserve Bank of St. Louis

The Ho
norable Wright Patman

-4-

41,'
448 to Protect
the Public Interest"
n7.

Our commercial banking system indisputably is
a public service industry, particularly as a
result of its exercise of the public authority
to create money. As such it is imperative that
our banking laws protect the public right of
access to available sources of credit and also
protect the public's rights and interests as
depositors.
What changes or additions to the present statutes,
in your opinion, are necessary to protect the
public interest in this regard?"

Recommendations for such amendments have been
aubmitted Answer:
these
to you from time to time. One of the most important of
i8 S.
3158.

"8.

What shortcomings are you aware of in your
agency and/or sister agencies in administering
the banking laws to serve the public?"

Answer: We believe that the three Federal supervisory agencies
ded
1 c4ted to the public interest and striving to carry out their
,:
'espo
:
sib
ilities to the best of their ability. The extent to which these
efte1
L8 hau
ve succeeded is better left to others to judge.
n9.

Does there exist any conflict between your
agency and other Federal or state banking
supervisory agencies, either as regards
existing law or regulations?"

of areas in which we
114\ie been ADAyer.
----• As you know, there are a number
of the Currency,
Comptroller
4t1d
the
unable to reach agreement with
wh we d.
-ether lsagree with the Federal Deposit Insurance Corporation as to
olldep-os
orption of exchange charges constitutes the payment of interest
4.ts.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

he

Honorable Wright Patman

"10.

ister.A

-5-

What criminal penalties are provided for
violations of the banking laws your agency
administers?"

Answer: Criminal penalties for violations of the laws admin105, the Federal Reserve are listed below:

Subiect
41.eign banking corporations

1)itector or officer serving
after
removal

Provision of
U. S. Code
Title 12, § 617

Prison term of 1 to
5 years, or fine of
$1,000 to $5,000 or
both

Title 12, § 630

Prison term of 2 to
10 years, plus fine
up to $5,000

Title 12, § 631

Prison term of up to
5 years, and fine up
to $10,000

Title 12, §

77

tailat
Holding Company Act


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Federal Reserve Bank of St. Louis

Penalty

Title 12, § 1847

Prison term of Up to
5 years, or fine of
up to $5,000, or both
Fine up to $1,000, per
day for violation of
Board's order or regulation; prison term up
to I year, or fine up
to $10,000, or both,
for violation of any
provision of the Act;
officers, employees,
et al, of a holding
company are subject
to prison term of up
to 5 years, or fine of
up to $5,000, or both,
for false entries, per
Title 18, § 1005

The H
onorable Wright Patman

Securities registration,
rePorts,
etc.
!!argin requirements
borrowing
to purchase
registered
securities

N.se entry
to deceive
examining authority

-6-

Title 15, § 78ff

Prison term of up
to 2 years, or fine of
up to $10,000, or both,
except a fine not exceeding $500,000 may
be imposed against an
exchange

Title 18, § 1005

Prison term of up to
5 years, or fine of
up to $5,000, or both

41se s
Title 18, § 1014
to i tatement or report
nfluence action of
Reserve Bank on any application) loan, discount, etc.

Prison term of up to
2 years, or fine of up
to $5,000, or both

(Iffer of fee
for loan from
Reserve Bank; acceptance
°I such
offer

Title 18, §§ 214,
215

Prison term of up to
1 year, or fine of up
to $5,000, or both

°Ifer of
.Loan or gratuity
to examiner;
acceptance by
eaminer

Title 18, §§ 212,
213

Prison term of up to
I year, or fine of up
to $5,000, or both,
plus a fine equal to the
sum loaned or given

Wro
ngfulL issuance of currency
by

334

Prison term of up to
5 years, or fine of up
to $5,000, or both

b
cer tification of check
Y Reserve
Bank employee

Title 18, § 1004

Prison term of up to
5 years, or fine of Up
to $5,000, or both

be
emps, ment by Reserve Bank
-1"Yee

Title 18, §

656

Prison term of up to
5 years, or fine of up
to $5,000, or both; but
if less than $100,
prison term of up to
1 year, or fine of up
to $1,000, or both

repr
Title 18, §
esentation of
Inetflbership in Reserve System

709

Prison term of up to 1
year, or fine of up to
$1,000, or both, for
individuals; fine of up
to $1,000 for business
entities

by Federal
Reserve Agent,
4. al

18,

ajse

418e


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Federal Reserve Bank of St. Louis

The

Honorable Wright Patman

-7

Theft by
examiner

Title 18, §

4t0ngfu1
disclosure of
inf
ormation by examiner;
Per
formance by examiner
°f service
for bank

Title 18, §§ 1906,
1909

"11.

656

Prison term of up to
5 years, or fine of up
to $5,000, or both; but
if less than $100,
prison term of up to
1 year, or fine of up
to $1,000, or both;
disqualified as examiner
Prison term of up to
1 year, or fine of up
to $5,000, or both

When a bank examiner discovers a suspected
criminal violation, what formal reporting
procedures are followed?"

tristr,
Answer: Examiners for the Federal Reserve Banks are under
violauctions to report immediately all apparent or possible criminal
ti°ns which they discover to the vice president in charge of examina:°f their respective Reserve Banks. Upon receipt of the details, the
kese
forvav! Banks report the offense to the local United States Attorney and
4ceiru ooPies of the reports to the Board's offices in Washington. Copies
ved by the Board are forwarded to the Department of Justice.
"12.

Are all suspected criminal violations immediately
reported to the U.S. Attorney, the Federal Bureau
of Investigation, and the Department of Justice?"

misdemeanors
orAllatIty.: Yes; however, the Reserve Banks do not report
Yue:
it would not
judgment
d -ItemPle, defalcations of $100 or less) if in their
retbilairable or serve any useful purpose to do so. Each Reserve Bank is
taller
eed to preserve in its files a complete record of the facts and circum8 of each case not reported.
"13.

How many criminal violations were reported
by your agency in 1965?"

Justice
3
Answer* In 1965, the System reported to the Department of
P8. 7------.
included
This
banks.
P°B
94 rot
le criminal violations involving State member
bank
than
other
41r.
yl vberies and 11 cases of larceny committed by persons
°Yees.
"14.

How many indictments and convictions were
obtained on the basis of these reports?"


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Federal Reserve Bank of St. Louis

The

Honorable Wright Patman

-8-

Answer: The System does not attempt to follow each offense
r!jltorted to determine the final results of indictment or prosecution
4Q, as a consequence, this information cannot be supplied.
"15. In 1965, how many officers, directors or
employees of insured banks were removed from
office for conviction of a criminal offense
involving dishonesty or breach of trust?
(See 12 U.S.C. 1829)"
Answer: Presumably, the question refers to that section of
the
vri‘recieral Deposit Insurance Act which provides that "Except with the
off`. ten consent of the Corporation, no person shall serve as a director,
is .cer, or employee of an insured bank who has been convicted, or who
or nereafter
convicted, of any criminal offense involving dishonesty
rltis breach of trust." As you know, this statute does not provide for
thecl
ival of such persons and is directed primarily toward prevention of
of
employment by insured banks. In actual practice persons guilty
tss7 criminal offense or even accused of a breach of trust frequently
tOn immediately from the bank. We know of no instance where it has
itIvrt necessary to "remove" any officer, director, or employee so
lved in the sense of ordering him to cease to serve. In the event
411!
Itamination of a State member bank disclosed an officer, director,
or ;
441.41Ployee in the service of the bank in violation of law, immediate .
"for their removal would, of course, be initiated by the System.
"16. Are you aware of any evidence of "organized
crime" in banking? If so, state the extent
of this involvement."
barki
Answer: We have no evidence of extensive penetration of
illstang by "organized crime" although there have been occasional
Ices in which persons with criminal backgrounds attempted to
kelt
:
the e the assets of banks, such as those on which your Committee and
he Senate Permanent Subcommittee on Investigations have recently held
arings.
"17. What checks are made by your agency to determine
whether or not banks under your jurisdiction have
been violating state usury laws?"
ekkin
Answer: Our examination report form requires that the
°4 10 ers ascertain the usual, highest, and lowest rates of interest
ekki4ris s Any violation of usury laws detected in the course of an
ekkination is brought to the attention of the bank and a copy of the
Sirketle,,tion report is furnished to the State Banking Department.
its 4tate law is involved, the State is primarily responsible for
znforcement.


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Federal Reserve Bank of St. Louis

ft

The Honorable Wright Patman

#jkl._

-9-

"18. Cite all specific instances or cases in the
last five years where action has been taken by
your agency to protect the public interest as
regards commercial banking operations under
your jurisdiction."
Answer: The Board naturally believes that it is exercising
itS
authority
in the public interest at all times. We provide the
Congress
with an account of our actions each year in the form of an
annual report.
ttt,
Audits, and Reports"
"19. S. 3158, the so-called "cease and desist"
legislation, if enacted, would require adequate
examinations, audits, and reports on commercial
banks.
How many field examiners does your agency employ,
and how often are the banks under your supervisory
jurisdiction examined by your agency every year?"
Answer: The question evidently refers to examinations of
State
Res
member banks, which are made by examiners employed by the Federal
te !rVe Banks. This examination force averages about 450 men. State
strer banks are examined once a year, except where special circumnces call for additional examinations.
"20. Describe in detail the examination of bank
trust departments."
Answer: There are enclosed a copy of the trust report of
pe;7
1 ,- ation and a copy of the trust manual used by examiners for the
pro ral Reserve Banks. It is believed these will provide you with the
cedures followed in the examination of bank trust departments.
"21. How many banks under your supervisory jurisdiction are audited each year by independent
public accounting firms?"
that

Answer: We have no information on this question to add to
already obtained by your Committee's survey.
"22. What authority do you have to require
independent audits of banks?"

Answer: No specific authority, although there is implied
414110,-4
"tY under some circumstances.


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Federal Reserve Bank of St. Louis

The Honorable Wright Patman

"23.

-10-

cf

• ,t
tikoAt,

Do you feel that there is need for independent
audits of all commercial banks under your
jurisdiction?"

Answer: The Board's views were furnished in our letter of
Jul.Y 28, 1965, a copy of which is enclosed.
"24.

What reports are required to be filed with your
agency by banks under your jurisdiction other
than ordinary examination reports?"

Answer: State member banks are required to submit reports
Of condition (Form 105), reports of earnings and dividends (Form 107),
and reports
of changes in management or stockholdings (pursuant to
tt.I, blic Law 88-593). All member banks are required to furnish informaarn needed for computation of required reserves (Form 414). Reports
n also required from affiliates of State member banks (Form 220)
a!
State member banks
8 1_4 foreign banking corporations (Form 314).
:
t7ject to the requirements of the 1964 amendments to the Securities
a!!Change Act of 1934 are also required to file annual reports (Form F-2),
Ly reports (Form F-4), and special reports needed to keep
silluiajterla„?rmation previously filed on a current basis (Form F-3). In
til'ultion, a number of State member banks voluntarily cooperate with
e Board by furnishing statistical information, both on a regular
basis
and in response to special surveys.
Question 25 is identical to question 24.
"26.

How many reports did your agency receive in 1965
pursuant to Public Law 88-593, requiring
notification to Federal banking agencies of
changes in control of insured banks and loans
secured by 25% or more of the voting stock of
insured banks?"

Answer: During 1965, 57 reports were received pursuant to
bank c Law 88-593 indicating 35 changes in control of State member
cent
m and 22 loans extended each of which were secured by 25 per
or !
bank.
member
— re of the voting stock of a State
'
"27.


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Federal Reserve Bank of St. Louis

What rules or regulatiodshave you promulgated
to protect the interests of minority stockholders, and what comments do you care to
make with respect to your experience under
the Securities Acts Amendments of 1964,
requiring certain commercial banks to
make public information as to their
operations?"

!tf,414
0,14.

The Honorable Wright Patman

-11-

t3J

t3:

Answer: Enclosed is a copy of Regulation F, and the press
ease announcing its issuance. You will notice on page 4 of the
Press release reference to a deferred decision on provisions offering
d
!
ditional protection to minority stockholders. The Board expects
LO publish soon proposed revisions to the regulation incorporating such
o visions. Experience thus far with the legislation indicates it is
Pre
,Persting reasonably well, and we have no recommendations for changes
"11 the statute at this time.
"28.

In the two years since enactment of the Securities
Acts Amendments, have you achieved your avowed
goal of uniform financial reporting by commercial
banks under your supervision?"

Answer: This question appears to be based on a misunderstandUniform financial reporting by commercial banks subject to Federal
erve supervision is not an "avowed goal" of the Board. As a part
th its Regulation F, "Securities of Member State Banks" (12 CFR 206),
the
Ilciard dealt with principles of financial reporting and prescribed
rtain general requirements with respect to such matters as accrual
a,
oicounting,
valuation and amortization of fixed assets, and consolidation
Th the financial statements of banks and certain of their subsidiaries.
pre Board's objective in this respect was and is to achieve, as far as
tha cticable, comparability of financial statements of banks, in order
that the
a
investing public may make informed investment decisions. To
achieved
have
thereof
eueat extent, the Regulation and administration
9Ach comparability. It must be borne in mind, of course, that more than
Per cent of all State banks are not subject to the requirements of
ulation F or of the comparable regulations of the Federal Deposit
8UranCe Corporation.

T

:
a

"29.

What additional statutory authority is required
for you to carry out your responsibility with
respect to examination, audit, and reporting
requirements?"

Answer: As indicated in the letter referred to in answer
to
apequestion 23, we feel there would be real merit in legislation
re cifically authorizing the Federal bank supervisory agencies to
i
coctluire
outside audits in appropriate cases such as where internal
5
1,70u r°1 are inadequate or have broken down. Enactment of S. 3158
;1 4 fill the need for "intermediate" powers with respect to supervision
Of :
panks.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

The Honorable Wright Patman

"11 enc

-12-

)(1

Procedure -- Rights of Parties"
"30.

"31.

a
What formal procedures are available as
ers,
chart
new
for
cants
matter of right to appli
mergers or branches?"
Are record hearings available?"

Board's Rules of OrganizaAnswer: Refer to pages 24-29 of the
tion and Procedure, a copy of which is enclosed. See particularly
Pages 24-26.
"32.

Is judicial review available?"

dures relating to and
Answer: Judicial review of Board proce
or branches is
rs,
actions on applications for new charters, merge
Board exists with respect
tova ble. The
!ila
e sole chartering power of the
corporations authorized to do foreign banking or financial business
Act (12 U.S.C.
P4rsuant to section 25(a) of the Federal Reserve
of Governors is
Board
.)
on 25(a), the
e 1 et se4 . Pursuant to secti
corporation to
cant
appli
bmPowered to issue a permit authorizing the
sion for
provi
no
ins
jegin business. The authorizing statute conta
provisions
w
revie
ial
the judic
(24 /dicial review. The Board interprets
cable
appli
being
as
Act
.„; section 10 of the Administrative Procedure
t.
caappli
h
branc
and
r
ti the aforementioned function. Regarding merge
ed
amend
as
c)
1828(
.
(12 U.S.C
h "s, while neither the Bank Merger Act
val
appro
h
branc
the
e Public Law 89-356, February 21, 1966) nor
?
'
of Board action,
tlriatute (12 U.S.C. 321) provides for judicial review
of the Adminthe
sions
provi
Board has considered the judicial review
dures as to
proce
Board
to
botrstive Procedure Act as being applicable
U.S.C.
(12
sion
provi
a
ins
Further, the Bank Merger Act conta
s
State
d
Unite
the
by
1828(c)(7)(A) through (D)) for the initiation
Atf.
s under the antitrust laws. In
°rheY General of judicial proceeding
'
novo the
i;Ir such action, the trial court is authorized to review de
itute
const
would
e,
es presented. Such a proceeding, of cours
n. Illustracatio
appli
r
merge
•rlicial review of Board action on a given
review provisions of the
e of the applicability of the judicial
!
Ari
ns for the establishment of
11,7inistrative Procedure Act to applicatio
Bank and Trust
enches by State member banks is the case of Old Kent
U.S.D.C. D.C.
58,
1993V. Wm. McC. Martin, Jr. et al., CA No.
"33.

tive Procedure
What provisions of the Administra
dures?"
Act apply to your agency proce

Administrative Procedure Act,
Answer: All provisions of the
to
are considered to be applicable
datory, permissive, or exclusionary,
and
ions
funct
its
in relation to
, Procedures adopted by the Board
0
ye
rations.

Z


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Federal Reserve Bank of St. Louis

The Honorable Wright Patman

-13'

"34.

Are all requirements for the granting of charters,
mergers and branches, or other actions published
as a matter of record so that applicants may know
precisely what is required to obtain approval?"

"35.

Are all such regulations and requirements published in the Federal Register?"

Answer: Such regulations and requirements are set forth in
Board's Rules of Organization and Procedure, which is published in the
ederal Register. Additional information is set forth both in specific
!
PPlicable regulations, which are published in the Federal Register, and
1111 ePPlication forms. Although such forms are not set forth in the
a
erd'a Rules of Procedure, the Rules include a list of such forms and
at
atement that they are available at the Reserve Banks.
the

7

"36.

Are all interested parties invited to comment
on proposed regulations and are public hearings
always permitted parties in order to present
their views on proposed regulations?"

"37.

Do third parties have the right to participate
in agency procedures concerning approval of a
charter, merger or branch applications?"

Answer. Refer to pages 24-29 of the Board's Rules of
OraanizatiZE—gReProcedure, a copy of which is enclosed.
"38.

Which of your records and documents are required
by law to be kept confidential?"

Board to keep
Answer: No provision of law expressly requires the
to conrelating
s
provision
special
are
document confidential. There
18
title
of
1906
section
as
such
process,
on
of entiality of the examinati
ative
prothe United States Code and section 3(e)(8) of the Administr
Actcedure Act, as amended by Public Law 89-487. Section 30 of the Banking
°f 1933 requires confidentiality in connection with removal proceed-

4,7):,

"39.

What records and documents do you keep
confidential from the public as a matter of
administrative practice?"

"40.

Have you published any rules or regulations
providing for the confidentiality of records
and documents and reports filed with your
agency?"


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Federal Reserve Bank of St. Louis

The Honorable Wright Patman

-14-

"41.

What records, reports and documents are not
confidential?"

"42.

Are these reports, records, and documents
readily available for public inspection?"

Answer: The answers to these questions are set forth in the
of Organization and Procedure, a copy of which is enclosed,
s
i
Rules
B(3ard
at Pages 13-19.
"43.

Do you maintain facilities for public inspection of documents as does, for instance, the
Securities and Exchange Commission?"

Answer: Facilities are maintained for public inspection of
re
gistration statements and reports filed by State-chartered insured
bank
both member and nonmember, under the 1964 amendments to the
Securities Exchange Act. Requests to examine other papers available for
sPection are not received often enough to warrant maintenance of
8Pecial facilities for that purpose, but such facilities are made available as
needed.
"44.

Is informal ex parte contact between officials
in your agency and parties seeking charters or
other approval permitted, or are all discussion
and contacts committed to writing and made a
permanent part of your files?"

Board
Answer: In many instances informal contact between
Per
SOrs...
ons
transacti
101„, uluel and parties seeking Board approval of proposed
potential
the
cases,
ii:cedes formal submission of an application. In such
g
concernin
on
nicants are directed to published sources of informati
Ihard
extent
the
To
requirements with respect to such applications.
tscrsnted, written notations or memoranda are made of such informal concontacts
Once an application has been filed, discussion and
e limits,
reasonabl
c_Lween Board officials and applicants are, within
files.
Qrsalitted to writing and made a permanent part of our
"45.


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Federal Reserve Bank of St. Louis

Have any employees of your office in recent
years who were processing charter or merger
applications been offered employment or
been subsequently employed by such
applicants?"

The Honorable Wright Patman

-15-

Answer: The Board cannot, of course, be certain that all offers
of employment of the nature described have come to its attention. The
ward is unaware of an instance where an offer of employment to a Board
employee in the position above described has resulted in employment by
such an applicant. The Board understands that a former member of the
Board's legal staff was retained, subsequent to his return to private
sctice, by such an applicant. As far as the Board is aware, in no
Instance of employment or offer of employment has there been presented a
Mssible conflict of interest.

r

"46, What rules of conduct have you published with
respect to agency employees?"
Answeh Rules governing "Employee Responsibilities and Conduct"
/lere published in the Federal Register on March 5, 1966. A copy is
enclosed.
"41.

Are your employees permitted to participate in
union activity, including the organization of
unions?"

Answer:
"48.

Do you know of any cases where employees of your
agency were discriminated against because of
union activity?"

Answer:
"49.

&a th

No.

Are your employees under the "classified'I civil
service?"

Answer:
"50.

Yes.

No.

Do officials and employees of your agency
customarily socialize with people of the
banking industry?"

Answer: 'Board officials and employees often attend social
rings at which bankers are present.


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Federal Reserve Bank of St. Louis

The Honorable Wright Patman
"51.

-16-

'14

I quote from a Banking and Currency Committee staff
analysis entitled "Audits of Banks by Public
Accountants." This was prepared for the Subcommittee
on Domestic Finance and released March 22, 1966.
"The actions and policies of the three bank
supervisory agencies suggest a conspiracy
of concealment among the supervisory agencies
and the banks which they are legally responsible for regulating. Simple requests addressed to the supervisory agencies for
financial information regarding commercial
banks get the standard response of 'Sorry,
but that is confidential information."
Is there anything in S. 3158 which would cure the
secrecy problem cited in this staff analysis?"

Answer: Such requests are not met with a standard response
the information is confidential. Some requests are, where the informa8 'n1 requested
is confidential. Nothing in S. 3158 would affect this
ituation.
that

Activityj Restraint of Trade and Self-Dealing by Banks"
"52.

In recent months, there has been much publicity
about contributions by banks, bank officers, and
directors to various political candidates.
Have any of the bank supervisory agencies investigated any of these public charges and, if so,
what have been the findings?"

Answer:
1153,

No such investigation has been made by the Board.

If you have not investigated these published
reports of political activities by banks and
bank officials, would you explain why not?"

Answer: Nothing has come to the attention of the Board that
aPPectr
keel ed to
warrant any special investigation. Federal law does not
be
e individuals from engaging in political activities simply
elattillee they are connected with banks. Action by the Board would be
poe'jized only where a State member bank has made a contribution to
etkil itioal party or candidate in violation of 18 U.S.C. 610. Any
I e r violation disclosed in the examination of a State member bank would
ePorted as described in the answer to question 11.


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Federal Reserve Bank of St. Louis

The Honorable Wright Patman

54.

-17-

Would you, under S. 3158, investigate charges of
political activity by banks and bank officers?"

Answer: Under any applicable statute, including S. 3158, the
Board would initiate appropriate investigation of charges of prohibited
Political activity by a member bank.
To what extent has your agency investigated the
use of bank funds for lobbying activities on
pending legislation before state and national
legislatures?"

"55.

Answer:

No such investigation has been made.

Would you broaden your investigation of lobbying
activities and lobbying expenditures under provisions of S. 3158?"

"56.

Answer:

No.

The pending bill provides for removal of bank
officials under certain circumstances.

"57.

Would such circumstances include collusion be• tween the bank and a customer of the bank
designed to freeze out other business enterprises in a community? For example, would this
legislation cover a situation where a bank
official entered into an agreement with a local
manufacturer to refuse loans to the manufacturer's
competitor?"
Cases

14("ad

Answer: Suspension or removal orders could be issued only in
involving, among other things, personal dishonesty; this element
not seem to be present in the example given.
"58.

The Subcommittee on Domestic Finance of the Banking and Currency Committee is carrying out a
survey of commercial bank stock ownership. One
question being looked into is the extent to which
banks use their trust departments to purchase
bank stock, both of their competitor's as well
as stock of the trustee bank.
Would you regard such purchases as a sound banking operation?"


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Federal Reserve Bank of St. Louis

tryir•ti.

The Honorable Wright Patman

-18-

41,M).

Answer: We would not regard all such purchases as unsound per se.
It would depend on all the circumstances and conditions surrounding the
trEmsaction. As indicated by the Board's former regulation on the exercise
of trust powers by national banks (which was terminated September 28, 1962,
When authority to issue regulations on that subject was transferred to the
Comptroller of the Currency), the Board believes that purchase of a bank's
°1411 stock by its trust department should be limited to cases where it is
exPressly required by the trust instrument or specifically authorized by
court order.
"Co
ordination"
"59.

One of the serious questions that has been raised
a number of times in the last few years in regard
to supervision of banks by the three Federal bank
supervisory agencies is the question of coordination of activity between these three agencies and
between them and the Justice Department. I regard
this as a serious problem.
What, if anything, in the proposed legislation
would help to solve this problem of coordination?"

Answer:
"60.

What would prevent agencies under this proposed
law from issuing regulations which would provide different criteria for the application of
this law to the three different sets of banks
under the examination and supervisory authority
of the three Federal bank supervisory agencies?"

Answer:
"61.

Yes.

If one of the Federal agencies issued rather
loose regulations and another issued strict,
there would be discrimination in the treatment
of different banks by agencies of the Federal
Government. Do you think this is fair?"

Answer:


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Federal Reserve Bank of St. Louis

See answer to question 65.

If the three agencies ever issue different
criteria and different regulations for the
application of this proposed law, doesn't this
mean unequal treatment for the three sets of banks?"

Answer:
"62.

Nothing.

No.

The Honorable Wright Patman

"63.

-19-

'tit)t

What criteria exists by which your agency will
judge whether or not a "cease and desist" proceeding will be undertaken?"

Answer: At the present time, the only criteria are those
specified in the bill.
"64.

Will these criteria be published in the
Federal Register?"

Answer: It seems unlikely that any formula could be devised
for publication that would cover all circumstances. In fact, one of the
arguments that has been advanced in favor of the bill is that it will
?liable problem cases to be solved on an individual basis, thereby lessen''g the need for a proliferation of published regulations.
"65.

How will your agency coordinate its activities
under S. 3158, assuming enactment, with the
other two Federal banking regulatory agencies?"

Answer: In the same way that we now endeavor to coordinate our
"
her activities, that is, through discussions and conferences between
members and staff and the heads and staffs of other agencies, as
3"
,
11
1,731'
t!'l as through the Coordinating Committee on Bank Regulation. Obviously,
"ie process will not assure complete agreement.
"66.

Is it not possible for each of the agencies to
use criteria which will discriminate against a
bank under the jurisdiction of one of the other
agencies?"

Answer:
"67.

Yes.

Would it not be more appropriate to have the
three banking agencies develop a single set of
criteria that would be applicable to all
commercial banks regardless of the individual
agency to whom a given bank were responsible?"

Answer: This is a most desirable goal and we will continue our
eine_
tee 'te efforts to achieve it. Under the present statutory division of
84 Pchnsibilities, however, there can be no guarantee that the effort will
eceed.


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Federal Reserve Bank of St. Louis

The Honorable Wright Patman
"68.

-20-

Would it not be more equitable to have one
administrative procedure hearing in the nature
of a court for all agencies involved so as to
insure uniform application of the law?"

Answer: Uniform application of the law can best be assured,
in 0ur
through unification of responsibility for administering
judgment,
the law.
413verl

Corn lex Criteria in S. 3158"
"69.

The provision of the proposed bill, S. 3158,
.providing for the removal of an officer or
director depends upon the interrelation of a
number of factors. Before action may be taken
against an officer or director, he has to have
(1) violated a provision of law, rule, regulation,
or final cease and desist order, or (2) engaged
in an unsafe or unsound practice, or (3) breached
his fiduciary duty as a director or officer, and
(4) as a result of such violation or breach of
duty the institution must suffer or will probably
suffer substantial financial loss or other damage,
or (5) the interest of depositors must be seriously prejudiced by such violations or breach, and
(6) such violation, practice, or breach of duty
must be one involving personal dishonesty.
Is it really necessary that this provision of
the proposed law be so complex and involve the
pyramiding of so many different criteria before
an agency can take action?"

Answer: No. Like many statutory provisions, this is the
of much negotiation among interested parties involving a number
Of
to comPromises. One such compromise is the provision limiting application
this ses involving personal dishonesty. The Board has reservations about
retool limitation, but has accepted it in the belief that the suspension and
bariatv l provisions of the bill are less important, insofar as State member
a4d 8 are concerned, than the provisions regarding cease and desist orders,
be ,that any deficiencies in the former are outweighed by the benefits to
c'ained from the latter.

Produ,,


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Federal Reserve Bank of St. Louis

The Honorable Wright Patman

"70.

-21-

OK)..),L)

Since this provision is so complex, can it
be effectively administered?"

Answer: We believe that it can, although it is likely to be
invoked rarely, insofar as State member banks are concerned.
"71. Wouldn't it be sufficient for the bill to
provide for the service of a notice of
removal on an officer or director upon a
finding of violation of law, rule, regulation, or final cease and desist order which
involves a breach of fiduciary duty of such
officer or director?"
Answer: This simpler provision would, of course, greatly
Pand the Board's authority. Naturally, we believe that we would
ilt&inIster it with discretion and would not abuse it. Just as naturally,
er institutions that would be subject to it have much greater doubts
°ut how it would be administered and oppose giving the Board that much
4eeway.
"72.

If this is not acceptable, what alternative
less complex criteria do you recommend?"

Answer: As indicated above, the simpler provision would be
Ptable to the Board.
Sincerely yours,

(Signed) Wm. McC. Martin,
Wm. McC. Martin, J •
tricio

ures


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Federal Reserve Bank of St. Louis

Item No. 8

TELEGRAM

9/27/66

LEASED WIRE SERVICE

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON
September 28, 1966.

Presidents, all Federal Reserve Banks.
Question has been raised whether Board's action of September 21, reducing
fr°m 5-1/2 per cent to 5 per cent maximum rate of interest payable by
member banks on time deposits of less than $100,000, requires a reduction
58 of the September 26 effective date in interest rates being paid on
certificates of deposit and other time deposits outstanding before
that date.
lloard has responded that a member bank may continue to pay on deposits
outstanding before September 26, 1966, the rate of interest that it was
13
t5Ying
immediately before that date. If it either has reserved the right
t° reduce the rate of interest in the event the Board of Governors lowers
tue maximum permissible rate below the contract rate or has the right to
u rminate the deposit upon specified notice, it may, but need not, do so.
!
:rn a contract is entered into on or after September 26, 1966, the rate
"L. interest may not exceed the new ceiling.

This is
consistent with the position taken by Board in its action of
Ju

01 1'Y 15, 1966, with respect to maximum rate effective July 20 on any
u tiPle maturity time deposit.
'
Boa,A
'u ls not issuing press statement on subject of this telegram but
7,!1_ggests that member banks in your District be informed of its substance
'fl such manner as you believe to be appropriate.

(Signed) Merritt Sherman
Sherman


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Federal Reserve Bank of St. Louis

Item No. 9
9/27/66

TELEGRAM
LEASED VVIRE SERVICE

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON

September 27, 1966.

TO PRESIDENTS OF ALL FEDERAL RESERVE BANKS.

The Board needs certain information in the consumer credit field, as
Part of its continuing evaluation of the impact of monetary policy on
the credit markets.

Brill has been in touch with the Heads of Research

to alert them to the general plan; this telegram spells out the details.
Board needs are twofold:

(1) some general impressions about lenders'

standards and the availability of funds for financing consumer purchases,
and (2) specific data on presently prevailing terms on consumer instalment

loans.

The Board would appreciate your conducting a spot survey of

4 small number of consumer credit lenders and venders in your city to
Obtain this
information.

The survey will cover

regular instalment con-

_,
tr
acts not revolving credit.
/1rst, as to general impressions about the consumer credit market, you
1411 probably want to ask the lenders such questions as:

(1) Are their

lending standards for consumer loans noticeably tighter than, say, six
Or eight months ago?

(2) If so, what policies have changed?

Of loans have been affected?

(3) Have they turned down a larger than

1114141 number of credit applicants in recent months?
charges on

What types

(4) Have their interest

consumer loans changed during this period?

(Get a few examples).

(S) 14 the case of finance companies or merchants, have they experienced any
re
at difficulty in obtaining funds for consumer lending?

(6) In the case

() banks, has management sought to curtail or ration the amount of funds
mde

available

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Federal Reserve Bank of St. Louis

for consumer lending purposes?

0110%

-2The second part of the survey will deal with data on
non-auto consumer
loans.

(Terms on auto loans are included in the material your Bank

regularly furnishes to the Consumer Credit Section.)

To the extent

Possible, the data should be based on actual consumer loan recor
ds
at banks, sales finance companies, consu
mer finance companies, credit
unions, and retailers, rather than statements of company policy
on
lending terms, which often differ from the actual prevailing terms
of transactions.

For each of the loan categories listed below, please

Obtain about 50 random observations of recent loans.

These can be

distributed among the various lenders more or less as you see fit,
although consideration should be given to the relative importance
in
Your District of the various lenders in the
different loan categories.
The loan categories are (1) furniture, (2) major
household appliances,
radio, television, (3) boats, trailers, mobil
e homes, (4) home improvement (excluding mortgage loans), (5) education, and (6) all other
Personal loans.

The information wanted for each loan is (1) purpose

(You should be specific, e.g., "refrigera
tor"--we will classify),
(2) face amount of note (including finance and other
charges),
(3) dawnpayment (incl
uding trade-in allowance), (4) maturity in months,
and (5) lender (bank, retailer, etc.)
Ihus, each Reserve Bank is to supply data on 300 separate loans
.

This

"fl Probably be most efficiently accomplish
ed by completing a short
f°rIn for each loan,
such as the one below:


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Federal Reserve Bank of St. Louis

3637
Date

$'ederal Reserve District Number

Consumer Loan Survey

(1) 22IRSTLV
(2
)Amount:*
(3) Dowuayment:*

(4) ItILIESII:
(5)Lender:

Omit cents.

two or threePlease summar ze- the answers to the general questions in a
Orville
Page statement and mail it, along with the completed forms, to
Th°mPson
materials should reach him no
in the Research Division. These
later than Wednesday, October 5.

Questions may be directed to Thompson.
(signed) Sherman
SHERMAN


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Federal Reserve Bank of St. Louis

:3638
BOARD OF GOVERNORS

Item No. 10
9/27/66

OF THE

of C01;!
4 •.

FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD

September 27, 1966.

CONFIDENTIAL (FR)
Mr. Darryl R. Francis, President,
Federal Reserve Bank of St. Louis,
St. Louis, Missouri. 63166
Dear Mr. Francis:
The Board of Governors has approved a special
Grade 16 maximum of $21,500 in the salary structure applicable to the Head Office of the Federal Reserve Bank of
St. Louis, effective immediately, as requested in your letter
of September 19, 1966.
Very truly yours,
(Signed) Merritt Sherman
Merritt Sherman,
Secretary.


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Federal Reserve Bank of St. Louis

)4 P.

BOARD OF GOVERNORS

Item No. 11
9/27/66

OF THE

FEDERAL RESERVE SYSTEM
WASHINGTON, O. C. 20551
ADDRESS OfFICIAL. CORRESPONDENCE
TO THE BOARD

September 28, 1966

Mt. Harry W. Huning, Vice President,
Federal Reserve Bank of Cleveland,
Cleveland, Ohio. 44101
Dear Mr. Huning:
In accordance with the request contained in
Your letter of September 21, 1966, the Board approves
the designation of the employees indicated on the list
enclosed with your letter as special assistant examiners
for the Federal Reserve Bank of Cleveland.
Appropriate notations have been made of the
names to be deleted from the list of special assistant
examiners.
Very truly yours,
(Signed) Elizabeth L. Carmichael
Elizabeth L. Carmichael,
Assistant Secretary.


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Federal Reserve Bank of St. Louis

BOARD OF GOVERNORS

Item No. 12
9/27/66

OF THE

FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD

September 28, 1966

irs Edward A. Wayne,
trresident,
Federal Reserve Bank of Richmond,
Richmond, Virginia.
23213
'ear Mr. Wayne:
The Board of Governors has recently approved incorporating
into the Board of Governors Plan of the Retirement System of the
/led
Reserve Banks certain provisions of Title V of Public Law
504. Section 507 of this Title increases the annuities of sur0,,ling spouses of deceased members who retired or died prior to
0,..uober 11, 1962 by 10 per cent. This adjustment became effective
`AlPtember 1, 1966.

4

In order that the widow of Maurice P. Flagg may continue
to r_
Boa c3ceive the same benefits that would have been payable under the
d Plan, as outlined in Mr. Leach's letter of September 9, 1955,
the
e Board of Governors authorizes the Federal Reserve Bank of
ii14.1chmond to pay to the Retirement System of the Federal Reserve
111.4
84 the amount necessary to fund the cost of this increase in
• Plaggls survivor annuity.

k

It is understood that the Retirement Office will bill the
or the cost of funding this benefit.
Very truly yours,
(Signed) Merritt Sherman
Merritt Sherman,
Secretary.

CO%

14r. Martin W. Bergin,
Secretary, Retirement System of
the Federal Reserve Banks,
Federal Reserve Bank of New York,
New York, New York.
10045

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Federal Reserve Bank of St. Louis