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17,60, Minutes for To: Members of the Board From: Office of the Secretary September 3, 1964. Attached is a copy of the minutes of the Board of Governors of the Federal Reserve System on the above date. It is not proposed to include a statement with respect to any of the entries in this set of minutes in the record of policy actions required to be maintained pursuant to section 10 of the Federal Reserve Act, Should you have any question with regard to the minutes, it will be appreciated if you will advise the Secretary's Office. Otherwise, please initial below. If you were present at the meeting, your initials will indicate approval of the minutes. If you were not present, your initials will indicate only that you have seen the minutes. Chm. Martin Gov, Mills Gov. Robertson Gov. Balderston Gov. Shepardson Gov. Mitchell Gov. Daane qt....A .1" Minutes of the Board of Governors of the Federal Reserve System on Thursday, September 3, 1964. The Board met in the Board Room at 10:00 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Balderston, Vice Chairman Mills Robertson Shepardson Mitchell Mr. Kenyon, Assistant Secretary Mr. Young, Adviser to the Board and Director, Division of International Finance Mr. Noyes, Adviser to the Board Mr. Molony, Assistant to the Board Mr. Cardon, Legislative Counsel Mr. Fauver, Assistant to the Board Mr. Hackley, General Counsel Mr. Brill, Director, Division of Research and Statistics Mr. Solomon, Director, Division of Examinations Mr. Shay, Assistant General Counsel Mr. Holland, Associate Director, Division of Research and Statistics Mr. Conkling, Assistant Director, Division of Bank Operations Mr. Daniels, Assistant Director, Division of Bank Operations Mr. Goodman, Assistant Director, Division of Examinations Mr. Leavitt, Assistant Director, Division of Examinations Mr. Sprecher, Assistant Director, Division of Personnel Administration Mr. Langham, Assistant Director, Division of Data Processing Mr. Forrestal, Attorney, Legal Division Circulated items. The following items, copies of which are attached to these minutes under the respective item numbers indicated, were a roved unanimously: 3044 -2- 9/3/64 Item No. Letter to Western Bancorporation International Bank, New York, New York, granting consent for the corporation to increase its capital stock and approving an amendment to its Articles of Association. 1 D.C., Letter to United Community National Bank, Washington, reduced n maintai to ion permiss granting its request for reserves. 2 ing Letter to Society Corporation, Cleveland, Ohio, rescind holding ing concern 1959 in made the Board's determination company affiliate status effective if and when Society company Corporation acquires the status of a bank holding Fremont The of stock of tion by virtue of its acquisi Savings Bank Company, Fremont, Ohio. 3 ng Letter to the Federal Reserve Bank of San Francisco regardi , Company Lease Center Music the the eligibility of bonds of Los Angeles, California, for investment by State member banks. 4 Letter to the Federal Reserve Bank of St. Louis concurring in 5 Letter to the Federal Reserve Bank of St. Louis authorizing the Bank to proceed with the preparation of final plans and Specifications for the proposed new Little Rock Branch building. 6 ng a Letter to the Federal Reserve Bank of Chicago approvi for rates salary ed increas of date ve effecti Change in the s. the Bank's painter 7 the opinion of the Bank that the present classification of g member banks in the Eighth District for the purpose of electin ctory. satisfa is rs Class A and Class B directo Lease Company As approved, the letter regarding the Music Center the draft that had bonds (Item No. 4) reflected certain editorial changes in been circulated. Chicago salary structures (Item No. 8). There had been circulated Personnel Administration to the Board, with a memorandum from the Division of v 4 9/3/64 Pito -3- dated August 24, 1964, containing a favorable recommendation, a request from the Federal Reserve Bank of Chicago for approval of increases averaging 3 per cent in the salary structures applicable to employees of the head office and the Detroit Branch. In discussion of the request, Governor Mitchell questioned Whether it was appropriate to make adjustments of such small proportions in Reserve Bank salary structures. He also noted that there appeared to be some inconsistency in the results of community wage surveys conducted by the Reserve Bank itself and by Business Research of Chicago. The independent Bank survey appeared to show that the head office structure 1ms about 5 per cent behind the community in grades 2 through 13, while the Business Research survey showed the head office structure to be only slightly behind the community. He doubted whether community rates could be measured with a fine degree of precision and suggested that revisions in Reserve Bank salary structures might appropriately be deferred until adjustments of as much as 5 per cent or more were clearly indicated. There followed discussion of the amounts and timing of recent salary structure adjustments at various Reserve Banks, and of the comPosition of the Business Research survey. Mx. Sprecher referred to the generalized nature of the Business Research survey, changes that had taken place in the participating group of organizations, and adjustments that the Chicago Reserve Bank had attempted to make in the survey for its own purposes. He indicated that the proposed Chicago structure would 3046 9/3/64 -4- Reserve appear to be quite well in line with the structures of the other Banks (it would rank third in the System, behind New York and San Francisco). existed Mr. Sprecher reported that President Scanlon felt a need increase, for some relief at this time, though not a 5 per cent structure and that Mr. Scanlon preferred relatively small and gradual adjustments, Bank. Which eased problems of salary administration within the Reserve wage While it was true, Mr. Sprecher acknowledged, that the competitive during market could hardly be measured with fine degrees of accuracy, the past several years there had been a trend on the part of the Reserve Banks, with Board approval, toward smaller and more gradual structure as adiustments so as to keep just about in step with the local market, oPposed to larger, more infrequent adjustments that would temporarily, at least, place the Reserve Banks ahead of the local market. After further consideration of the results of the Chicago surveys, Chicago Governor Mitchell commented that the information submitted by the Bank did not indicate that undue difficulty was being experienced in the attraction and retention of employees. record did not provide evidence. This might be the case, but the He added that he would not argue, of course, against the Reserve Banks paying competitive rates. He would argue, facts clearly however, against changes in scales of compensation unless the demonstrated that higher rates were needed. He concluded by saying that in the Chicago case he would be prepared to vote either for deferring any ",, 3041 9/3/64 -5- salary structure adjustment or for an upward adjustment of 5 per cent as seemed to be suggested by the Reserve Bank's independent survey, such a change was warranted. Governor Shepardson commented that at one time the Board had followed a practice of approving salary structures that were above the average for the respective communities, with somewhat longer intervals between adjustments. The argument was advanced within the Board several times that through this procedure the Reserve Banks were leading the market. The objective in moving toward smaller and somewhat more frequent adjustments was to avoid being in the position of leading the market, and also to avoid internal administrative problems such as the need for individ1R1 rather substantial adjustments, which might not be merited in oases, to bring salaries of employees up to the grade minimums of revised salary structures. Granting the difficulty of measuring small changes in the local market accurately, the practice of making more gradual adjustMents in the salary structures avoided some of the distortions that otherwise occurred. Governor Mills commented that he would be willing to accept the Proposal of the Chicago Bank, on the basis of having confidence in the jUdgment of the management of the Bank and its directors. He noted that the problem involved in Governor Mitchell's questions went back to the whole area of cost-push inflation, which the Board was trying to avoid. He did not feel that the Chicago proposal was inconsistent with the general -6- 9/3/64 trend of thinking that the Board had adopted in recent years in relation to the Reserve Bank salary structures. After further discussion the request of the Chicago Reserve Bank was approved, Governor Mitchell dissenting for the reasons he had indicated. A copy of the letter sent to the Reserve Bank pursuant to this action is attached as Item No. 8. Messrs. Holland, Sprecher, and Forrestal then withdrew from the meeting. Report on interagency conflicts (Item No. 9). There had been distributed, with a memorandum from Messrs. Cardon and Shay dated September 2, 1964, a draft of reply to a letter dated August 20, 1964, in Ithich Chairman Patman of the House Banking and Currency Committee requested a list of points of disagreement between the Board of Governors and other bank supervisory agencies, with an elaboration of disagreements or conin jurisdiction with the Comptroller of the Currency. Subsequent inquiry of Committee Counsel indicated that the principal reason for the l'equest was to deal with a press inquiry that had been directed to the eftmittee staff, and that a listing of only the principal points of conwould suffice. The draft of reply had been prepared accordingly. in In discussion, several suggestions were agreed on for changes language in the interest of clarification and emphasis. It was also agreed that reference to the difference between the Board and the Federal IDeloosit Insurance Corporation on the question whether absorption of exchange 9/3/64 d from charges involves payment of interest on deposits should be delete the report and included instead in the transmittal letter. Further, there listing of waS agreement with a suggestion by Governor Robertson that the paragraph indicating Points of conflict be preceded by an introductory out of changes that in general the disagreements with the Comptroller arose ed by the the Comptroller had announced in rules that had been embodi was whether laws Congress in statutes, and that the essential issue Congress itself. Should be altered by any authority other than the letter to Chairman Accordingly, unanimous approval was given to a No. 9. Patman and enclosure in the form attached as Item . Hexter, Assistant Messrs. Cardon and Shay then withdrew and Messrs Division, entered the room. General Counsel, and Sanders, Attorney, Legal Issuance of unsecured notes. The First National Bank of Boston, intention to issue its Boston, Massachusetts, had announced yesterday its maturities tailored °wn unsecured notes in multiples of $1 million, with to a broad range of customer requirements. The bank did not indicate sPecifically what interest rates it would pay, but noted that the rates of deposit. would be similar to those on commercial paper and certificates inquiries at This announcement had resulted in press and other Interprethe Board and at least two Reserve Banks (Boston and New York). st rate limitations tation was sought as to the applicability of the intere reserve requirec3f Regulation Q, Payments of Interest on Deposits, and the Ments of Regulation D, Reserves of Member Banks. There was some indication 3WO -8- 9/3/64 actively considering that other banks, particularly in New York, were the possibility of issuing unsecured notes. This raised the question Board should take at this time, Whether there was any action that the by way of issuance of a public statement or otherwise. Hackley commented that in this In discussion of the matter, Mr. see that there would be any evasion Particular case it was difficult to Of Regulation Q. National of Boston As the facts were understood, First with maturities from 30 days Proposed to issue unsecured negotiable notes interest rates not in to one year, on which notes the bank would pay certificates of deposit. excess of those it could pay on negotiable implications, however, were rather perplexing. The If a bank's notes represented ation Q, "borrowings," the rates paid thereon would not be subject to Regul est than permissible and a bank could therefore pay a higher rate of inter for certificates of deposit. to Also, the notes would not be subject assessments. reserve requirements, or to deposit insurance The only bank, limitation would be that on a bank's borrowing (for a national 100 per cent of capital and 50 per cent of surplus). In addition, the that the sale of ComPtroller of the Currency, who had issued a ruling notes was legal for national banks, conceivably might take the position could be included that such notes were part of capital and surplus and in the base for computing a bank's lending limitations. conceivably might happen under State law. The same thing Offhand, Mr. Hackley said, he there was did not see any legal ground on which the Board could hold that -9- 9/3/64 Board's any positive evasion of Regulation Q, particularly in light of the Federal Reserve recent ruling, as published in the August issue of the bank's demand deposit balances carried Bulletin, which held in effect that a city bank with a city bank could be converted into borrowings on which the could pay interest. the general public Governor Mills suggested that at some point hold on banks should be made aware of whatever views the Board might normal deposit resources living beyond their means and augmenting their through borrowed funds. they To the extent that banks were doing this, deposit were in effect diluting the protection afforded to their ordinary customers. criticisms of the He was surprised that there had been no , who were Use of borrowed funds on the part of corporate treasurers careful analysts of bank statements. He felt that the cautious analyst substantial amounts should differentiate between a bank that was borrowing (If money and a bank that lived off its normal resources. Somewhere along tion. He inthe line, that reasoning should be brought to public atten members to qUired whether there was a desire on the part of the Board such a practice. clevelop a philosophical resistance to In his view the felt. Board had a public duty to express whatever doubts it stemming from the After further discussion of developments the additional announcement by First National of Boston, Governor Mills made c coMment that he considered it important for the Board to make a publi statement if it was disposed to feel that the issuance by banks of unsecured -10- 9/3/64 notes constituted an undesirable practice. There appeared to be no in the open question of legality about a bank's borrowing directly market, within the limitations provided by statute. However, the Board that is, might want to express definite reservations about the practice, commercial Whether it was good banking--in the established sense of resources it derived banking—for a bank to borrow funds to augment the from the normal flow of deposits. He had concern about this kind of extending their transaction, which carried an indication that banks were rily be concredit facilities beyond the limitations that would ordina sidered proper. question There followed comments by Mr. Solomon raising the whether the Board would want to consider in any statement alerting banks that if they overextended their resources in normal times they should obtain relief, riot do so on the assumption that they could automatically if needed at some point, at the Federal Reserve discount window. However, phase there were comments by Board members indicating a view that this or the matter should be thought through very carefully. exercise moderation Governor Mitchell suggested that the Board in looking at the problem. While he shared some of Governor Mills' re servations, he felt it was not feasible to try to protect people fully from their own indiscretions. He was troubled, nevertheless, by the kind °r investments banks were making with short-term funds. The negotiable for only a relatively short certificate of deposit had been in popular use :MJ33 -11- 9/3/64 nible. time, and the implications of its use were not yet fully discer a better Offhand, it appeared to him that the unsecured note might be the banks instrument for banks than the negotiable certificate, for achieved more flexibility. On balance, he was inclined to think that the Board should sit back a little rather than to try to do something i mmediately. appropriate Board Governor Mills expressed the view that some statement might be welcomed by the more responsible elements of the of the competitive banking and financial community, particularly in view g industry, causing Pressures that had grown up recently within the bankin some banks to follow certain practices reluctantly. under discussion Governor Robertson commented that the question Board to seemed sufficiently important that it would be prudent for the e°11sider any action carefully. However, timing was also a factor. He ly felt that it would be appropriate for the staff to begin work prompt issuing. °fl a draft of statement that the Board could study and consider Re then indicated several points that he felt should be considered by the staff for inclusion in such a draft of statement. son's suggestion, There was general agreement with Governor Robert underand Messrs. Noyes, Molony, Hackley, and Solomon were designated to take the initial drafting of a statement. It was suggested that a draft Illight be considered at tomorrow's meeting of the Board, and that such revised draft as resulted might then be discussed with the Reserve Bank -12- 9/3/64 Presidents when they were in Washington on Tuesday, September meeting of the Federal Open Market Committee. 8, for a It was understood that, Pending further Board discussion, any inquiries received should be handled in such manner as to avoid taking a position. Messrs. Young and Brill then withdrew from the meeting. Regulation of trading in bank securities. At its meeting on of a September 2, 1964, the Board approved additional draft sections on proposed Regulation F, Securities of Member State Banks, for publicati in the Federal Register for comments. Messrs. Hexter and Sanders now advised that before steps implementing the Board's action had been comPleted, word was received from a representative of the Federal Deposit Insurance Corporation indicating that the Corporation had under consider4.tion certain procedures that would depart, in respect to nonmember State insured banks, from those contemplated by the Board in respect to member banks. After discussion of this development, it was understood that view Governor Balderston would get in touch with Chairman Barr with a to obtaining clarification of the procedures under consideration by the Pederal Deposit Insurance Corporation. The meeting then adjourned. Secretary's Note: Governor Shepardson today approved on behalf of the Board the following items: Letter to the Federal Reserve Bank of San Francisco (attached approving the appointment of Andrew P. Pilara, Jr., 48 assistant examiner. 3055 9/3/64 -13- Memoranda recommending the following actions relating to the Board's staff: 2.111E211. Robert S. Plotkin as Senior Attorney, Legal Division, with basic annual salary at the rate of $14,660, effective the date of entrance Upon duty. Salary increase David Sullivan, Guard, Division of Administrative Services, from $5,220 to $5,680 per annum, effective September 13, 1964. t ttj Item No. 1 9/3/64 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD September 3, 1964. Western Bancorporation International Bank, 61 Broadway, New York 15, New York. Gentlemen: In accordance with the request made by Mr. Frank L. King, Chairman of the Board, Western Bancorporation, Los Angeles, California, on behalf of Western Bancorporation International Bank, the Board of Governors grants consent for your Corporation to increase its capital stock from $2,500,000 to $5,000,000. Pursuant to the provisions of Section 211.3(a) of Regulation K, as amended September 1, 1963, the Board also approves the amendment to Article SEVENTH of the Articles of Association of your Corporation as contained in the Certificate Of Amendment as adopted on August 18, 1964 by the unanimous consent, in writing, of the shareholders of Western Bancorporation International Bank in lieu of a shareholders' meeting. It will be appreciated if you will inform the Board ' of Governors, through the Federal Reserve Bank of New York, When the additional capital has been paid in. Very truly yours, (Signed) Karl E. Bakke Karl E. Bakke, Assistant Secretary. 31s6L: Item No. 2 9/3/64 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD September 3, 1964. Board of Directors, United Community National Bank, Washington, D. C. Gentlemen: through With reference to your request submitted Governors, of Board the Federal Reserve Bank of Richmond, the l Federa the acting under the provisions of Section 19 of ity Commun Reserve Act, grants permi3sion to the United t deposits National Bank to maintain the same reserves agains banks, city as are required to be maintained by nonreserve ss. busine effective as of the date it opens for Your attention is called to the fact that such ors. of Govern permission is subject to revocation by the Board Very truly yours, (Signed) Kenneth A. Kenyon Kenneth A. Kenyon, Assistant Secretary. 4 .? BOARD OF GOVERNORS Item No. 3 9/3/64 OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD September 3, 1964. Society Corporation, Cleveland, Ohio. Gentlemen: Under date of April 13, 1959, Society for Savings Company in the City of Cleveland, now known as "Society Corporation," was advised of the determination by the Board of Governors that the Company was not engaged, directly or indirectly, as a business in holding the stock of, or managing or controlling, banks, banking associations, Savings banks, or trust companies within the meaning of section 2(c) clf the Banking Act of 1933. As a result of this determination, the Company ceased to be a holding company affiliate for any purposes Other than of those of section 23A of the Federal Reserve Act. The Board's determination was made upon the understanding 9:hat Society for Savings Company in the City of Cleveland did not, d xrectly or indirectly, own or control any stock of, or manage or control, any banking institution other than Society National Bank of Cleveland. Under date of July 27, 1964, the Board issued an order .,PProving an application by Society Corporation to become a bank _tlolding company through acquisition of common and preferred stock of The Fremont Savings Bank Company, Fremont, Ohio. In view of the proposed acquisition of stock in a second bank, the Board rescinds the determination made on April 13, 1959, if and when Society Corporation acquires the status of a bank holding company by virtue of its acquisition of stock of The Savings Bank Company. Accordingly, at such time, the Corporation will become a holding company affiliate for all purposes Within the meaning of section 2(c) of the Banking Act of 1933, and the Corporation desires to vote the stock of Society National vank of Cleveland, it will be necessary to apply for and obtain a t)ting permit from the Board of Governors. Very truly yours, (Signed) Kenneth A. Kenyon Kenneth A. Kenyon, Assistant Secretary. Item No. BOARD OF GOVERNORS ..... 0,00f001, 4:. OF THE 4 9/3/64 FEDERAL RESERVE SYSTEM :0 ja4 WASHINGTON, D. C. 20551 : 9 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD ' ;AL REStC'" • September 3, 1964. 1,1r- E. H. Galvin, Vice President, Federal Reserve Bank of San Francisco, San Francisco, California 94120. Dear Mr. Galvin: This is in reply to your letter of July 30, 1964, concerning bonds of the Music Center Lease Company, Los Angeles, California. Both member State banks referred to in your letter !PPear to have purchased such bonds for the purpose of investing cherei_u, as distinguished from dealing or underwriting. There is enclosed herewith a copy of a ruling of August 21, 1964, by the Comptroller of the Currency that the ! usio Center Lease Company bonds are eligible investments for ',Lational banks. The ruling was published in the August 27, 1964 ,11;sane of the Federal Register (29 Federal Register 12299). In it"' of the Comptroller's ruling, the Board will raise no question 2,1 this case, and accordingly the bonds will be considered gible for investment by member State banks. Very truly yours, (Signed) Kenneth A. Kenyon Kenneth A. Kenyon, Assistant Secretary. Rtiel°sUre 3060 BOARD OF GOVERNORS Item No. OF THE 5 9/3/64 FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD September 3, 1964. Mx. Harry A. Shuford, President, Federal Reserve Bank of St. Louis, St. Louis, Missouri. 63166 Dear Mr. Shuford: This refers to your letter of August 7, 1964, concerning classification of member banks in the Eighth District for the purpose of electing Class A and Class B directors. It is noted that after reviewing the present which has been in effect since September 10, ation, classific 1962, your Bank believes that it is satisfactory. The Board concurs in this opinion, and will make no change in the existing classification at this time. Very truly yours, (Signed) Kenneth A. Kenyon Kenneth A. Kenyon, Assistant Secretary. A tiptt BOARD OF GOVERNORS Item No. 6 9/3/64 OF THE FEDERAL RESERVE SYSTEM WASHINGTON, O. C. 20551 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD September 3, 1964. Mr. Harry A. Shuford, President, Federal Reserve Bank of St. Louis, St. Louis, Missouri. 63166 Dear Mx. Shuford: This refers to your letter of July 23, 1964, with which you transmitted for Board consideration preliminary plans and outline specifications for the proposed new building for the Little Rock Branch. The Board authorizes the preparation of final plans Little Rock Branch building in inary plans and specifications your Bank to proceed with and specifications for the accordance with the prelimsubmitted with your letter. Very truly yours, (Signed) Kenneth A. Kenyon Kenneth A. Kenyon, Assistant Secretary. d .. BOARD OF GOVERNORS 1:00v (.01,• ••. .1, 4%e 0. Item No. 'a tiX.311-4; 7 9/3/64 OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 ADDRESS OFFICIAL CORRESPONDENCE TO THE HOARD September 3, 1964. Mr. C. J. Scanlon, President, Federal Reserve Bank of Chicago, Chicago, Illinois. 60690. Dear Mr. Scanlon: As requested in your letter of August 26, the Board of Governors approves a change in the effective date of increased salary rates for painters at the Federal Reserve Bank of Chicago. The rates which were approved effective June 1, 1964, are approved to be retroactive to April 1, 1964, because of a change made by the Building Managers Association of Chicago. Very truly yours, (Signed) Kenneth A. Kenyon Kenneth A. Kenyon, Assistant Secretary. BOARD OF GOVERNORS Item No. OF THE 9/3/64 8 FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD September 3, 1964. 221TJagaLLL_Lal Charles J. Scanlon, President, ederal Reserve Bank of Chicago, Ch icago, Illinois 60690. near Mr. Scanlon: Board of As requested in your letter of August 13, 1964, the Co,__ the respveernors approves the following minimum and maximum salaries for at the Federal Reserve Ba tive grades of the employees' salary structures of Chicago and Detroit Branch, effective immediately. Grade 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Head Office Maximum Minimum $ 2,645 2,875 3,170 3,530 3,895 4,265 4,760 5,255 5,760 6,365 6,985 7,670 8,515 9,475 10,640 11,900 $ 3,575 3,885 4,290 4,780 5,275 5,775 6,440 7,105 7,790 8,615 9,455 10,380 11,525 12,815 14,390 16,100 Detroit Branch Maximum Minimum $ 2,900 3,150 3,400 3,800 4,200 4,650 5,050 5,600 6,200 6,700 7,250 7,850 8,600 9,350 10,350 11,400 $ 3,900 4,250 4,600 5,100 5,700 6,250 6,850 7,600 8,350 9,050 9,850 10,650 11,600 12,650 14,000 15,400 es within The Board approves the payment of salaries to the employe ve respecti of the 'nits specified for the grades in which the positions s minimum the All employees whose salaries are below YeeS are classified. Of to brought be should appr eir grades as a result of these structure increases of the new strucdate e effectiv the of months three ture°Priate ranges within the 14-, Very truly yours, (Signed) Kenneth A. Kenyon Kenneth A. Kenyon, Assistant Secretary. BOARD OF GOVERNORS Item No. OF THE 9 9/3/64 FEDERAL RESERVE SYSTEM WASHINGTON OFFICE OF THE VICE CHAIRMAN September 3, 1964. The Honorable Wright Patman, Chairman, Committee on Banking and Currency, House of Representatives, Washington, D. C. 20515 Dear Mr. Chairman: In reply to your letter of August 20, 1964, there iS enclosed a list of principal points of disagreement or conflict between the Board and the Comptroller of the Currency. Although your request was sufficiently broad to cover points of disagreement with the Federal Deposit Insurance Corporation as well as the Comptroller of the Currency, there is only one instance in which the Board and the Corporation have been unable thus far to resolve their differences. That relates, as you will recall, to the question of whether absorption of exchange charges involves a payment of interest on deposits. In accordance with your letter, each item listed is followed by a brief explanation of the matter involved. Sincerely yours, /7 ( :2(< . C. Canby Balderston, Vice Chairman. Enclosure c POINTS OF DISAGREEMENT BETWEEN THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM AND THE COMPTROLLER OF THE CURRENCY Set forth below are principal points of disagreement between the Board of Governors and the Comptroller of the Currency in connection with the regulation of commercial banking. In general, these disagreements arise out of changes the Comptroller has announced in rules that have been embodied by the Congress in statutes. Quite apart from policy questions, the essential issue is whether laws should be altered by any authority other than the Congress itself. (1) Access to Information in Comptroller's Office Information contained in reports of examination of national banks is essential to the Board in carrying out its statutory responsibilities relating to credit conditions, bank holding companies, reserves against deposits, and a number of other matters. While this information could be obtained under the law by direct examination of national banks (12 U.S.C. 483), this would involve costly duplication of the Comptroller's examinations, so the Board and the Federal Reserve Banks have relied on the Comptroller to furnish copies of his examination l'ePorts upon payment of the costs of reproducing the additional copies needed. Effective July 1, 1962, the Comptroller raised his charges f°r these copies. Under the new schedule the charges for single Copies of commercial, trust, and separate branch reports are $100, 30:1 -2old schedule the charge $50, and $25, respectively, whereas under the with a few vas $10 for single copies of commercial reports and, exceptions, $5 for single copies of trust and separate branch reports. Formerly, second copies of reports were obtained for the use of the cost of a first various Reserve Bank branches at 50 per cent of hed COPY, whereas under the new schedule second copies are not furnis to the Reserve Banks. months of discussion The new charges were imposed after five under and correspondence, in which the Board took the position that, be used as a sPPlicable law (12 U.S.C. 482), these charges could not to the means of shifting part of the costs of examining national banks effect of reducing Federal Reserve System, which in turn would have the the System's annual payments into the Treasury. The charges finally agreed to imPosed were lower than originally proposed, and the Board Pay them. e Banks to conduct The only alternative was for the Reserv separate examinations at much greater expense in order to obtain this essential class of information. (2)Itports of Condition banks that are members All national banks and State-chartered °f the Federal Reserve System or insured by the Federal Deposit of condition four Insurance corporation are required to make reports 4 OkA.IF -3times a year to the appropriate Federal bank supervisory agency (Comptroller for national banks, Board for State member banks, and FDIC for insured nonmember banks). Until recently the three Federal bank supervisory agencies have used nearly identical report forms for all three categories of banks, developed after consultations with State bank supervisors. Under established agreements, almost all States use the same form as adopted by the FDIC and the Board. For the September 30, 1963 report, however, the Comptroller °f the Currency unilaterally made changes in the form sent to national banks, as a result of which data reported by national banks in response t° that call became incompatible with data previously compiled for all three types of banks, and with data gathered from State banks at the same call, since the Board and the FDIC continued to use the report f°rm previously worked out with State authorities. The Comptroller dr°PPed plans for use of the September 30 format and changed back to 4 substantially compatible form for the December 20, 1963 call, but switched to another incompatible form for the April 15, 1964 and aune 30, 1964 calls. The changes initiated by the Comptroller created important "Ps in data needed for monetary policy formulation and general financial 4 analysis. To offset these losses in part, it has been necessary to require national banks to submit supplemental information (12 U.S.C. 248f,, ‘"), 483) through reconciliation statements and in response to less f°rmal inquiries from the Reserve Banks. -4- (3) Federal Funds Transactions In June 1963, the Comptroller of the Currency published his ruling that "Federal funds" transactions (i.e., interbank transfers of bank balances with Federal Reserve Banks) are not subject to the statutory lending and borrowing limitations applicable to national .banks, (Comptroller's Manual, paragraph 1130) This ruling, reversing the previous view of the Comptroller's Office, is contrary to the Board's position over the years that, for the purposes of statutory limitations administered by it, so-called "sales" and "purchases" of Federal funds actually constitute loans and borrowings. (1963 Federal Reserve Bulletin 1238) (4) cor orate Savings Accounts The Comptroller expressed the view in December 1963 that the Board has no authority to preclude the maintenance of savings deposits by any class of depositor and that, therefore, national banks may accept such deposits from business corporations. Paragraph 7510) (Comptroller's Manual, The Board subsequently reiterated its long-standing Position that business corporations may not maintain savings deposits, and referred to its express statutory authority in section 19 of the Pederai Reserve Act to define "savings deposits" for interest and reserve purposes with respect to all member banks, State and national. (1964 Federal Reserve Bulletin 9) 366`..: -5.. (5)Loans to Executive Officers In an interpretation published in December 1963 (Comptroller's Hanual, paragraph 5235), the Comptroller intimated that national banks are not bound by the definition of the term "executive officer" set forth in the Board's Regulation 0 (12 CFR 215.1(b)), implementing the s tatutory prohibition in section 22(g) of the Federal Reserve Act against the making of loans to their executive officers by all member banks, including national banks. As the statute specifically authorizes the Board to issue the Regulation and to define "executive officer", the Board's position is that the definition and its Regulation are controlling as to both State member and national banks. (6) pubordinated Notes and Debentures, and Undivided Profits, as art of Capital and Surplus A number of provisions of the Federal banking laws impose limitations on bank activities based on the size of the capital, or surplus, or both, of the particular bank. In December 1963, the Co mptroller published a ruling that capital notes and debentures that are subordinated to deposit liabilities may be regarded as part of a national bank's capital stock and surplus in applying statutory limitaticns on loans by national banks. Shortly thereafter, the Comptroller issued a ruling that undivided profits could also be regarded as part Of capital and surplus for the same purpose. (Comptroller's Manual, Paragraph 1100) The Board, in construing statutory provisions it 30TO -6-nor administers, continues to believe that neither undivided profits subordinated notes and debentures may properly be included in capital and surplus under the law as enacted by the Congress. (1964 Federal Reserve Bulletin 9, 710) .(7)Iluylation of Overseas Operations in Under a proposed regulation published for comment December 1963 (28 Federal Register 13868), the Comptroller would. have tequired national banks to obtain his prior approval and comply with ns" his conditions in order to engage in any "international operatio through direct branches overseas or through subsidiary organizations, including so-called Edge and Agreement corporations. The authority to authorize and regulate the overseas operations of all member banks, both national and State, has been centered in the Board for years under sections 9, 25, and 25(a) of the Federal Reserve Act. Under these Board lawe national banks, and State member banks also, have to obtain 411Proval and comply with applicable Board regulations in the conduct ry Edge or Overseas operations through direct branches or subsidia Agt'eement corporations. the adminkThe Board opposed the proposed regulation because of istretive duplication and confusion that would flow from adoption he proposed regulation would be an unnecessary encumbrance to the conduct of overseas operations by national banks. , -7- The Comptroller has now issued, effective September 7, 1964, a regulation requiring 'prior notification" to him (rather than his Prior approval) of proposed overseas operations by national banks. (29 Federal Register 11333) However, under the Board's procedures in connection with its statutory responsibilities over foreign branches and Edge and Agreement corporations, the Comptroller already receives Pllor notification of the principal proposals of national banks for overseas operations. (8) Investments in Foreign Banks The Comptroller issued a ruling in July 1964 that national banks may acquire and hold directly stock interests in foreign banks as a means of conducting overseas operations. (Comptroller's Manual, Paragraph 7525) In the Board's opinion (of which the Comptroller had been specifically advised prior to the issuance of his ruling), the direct acquisition and holding by any member bank, national or State, stock of foreign banks clearly is not permissible under present law. (1984 Federal Reserve Bulletin 1000) (9) Revenue Bonds Section 5136 of the Revised Statutes prohibits national banks from knxiriting State or local bond issues unless the bonds involved "general obligations". (12 U.S.C. 24) This is made applicable to -8State member banks by section 9 of the Federal Reserve Act. By long- established precedent, the term "general obligations" has been confull faith strued to mean bonds backed directly or indirectly by the and credit of a governmental body that possessed general powers of taxation, including property taxation. Last year, however, the effective Comptroller of the Currency issued a revised regulation, September 12, 1963 (12 CFR 1), defining "general obligation" to , of the include an obligation "supported by the full faith and credit authority without taxing Obligor" even though the obligor is a special Power. banks from most In effect, this new definition freed national of the law's restrictions against underwriting revenue bonds. The Board believes the Comptroller's new definition is unwarranted, and that the statutory term, "general obligations", should be construed in accordance with the long-established precedents. The result of the Comptroller's action is that national banks are operating under new municipal rules that allow them much broader authority for underwriting (1963 Federal ISSUeS than is permissible for State member banks. Reserve Bulletin 1505, 1508) September 3, 1964. Item No. 10 9/3/64 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD September 4, 1964. Mr. E. H. Galvin, Vice President, Federal Reserve Bank of San Francisco, San Francisco, California. 94120 Dear Mr. Galvin: In accordance with the request contained in Mr. Cavan's letter of August 28, 1964, the Board approves the appointment of Andrew P. Pilara, Jr., as an assistant examiner for the Federal Reserve Bank of San Francisco, effective today. Very truly yours, (Signed) Elizabeth L. Carmichael Elizabeth L. Carmichael, Assistant Secretary.
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