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MISCELLANEOUS BANKING AND
CREDIT UNION BILLS
HEARING
BEFORE
THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
OF
THE
COMMITTEE ON BANKING AND CURRENCY
UNITED STATES SENATE
N I N E T I E T H CONGRESS
FIRST SESSION
ON
S. 714, S. 965, and S. 966
BILLS TO AMEND THE FEDERAL RESERVE ACT AND
OTHER STATUTES
MARCH 14, 1967
Printed for the use of the
Committee on Banking and Currency
U.S. G O V E R N M E N T P R I N T I N G
76-439 O
WASHINGTON
:
1967
OFFICE
COMMITTEE
ON B A N K I N G A N D
CURRENCY
JOHN; SPARKMAN, Alabama, Chairman
W I L L I A M PROXMIRE, Wisconsin
HARRISON A. W I L L I A M S , JR., New Jersey
EDMUND S. MUSKIE, Maine
E D W A R D Y. LONG, Missouri
THOMAS: J. M c I N T Y R E , New Hampshire
W A L T E R F. MONDALE, Minnesota
GALE, W. McGEE, Wyoming
WILLIAM B. SPONG, JR., Virginia
W A L L A C E F. BENNETT, Utah
JOHN G. T O W E R , Texas
BOURKE B. HICKENLOOPER, Iowa
E D W A R D W. BROOKE, Massachusetts
CHARLES H. PERCY, Illinois
LEWIS G. ODOM, Jr., Staff Director
MATTHEW HALE, Chief Counsel
JOHN R. EVANS, Minority Staff Director
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
W I L L I A M PROXMIRE, Wisconsin, Chairman
JOHN SPARKMAN, Alabama
EDMUND S. MUiSKIE, Maine
E D W A R D V. LONG, Missouri
THOMAS J. M c I N T Y R E , New Hampshire
GALE W. McGEE, Wyoming
II
W A L L A C E F. BENNETT, Utah
BOURKE B. HICKENLOOPER, Iowa
E D W A R D W. BROOKE, Massachusetts
CONTENTS
Page,
S. 714 (loans to certain officers of member banks and Federal credit unions) _
Agency reports:
Federal Reserve
Federal Deposit Insurance Corporation
Treasury Department
S. 965 (Federal Reserve Bank investments in foreign government obligations)
Agency reports:
Federal Reserve
Treasury Department
S. 966 (eligible paper)
Agency reports:
Federal Reserve
Federal Deposit Insurance Corporation
Treasury Department
17
20
21
22
23
25
26
27
33
44
45
WITNESSES
Gannon, J. Deane, Director of the Bureau of Federal Credit Unions
Grant, Richard H., vice president, CUNA International, Inc.; accompanied
by J. Orrin Shipe, managing director
Jennings, Lewellyn A., chairman of the board of Riggs National Bank, and
chairman of the Federal Legislative Committee of the American Bankers Association
Robertson, J. L., Vice Chairman of the Federal Reserve IJoard
8
13
10
2
LETTERS A N D DATA
American Bankers Association; comments on:
S. 714
S. 965
S. 966
Eligible paper presented by member banks as collateral for borrowing at
Federal Reserve banks, 1959-66, table
Federal Deposit Insurance Corporation:
Report on—
S. 714
S. 966_
Federal Reserve:
Draft of—
S. 714
S. 965
S. 966
Explanation of proposed bill regarding advances by Federal Reserve
banks.
Letter proposing—
S. 714
S. 965
S. 966
Textual changes in present law that would be made by proposed bill
regarding advances by Federal Reserve banks
First National City Bank of New York, letter to Senator Proxmire, from
Carl W. Desch, senior vice president and cashier
in
13
12
11
8
21
44
20
25
34
36
20
25
33
38
22
IV
CONTENTS
Independent Bankers Association of America, letter to Senator Proxmire,
from Stanley R. Barber, president
Member banks borrowing one or more times during year as percent of
total number of member banks, 1959-66, table
Number of member banks borrowing one or more times during year from
Federal Reserve, 1959-66, table
Treasury Department:
Report on—
S. 714
S. 965
S. 966
Page
46
8
8
22
26
45
MISCELLANEOUS BANKING AND CREDIT UNION BILLS
TUESDAY, MARCH
14,
1967
U . S . SENATE,
COMMITTEE ON B A N K I N G AND C U R R E N C Y ,
SUBCOMMITTEE ON F I N A N C I A L INSTITUTIONS,
Washington,
D.C.
The subcommittee met at 10:05 a.m., in room 5302, New Senate
Office Building, Senator William Proxmire, chairman of the subcommittee, presiding.
Present: Senators Proxmire and Hickenlooper.
Senator PROXMIRE. The committee will come to order. We are holding hearings today on three bills:
S. 714, loans to certain officers of member banks and Federal credit
unions;
S. 965, Federal Reserve bank investments in foreign government
obligations ; and
S. 966, eligible paper.
These bills are the same as S. 1558, S. 1557, and S. 1559 of the last
Congress with the single exception that S. 714 also includes a provision taken from S. 2330 of the last Congress increasing the amounts
which Federal credit unions may lend to certain officers.
S. 1557, S. 1558, and S. 1559 Avere reported by the committee and
were passed by the Senate without objection during the last Congress.
However, they were not acted on in the House. I introduced these
three bills this year in accordance with the suggestion of the majority
leader that committees renew action on bills which had previously been
considered by the committees and the Senate.
The Federal Reserve Board has again recommended the same three
proposals—not including, of course, the Federal credit union proposal—and without objection their letters, together with their draft
bills, will be included in the record of the hearings. Favorable reports
on all three of my bills have been received from the Treasury Department, and the FDIC has reported favorably on S. 714 and S. 966.
These letters will also be included in the record.
The other comments which have been received include a letter recommending that loans to executive officers of member banks for the
purpose of financing their children's education should be increased to
$10,000, not just to $5,000. Copies of these letters will also be inserted
in the record.
Copies of last year's hearings and the reports on these three bills
last year are before us. Copies of last year's hearings and of a memorandum explaining the bills coming before this hearing were sent
around to the subcommittee members last night for their information.
(The bills and letters appear at the end of the hearing at page 16.)
1
2
MISCELLANEOUS BANKING AND CREDIT UNION BILLS
Senator PROXMIRE. Our first witness is J . L . Robertson, Vice Chairman of the Federal Reserve Board. We are very happy to have you
with us. You are an old friend of the committee. Go right ahead.
STATEMENT OF J. L. ROBERTSON, VICE CHAIRMAN, FEDERAL
RESERVE BOARD
Mr. ROBERTSON. Thank you, Mr. Chairman.
In view of the fact that these three bills have previously been passed
by the Senate, I have not only prepared a statement which I would
like to insert in the record
Senator PROXMIRE. Yes, indeed.
Mr. ROBERTSON (continuing). But I have boiled it down to save
time and if it is agreeable I can present it in say 5 minutes instead
of 20.
Senator PROXMIRE. Very considerate. Without objection, your full
statement will be printed in the record.
You may proceed.
Mr. ROBERTSON. S. 966 relates to one of the Federal Reserve System's principal responsibilities—the extension of credit to the commercial banking system.
Banks borrow from the Federal Reserve banks on their promissory
notes secured either by Government obligations or by so-called eligible
paper. The latter category is based on a concept, embodied in the
original Federal Reserve Act, that the credit needs of the country
could be measured and satisfied by the rise and fall of commercial
banks' holdings of their customers' short-term commercial paper.
Although this concept has been outmoded for decades, the ability of
the Federal Reserve System to meet the country's needs through the
so-called discount window is still limited, to some extent, by rules
that were imposed 50 years ago.
This system has at least two adverse effects. It unnecessarily imposes upon commercial banks and Federal Reserve banks the burden
of ascertaining whether a large number of notes and other instruments meet highly technical tests of eligibility. In addition, since
banks prefer to hold discount-eligible paper, at times they may not
feel free to allocate credit solely on the basis of creditworthiness and
market considerations, as is most desirable.
S. 966 would eliminate the "eligibility" standards that now complicate the procedure by which commercial banks borrow from the
Federal Reserve System. In lieu thereof, it would authorize each
Federal Reserve bank to make advances at the regular discount rate
to its member banks "secured to the satisfaction of such Federal
Reserve bank," subject to regulations prescribed by the Board of
Governors. Its enactment would simplify and modernize the mechanism through which Federal Reserve credit flows to the banking
system in order to accommodate commerce, industry, and agriculture.
S. 965 would authorize Federal Reserve banks to buy and sell shortterm foreign government securities that are payable in convertible
currencies. Despite its general terms, this legislative proposal has a
specific purpose. As a part of its efforts to safeguard the international value of the dollar, the Federal Reserve System has entered
into reciprocal currency agreements—the so-called swap arrange-
3 MISCELLANEOUS
BANKING
AND
CREDIT U N I O N
BILLS
ments—with a number of other countries. As a result of such transactions, we hold, from time to time, currency balances in such other
countries. These can be used for appropriate investment abroad, but
obligations in which the Reserve banks are permitted to invest are
not always readily available. The proposed change in the law would
enable such funds to be invested in suitable foreign government securities, thereby yielding a return to the United States instead of lying
idle.
The Board believes that S. 965 would enable us to conduct the foreign currency operations more efficiently and economically.
S. 714 relates to borrowing by executive officers of banks that are
members of the Federal Reserve System. In the 1930's, Congress
prohibited an executive officer from borrowing more than $2,500 from
his own bank, and even such a loan could be made only "with the prior
approval of a majority of the entire board of directors." Such officers
were also required to give their banks detailed information regarding
indebtedness to other banks.
The first of these provisions was designed to prevent overreaching
by an influential official of a bank, whose dominance might otherwise
enable him to obtain credit that he could not have obtained as an ordinary member of the banking public. The second was intended to inform member banks' directors of excessive borrowing by their chief
officers, because they should be alert to situations that might lead to
embezzlement or other misconduct.
S. 714 would raise to $5,000 the permissible amount of an officer's
"ordinary" borrowing from his own bank and would permit him to
borrow up to $30,000 on the security of a first mortgage on his home,
and in no case could the terms of his loan be more favorable than those
extended to other borrowers. If he borrowed from another bank, a
report to his own bank would be required only if such "outside" borrowing exceeded the amount he could lawfully borrow from it.
The Board of Governors believes that this bill would adjust the
Federal Reserve Act, in this respect, to current economic conditions
and still provide the safeguards that were sought when the statutory
provision was originally enacted.
I would be very glad to attempt to answer any questions that you
may have with respect to these three bills. We think they are all desirable and we would hope, not controversial.
Senator PROXMIRE. Governor Robertson, do you express the unanimous position of the board ?
Mr. ROBERTSON. On all three.
Senator PROXMIRE. D O I understand that S. 9 6 6 and S. 9 6 5 would
be neutral as far as the money supply and the quantity of credit is
concerned ?
Mr. ROBERTSON. We can do exactly the same thing now that we could
do after the bill is enacted, but it is much more cumbersome and frustrating. Over the years, most of the borrowing from Federal Reserve
banks has been on notes secured by government bonds. But in the
past few years commercial bank holdings of government bonds have
diminished, and at the same time public deposits at commercial banks
which must be secured by government bonds have risen, so that the
amount of government obligations available to member banks for
use as collateral on advances from the Federal Reserve banks has
4
MISCELLANEOUS
BANKING
AND
CREDIT
UNION
BILLS
diminished. As a result, we have had a situation where the banks
have been obliged to go back to using eligible paper, which was the
original form of obtaining funds from the Federal Reserve banks and
which, by the way, was found to be inadequate even in 1916, when the
statute was amended, and again in 1932 and again in 1935.
Last year, for example, paper having a face value of 20 billion was
analyzed to see whether it was eligible or ineligible in connection
with loans from Federal Reserve banks. This takes an awful lot
of time and serves no purpose because merely by paying a half percent more you can make exactly the same loan on any paper that is
satisfactory to the Federal Reserve. Of course, banks want to borrow at the discount rate. As a result, they try to keep enough paper
available that is eligible in order to use that as collateral for the purposes of borrowing from Federal Reserve banks.
Senator PROXMIRE. And they have no trouble keeping enough paper
available for that. Then you have to go through the procedure of
examining the paper, which is time consuming and inefficient.
Mr. ROBERTSON. Yes, but even having that kind of paper is difficult,
too, because the situation has changed very much over the past 50
years.
For example, the needs of agriculture, which used to be financed
on a very short term basis, now must be financed on a much longer
basis. A combine is a big investment for a farmer that calls for longer term financing. Therefore, that sort of paper would not be eligible,
if it were over the statutory maturity limit, for discount.
Now, what we are doing is attempting to eliminate all of these
eligibility requirements and merely put everything on the basis of
whether it is acceptable or is not acceptable. This has nothing to do
with the volume of our lending to commercial banks. It has to do
with the ease, the facility of meeting the needs.
Senator PROXMIRE. Why is it that these bills did not pass the
House ? Was there objection in the House, to your knowledge ? Was
there any opposition in the banking community or business community or elsewhere ?
Mr. ROBERTSON. S O far as I know, there is no opposition to this
in the banking community or in the business community. I do not
have the slightest notion of why it was not approved by the House.
I hope it will be passed by the House this year.
Senator PROXMIRE. You have never heard any objection from a
Member of Congress against the bill ?
Mr. ROBERTSON. I have not testified on these bills on the House
side, so I do not know.
Senator PROXMIRE. There have been no communications, to your
knowledge, to the Federal Reserve Board complaining about this?
Mr. ROBERTSON. There may be some, but I do not know of them,
Mr. Chairman.
Senator PROXMIRE. T O your knowledge ?
M r . ROBERTSON. N O .
Senator PROXMIRE. N O W ,
there is just one other question I have.
That refers to the comment in the letter recommending loans to execu-
5 MISCELLANEOUS BANKING AND CREDIT UNION BILLS
tive officers for the purpose of financing their children's education to
be increased to $10,000, not $5,000, Do you have any position on this?
Mr. ROBERTSON. We could not possibly be opposed to educational
loans. We would have no objection if this bill were amended to include them.
Senator PROXMIRE. Senator Hickenlooper ?
Senator HICKENLOOPER. N O questions.
Senator PROXMIRE. Thank you very much.
(The prepared statement of Mr. Robertson follows:)
STATEMENT OF J . L . ROBERTSON, V I C E C H A I R M A N , BOARD OF GOVERNORS OF THE
FEDERAL RESERVE S Y S T E M
On behalf of the Board of Governors, let me express our appreciation, Mr.
Chairman, for the actions you have taken to assure prompt consideration of
three of the Boards legislative proposals. Two of the three bills you have introduced and scheduled for this morning's hearing are identical with drafts submitted by the Board and passed by the Senate in the last Congress. These are S.
966, which would modernize the laws relating to borrowings by member banks
from the Federal Reserve Banks, and S. 965, which would facilitate Federal
Reserve operations in foreign currencies by permitting investment of such currencies in obligations of foreign governments. The third bill, S. 714, incorporates
another of the Board's recommendations—also passed by the Senate in 1965—
concerning loans by member banks to their executive officers, as well as other
provisions relating to Federal credit unions.
ADVANCES BY FEDERAL RESERVE B A N K S
(S.
966)
S. 966 would eliminate provisions of the Federal Reserve Act that now require
imposition of a "penalty" rate of interest where a member bank borrows from a
Reserve Bank on collateral other than U.S. obligations, and the security—even
though it is fully acceptable to the Reserve Bank—does not meet obsolete and
complex eligibility requirements specified in the statute. In such cases, the Act
authorizes the reserve Banks to extend the credit, but the rate of interest must
be one-half per cent higher than the regular discount rate applicable to advances
secured by "eligible paper." Naturally, member banks wish to borrow at the
regular discount rate rather than a rate one-half per cent higher, and consequently
the question repeatedly arises whether paper offered as collateral for such
advances actually does comply with the eligibility tests.
Under the federal Reserve Act as originally enacted member banks could borrow from the Reserve Banks only by discounting eligible paper, consisting essentially of "notes, drafts, and bills of exchange arising out of actual commercial
transactions; that is, notes, drafts, and bills of exchange issued or drawn for
agricultural, industrial, or commercial purposes, or the proceeds of which have
been used, or are.to be used, for such purposes." Paper eligible for discounting
was also generally restricted to that having a maturity at the time of discount
of not more than 90 days. The statutory requirements as to eligibility for discount have remained substantially unchanged since 1913. The limitations in the
Act were imposed on the assumption that the legitimate needs of the economy
for bank credit would always be exactly reflected in the volume of these shortterm, self-liquidating loans. Thus an automatic control mechanism over discounting was provided, insuring (it was thought) that the amount of reserves
created in the process would vary directly with the needs of the economy.
This concept was found inadequate relative to needs as early as 1916, at
which time Federal Reserve Banks were authorized to make advances to member banks on their promissory notes secured by direct obligations of the United
States. Again in 1932 conditions made it necessary to relax further the narrow
restrictions on discounting. At that time section 10(b) was added to the Act,
making it possible for member banks to borrow on their own notes secured to
76-439 O—67
2
6
MISCELLANEOUS BANKING AND CREDIT UNION BILLS
the satisfaction of the Reserve Bank, but only at a rate of interest at least
one per cent above the "regular" discount rate. In 1935 this mandatory differential was reduced to % of one per cent, which is the requirement in the present
law.
Both substantive and operational problems have developed in the implementation of the so-called "eligible paper" concept. As the economy has grown, increasing needs for bank credit have developed which are wider in scope and
longer in duration than those which may be satisfied within the definition of
eligibility. These are largely the result of the growing capital investment needs
of a mechanized agricultural and industrial society. For example, farmers
today make much greater use of expensive equipment; a modern combine represents a big investment and requires longer-term financing. In filling these needs,
member banks make many loans which are as sound and acceptable as shortterm commercial loans but which are not eligible as collateral for Federal
Reserve credit at the usual discount rate. In other words, credit needs now
exceed the supply of short-term, self-liquidating loans classified as "eligible"
and vary for the most part independently of changes in that supply. Experience
has also demonstrated that the provision of a given type of collateral does not
necessarily indicate the use to which the member bank will put the credit.
Aside from these substantive shortcomings, the eligible paper concept poses
practical problems for the Reserve Banks, for member banks, and perhaps to a
certain extent for banking customers. The Reserve Bank must analyze each
instrument presented to it, not only for its soundness and acceptability, but also
for its eligibility under the narrow and complex standards specified by the Federal Reserve Act. The member bank also must make this analysis when it
contemplates borrowing on the security of commercial paper, and may at times,
depending on the extent to which it must use eligible paper to obtain Federal
Reserve credit, tailor its lending practices to these standards. When a member
bank finds it necessary to so alter its lending policy, hardship—or at least inconvenience—can result for some of its credit-worthy borrowers.
These problems did not cause any great difficulties for Reserve Banks or
member banks in the immediate post-war years, largely because banks then held
ample supplies of U.S. Government securities. For two decades, the bulk of the
credit provided through the discount window has been collateralized by such
securities. However, in recent years non-Federal debt has increased far more
rapidly than Federal debt, and bank portfolios have reflected this development.
Furthermore, bank holdings of Government securities available for use as collateral at the discount window have been curtailed by the rise in the level of
public deposits which typically must be secured by a pledge of these same assets.
The declining supply of free Government obligations—that is, holdings not
needed as security for public deposits—has led in the past several years to a
dramatic increase in borrowing on the basis of eligible paper. The face amount
of eligible paper analyzed at the Federal Reserve's discount window increased
from about $250 million in 1964 to more than $20 billion in 1966. The number
of pieces of eligible paper analyzed increased from 833 in 1964 to 24,345 in 1966.
The number of banks using this paper is still small, but also is increasing rapidly
(from 20 in 1964 to 82 in 1966). Overall use of the window has shown no such
dramatic increases, but it has remained fairly substantial and has grown in the
past several years. The above and other data for the last eight years are shown
in the attached tabulation.
These increases have resulted in an increasing administrative burden for member banks and Reserve Banks for the reasons cited earlier. And if this rate of
increase continues it is only a matter of time before banks begin to face shortages of eligible paper, which represents only a small fraction of their total
loans.
In sum, we feel that all relevant factors argue for elimination of the eligibility
standards. It would do away with what are today artificial limitations, originally imposed for reasons which in the light of history have proven not valid or
workable, and would thus bring the operation of the discount mechanism more
into line with current realities. It would also relieve the member banks and the
Reserve Banks of an unnecessary administrative burden, and would enable them
to serve the needs of the financial system and the economy more effectively, without being confined by outmoded limitations. The Board, therefore, strongly
urges approval of this bill.
7 MISCELLANEOUS BANKING AND CREDIT UNION BILLS
INVESTMENT OF FOREIGN CURRENCIES HELD BY FEDERAL RESERVE (S. 9 6 5 )
As a part of its efforts to safeguard the value of the dollar in international
exchange markets, the Federal Reserve System has entered into reciprocal currency agreements—the so-called "swap arrangements"—with a number of central
banks in other countries. Under these arrangements, the Federal Reserve can
obtain a stated amount of foreign currency in exchange for a corresponding
amount of dollars. In the event of a drawing—which may be initiated by either
party—the balances acquired have to be repaid at the same exchange rate, thus
protecting each party against any loss from currency devaluation. The currencies acquired may be sold to smooth out abrupt changes in exchange rates or
to prevent fluctuations in U.S. gold reserves or dollar liabilities due to temporary forces acting in the exchange markets.
A drawing by one party under one of these arrangements puts currencies into
the hands of the other party. Balances so acquired may be invested at a preagreed rate of interest (the same for both parties). Present law, however, needlessly restricts the means available to us to invest such balances. Under the Federal Reserve Act idle balances of foreign currencies held by the System may be
invested in short-term commercial paper in the foreign country or placed in an
interest-bearing time account with the same or some other foreign bank. In
most; countries, however, there is a scarcity of commercial paper for investment,
and in some countries time deposit facilities are not conveniently available.
Present law contains no authority for the investment of such idle funds in obligations of foreign governments, such as foreign treasury bills. On the other
hand, a foreign central bank may—and generally does—invest its excess dollar
balances in interest-bearing securities of the United States Government.
S. 965 would authorize the Federal Reserve to buy and sell securities of a foreign government or monetary authority that have maturities of not more than
12 months and are payable in a convertible currency. This would insure that
any foreign currencies we acquire in excess of current operating needs may be
safely and conveniently invested in income-producing securities. For this reason, the Board recommends enactment of this bill.
LOANS TO EXECUTIVE OFFICERS
(S.
714)
Section 22(g) of the Federal Reserve Act prohibits a member bank of the Federal Reserve System from making a loan of more than $2,500 to any of its executive officers, and loans up to $2,500 may be made only with the prior approval of
a majority of the bank's board of directors. The section further requires every
executive officer to file a written report with his board of directors regarding any
loan obtained by him from another bank.
The underlying purpose of these restrictions is unquestionably sound. However, they seem unreal]stically severe in the light of changes in economic conditions that have taken place since they were enacted in 1933 and 1935. The President's Committee on Financial Institutions in 1963 recognized the desirability of
increasing the $2,500 ceiling on the amount that an executive officer may borrow from his own bank. In addition, it would seem appropriate to provide a
considerably higher ceiling on a mortgage loan covering the purchase of an
executive officer's home. Under present law, such an officer is compelled to obtain home mortgage financing from another financial institution.
The first section of S. 714 would amend section 22(g) so as (1) to raise the
"general" loan ceiling from $2,500 to $5,000, and (2) to permit executive officers
to borrow up to $30,000 from their own banks on home mortgage loans. Member banks would be prohibited from making such loans on terms more favorable
than those extended to other borrowers. Instead of requiring prior approval of
such loans by the board of directors of the officer's bank—a time-consuming
formality that is unnecessary in view of the other safeguards provided—the
bill would require only that the officer report the borrowings to his board of
directors. Finally, reports of borrowings from other banks would be required
only where they exceed in the aggregate the applicable ceiling ($5,000 or $30,000,
depending on the purpose of the loan) on borrowing from his own bank.
The Board believes that these liberalizing amendments would be consistent
with the basic purposes of present law and that such liberalization is desirable.
Accordingly, the Board recommends their enactment. Since the provisions of
section 2 of S. 714 do not relate to the Board's area of responsibility, we have no
comments with respect to that section.
8
MISCELLANEOUS BANKING AND CREDIT UNION BILLS
Eligible paper presented by member banks as collateral for borrowing at
Federal Reserve banks, 1959-66
[Face amounts in millions of dollars]
All member banks:
Number of pieces
Face amount
Number of banks
Reserve city banks:
Number of pieces
Face amount
Number of banks
Country banks:
Number of pieces
Face amount
Number of banks
-
—
1965
1966
1963
1964
397
71.3
7
277
133.7
8
24,345
841
18,343
248.6 7,186. 4 20,085. 2
40
82
20
5
4.2
1
131
56.9
3
223
133.4
5
11,934
271
239.3 7,064. 9
21
8
118
1.2
4
266
14.4
4
54
.3
3
1959
1960
527
153.0
13
1,006
673.0
21
123
5.4
5
355
82.3
8
448
241. 3
9
172
70.7
5
558
431.7
12
1961
1962
570
9.2
12
16,606
19, 630 4
43
7,739
454.8
39
6,4C9
121.5
19
Source: Federal Reserve banks.
NOTE—Eligible paper is counted for this table only when it is initially analyzed. If paper is left at the
Reserve Bank and offered as collateral again without requiring further analysis, it does not enter into these
totals a second time.
Number of member banks borrowing 1 or more times during year
Federal Reserve, 1959-66
All member banks
Reserve city banks
Country banks
from
1966
1959
1960
1961
1962
1963
1964
1965
1,911
1,903
1,268
1,102
1,222
1,232
1,157
1,614
238
1,673
207
1,696
161
1,107
150
952
168
1,054
158
1,074
161
996
166
1,448
Member banks borrowing 1 or more times during year as percent of total number
of member banks, year-end 1959-66
1959
All members banks
Reserve city banks
Country banks
1960
1961
1962
1963
1964
1965
1966
30.7
30.8
20.7
18.2
20.0
19.8
18.6
26.3
81.2
28.2
86.2
28.6
71.6
18.8
68.2
16.4
78.1
17.9
76.0
17.9
83.0
16.5
86.5
24.3
Source: Federal Reserve Banks.
Senator PROXMIRE. The next witness is Mr. J. Deane Gannon, Director of the Bureau of Federal Credit Unions. Mr. Gannon, it is my
understanding that these three bills were unobjected to in the Senate
last time. Senator Hickenlooper wisely suggested that you might, if
you see fit, simply put your testimony into the record. However, if
you would like to make any particular point, this is your opportunity
to do so, and go right ahead and do it. Your testimony will be printed
in full.
STATEMENT OF J. DEANE GANNON, DIRECTOR, BUREAU OF
FEDERAL CREDIT UNIONS
Mr. G A N N O N . All right.
Senator H I C K E N L O O P E R . I go on the old legal theory that many a
lawyer lost his case by overtrymg it.
If there is no objection, I do not see. why we cannot go back and answer our mail in the office.
9 MISCELLANEOUS BANKING AND CREDIT UNION BILLS
Mr. G A N N O N . I think my statement covers our position, so I am perfectly agreeable to filing my statement.
Senator PROXMIRE. Fine. You have nothing else you would like to
add to that ?
M r . GANNON. N o .
Senator PROXMIRE.
All right, fine. Thank you very much for appearing.
(The prepared statement of Mr. Gannon follows:)
STATEMENT OF J . D E A N E G A N N O N , DIRECTOR, B U R E A U OF FEDERAL CREDIT U N I O N S ,
SOCIAL SECURITY ADMINISTRATION, DEPARTMENT OF H E A L T H , EDUCATION, AND
WELFARE
Mr. Chairman and members of the subcommittee, I am J. Deane Gannon director of the Bureau of Federal Credit Unions. I appreciate very much this opportunity to appear before the subcommittee in order to comment briefly on that
portion of S. 714 which would amend the Federal Credit Union Act. Section 2 of
the bill would amend subsection (5) of section 8 of the Federal Credit Union Act
by permitting loans to a director or member of the supervisory or credit committees in an amount not exceeding that of the statutory unsecured loan limit plus
the amount of his shareholdings and any unencumbered shareholdings of a member pledged as security on the loan.
Without going into great detail, our position is that the interests of Federal
credit unions would be better served if the committee were to adopt a somewhat
different approach, which I shall briefly explain.
The original Federal Credit Union Act, approved in 1934, provided that "No
loans to a director, officer, or member of a committee shall exceed the amount of
his holdings in the Federal credit union as represented by shares thereof." The
sponsors of the Act believed that the limitations on borrowing and the prohibition against the compensation of officials except the treasurer contained in Section 13 assured that the officials could not personally profit or gain undue advantage by virtue of their responsibilities. In 1959, the borrowing restriction was
eased slightly to include in the amount an official could borrow the total unencumbered shareholdings of a member who would serve as a cosigner. There is
no doubt that the strict requirements of the law have had the desired effect, since
no significant regulatory problems have developed in this area. By far the majority of Federal credit union officials have conducted themselves in a completely
responsible way. The few who have not have been dealt with properly and
firmly.
W e have become aware, nevertheless, that the present restrictions on borrowing by officials continues to work a hardship in certain instances. The liberalization permitted in the 1959 amendments provided an indication that Congress was
aware of the difficulties some officials were encountering. The present restrictions discriminate against officials who have a genuine need to borrow. Some
officials have resigned in order to become fully eligible for the borrowing privileges accorded ordinary members. Others have reluctantly declined to serve
at all, knowing in advance that they will need to borrow but being unwilling to
undergo the embarrassment and difficulty of obtaining a cosigner. The restriction, in sum, has had the effect of placing an impediment in the way of full
member participation in the operation of Federal credit unions. Obviously such
participation is a highly desirable goal in these mutual institutions.
The problem is even more pronounced in Federal credit unions serving largely
low-income members, where particular attention is paid to encouraging the poor
themselves to participate in the operation of the credit union. There is understandable reluctance on the part of the poor to accept official positions, because,
by doing so, they lessen to a great degree their eligibility for borrowing from
their credit union. There are now approximately 530 Federal credit unions defined as serving low-income groups, but nearly all Federal credit unions have
significant numbers of their membership at or near the poverty level. Consequently, the restriction not only limits the chances for full member participation in low-income credit unions, but it also is a factor in credit unions whose
members, on average, have higher incomes. The result, in many instances, is
that board and committee positions are filled by those who can afford to sacrifice
10
MISCELLANEOUS BANKING AND CREDIT UNION BILLS
the borrowing privilege while there may be well qualified members with lower
incomes who would be willing to serve but find themselves unable to do so because of the present restriction.
.
The language of section 2 of S. 714 would limit borrowing by officials to the
amount of the present statutory unsecured loan limit of $750, plus the amount
that they may presently borrow. The additional amount allowed—$750—is relatively small and would not, in our opinion, significantly assist in meeting the
problems I have cited. W e feel that the solution to this problem lies rather in
regulating officials' borrowing activity through disclosure of their loan activity
to the board of directors, subject to an overall dollar limitation that takes into
consideration the legitimate needs of the officials consistent wih the basic purposes of the A.ct
We would therefore recommend that section 2 of S. 714 be amended to incorporate three desirable objectives: First, liberalization of the present restrictions on borrowing by board or committee members of Federal credit unions
beyond that in the bill—perhaps patterned generally after the limits for bank
officials; second, establishing adequate safeguards against self-dealing by these
officials by requiring full disclosure of existing loans and delinquencies, if any,
of these officials and approval of each loan by the board in addition to the credit
committee; and third, providing an additional barrier against improper conduct
by requiring that any board or committee member submitting a loan application
would be disqualified from taking part in any actions involving the loan. Enactment of an amendment along these lines would, in our view, continue to furnish
an appropriate atmosphere of fiduciary responsibility while adding a desirable
degree of flexibility in Federal credit union operations.
We have been advised informally by the Bureau of the Budget that it interposes
no objection to the presentation of this statement from the standpoint of the
Administration's program.
Senator PROXMIRE. Our next witness is Mr. L . A. Jennings, chairman of the board of the Riggs National Bank and chairman of the
Federal Legislative Committee of the American Bankers Association.
Mr. Jennings, the same suggestion applies to you, and, once again,
we are happy to have you handle this any w^ay you wish, but it wTould
be convenient if you would simply like to file your statement and
make any observation you would like to make.
STATEMENT OP L. A. JENNINGS, CHAIRMAN OF T H E BOARD OF
RIGGS NATIONAL B A N K AND CHAIRMAN, FEDERAL LEGISLAT I V E COMMITTEE OF T H E AMERICAN BANKERS ASSOCIATION
Mr. JENNINGS. Mr. Chairman, I would be delighted to file my
statement.
Senator PROXMIRE. Fine.
Mr. JENNINGS. I would like to make one comment. It pertains to
loans to executive officers of Federal Reserve member banks.
The bill would authorize home mortgage loans to officers up to
$30,000 and we support that. However, we would recommend that
language be inserted to make it clear that in no case shall the amount
loaned be in excess of the legal lending limit of any bank.
We have in this country, of course, a situation where the lending
limits of banks depend on their size—in the case of national banks
section 5200 of the Revised Statutes sets a limit of 10 percent of capital and surplus. The limits vary from let us say $10,000 for very
small institutions all the way up to the largest banks with perhaps
$50-million lending limits. $30,000 to many banks is a very reasonable and acceptable figure, but not if a bank has a legal lending limit
of $15,000 or $20,000. I do not believe that the proposed bill would
11 MISCELLANEOUS BANKING AND CREDIT UNION BILLS
authorize violating section 5200 or any similar statute. However, it
might be just as well to have it crystal clear that the bill means that
mortgage loans may be made up to $30,000 only if the bank's legal
lending limit will permit it.
Senator PROXMIRE. Mr. Jennings, that is a fine suggestion. I discused this briefly with Mr. Hale and he agreed we could make that
explicit in the bill. We will check it with the Federal Reserve, but
I think this is a fine suggestion and is very much appreciated.
Senator HICKENLOOPER. It has been called to my attention that in
the hearings last year the $30,000 figure w^as arbitrarily put as a limit
because that was the F H A limit and that was the yardstick which
they used for some reason.
Mr. JENNINGS. May I say this: My lawyers tell me that the way the
bill is presently written, it provides for the $30,000 maximum amount
to a bank officer against a mortgage on his home but it would be
looked upon as not superseding the 10 percent of capital and surplus
limitation placed on national banks, for example, under section 5200
and if the 10-percent limitation on a small bank happened to be $10,000 or $15,000 or $20,000, the bank would have to stay within that
legal lending limit.
On the other hand, it is always easier, it seems to me, to have it
crystal clear in the bill that there was no intention to supersede another
statute. That would be, of course, a big loan for some banks, particularly a mortgage loan on a home in a very small community—
$30,000—it is unlikely, of course, that they would make such a loan.
Senator PROXMIRE. Thank you again very much. Was there something else you wanted to add ?
Mr. J E N N I N G S . NO. I just want to say we are wholeheartedly back
of all three bills. We think there is not any question about their soundness and that it would act to the benefit of the banking community and
business community generally to have them enacted into law. Thank
you very much.
Senator PROXMIRE. Thank you.
(The prepared statement of Mr. Jennings follows:)
STATEMENT
OF L E W E L L Y N A . J E N N I N G S ON B E H A L F OF T H E
B A N K E R S ASSOCIATION
AMERICAN
Mr. Chairman, members of the Subcommittee, I am Lewellyn A. Jennings,
Chairman of the Board of The Riggs National Bank of Washington, D. C. I am
appearing before your Subcommittee on behalf of The American Bankers Association. At the outset I want to say that The American Bankers Association favors
enactment of S. 714, S. 065, and S. 966. I would like to make a brief statement on
each issue.
ELIGIBLE PAPER
(S.
966)
S. 966 is similar to S. 1559, which our Association supported and which passed
the Senate in the 89th Congress. It would permit member banks of the Federal
Reserve System to borrow from the Federal Reserve banks on the security of
any sound asset without paying a "penalty" rate of interest. Under present law,
only U. S. Government obligations and short-term, self-liquidating commercial
loans of up to 90 days, or agricultural loans of up to 9 months, are eligible as
security against advances obtained at regular discount rates from Federal
Reserve banks. Most other loans, including such a major category as real estate
loans, regardless of their maturity, are ineligible f o r discount under present law.
The difficulties which this bill is designed to correct stem from practices and
economic theories prevailing prior to, and at the time of, the enactment of the
12
MISCELLANEOUS BANKING AND CREDIT UNION BILLS
Federal Reserve Act. In 1913, the Act reflected the view then commonly accepted that the liquidity and soundness of the commercial banking system depended upon short-term, self-liquidating bank loans. Consequently, Reserve
banks were authorized to discount only certain types of paper "arising out of
actual commercial transactions—for agricultural, industrial, or commercial purposes" and subject to a maturity limitation of 90 days. These restrictions were
slightly modified by amendments in 1916,1932, and in 1935.
The make-up of a bank's loan portfolio today differs markedly from that which
existed in the early days of the Federal Reserve System. For example, at that
time residential real estate mortgage loans amounted to about 12 percent of all
loans of commercial banks. At national banks the ratio was less than 2 percent.
Of course, FHA and GI loans were unheard of and such loans are still not eligible
as security for advances made by Reserve banks. Today, real estate loans account for 24 percent of all loans at commercial banks. Likewise, consumer instalment loans and term loans to farmers and other businessmen were then of
minor importance, and are not yet considered eligible paper in most instances,
because of maturity restrictions or for other reasons—no matter how well secured such paper may be. Because of the narrow definition in the present law,
the percentage of eligible loans in the loan portfolios of banks today is very small.
There is a tedious burden upon both the borrowing bank and the Reserve bank
in reviewing loan portfolios to determine which loans, if any, are eligible. For
example, loans to farmers f o r purchasing farm implements are eligible if they
meet the maturity restrictions, but a loan to acquire a silo or to build a barn
would be ineligible because these are considered to be permanent or fixed
investments.
We believe that the amendments to the Federal Reserve Act contained in S. 966
would bring the lending authority of the Reserve banks into conformity with
modern banking practices. If enacted, the bill would replace the present requirement for conformity to outmodel technical details with a provision that paper
to secure advances must be sound and appropriate. There is no good reason
why the Reserve banks should be bound by the technical requirements written
into the law a half century ago, but instead should be guided by the quality of
the loans offered for discount or for collateral. The proposed amendments would
make this possible.
S. 966 provides that the Reserve banks will be "subject to such limitations,
restrictions, and regulations as the Board of Governors may prescribe." It
further provides that in making advances due regard shall be given to the maintenance of sound credit conditions, and that both the banks and the Board shall
guard against undue or inappropriate use of the borrowing privilege by member
banks.
The American Bankers Association recommends that your Subcommittee give
favorable consideration to this bill.
FEDERAL RESERVE PURCHASE OF FOREIGN GOVERNMENT OBLIGATIONS
(S.
965)
s. 965 would amend Section 14(e) of the Federal Reserve Act (12 U.S.C. 358)
to authorize the investment of funds held by Federal Reserve banks in foreign
central banks in securities which are direct obligations of, or fully guaranteed
as to principal and interest by, any foreign government or monetary authority,
and which have maturities from the date of purchase not exceeding 12 months
and are denominated payable in any convertible currency. This has reference to
idle amounts of foreign currency held by the Federal Reserve Bank of New York,
acting for the System, in reciprocal credit balances or "swap" arrangements with
foreign central banks. These funds are used, among other things, for currency
exchange purposes. Under present law, Federal Reserve bank balances in accounts in foreign banks may only be invested in bills of exchange and acceptances
resulting from commercial transactions, with maturities of not more than 90
days; or the funds may be placed in interest-bearing time accounts. The trouble
is, there are instances when these investment media are just not available. As
a result the Federal Reserve has to resort to various roundabout devices to earn
interest on its idle funds.
The American Bankers Association supports S.965 because it would permit
greater flexibility and would allow a more economic use of Federal Reserve bank
balances held at foreign central banks.
13 MISCELLANEOUS BANKING AND CREDIT UNION BILLS
LOANS TO EXECUTIVE OFFICERS OF FEDERAL RESERVE MEMBER BANKS (S. 7 1 4 )
S. 714 would amend Section 22 ( g ) of the Federal Reserve Act by liberalizing
the provisions relating to loans to executive officers by member banks of the Federal Reserve System. This bill (Section 2) also modifies the loan provisions of
the Federal Credit Union A c t ; however, I am limiting my statement to those
provisions of the bill dealing with the Federal Reserve Act.
At the present time, Section 22 (g) of the Federal Reserve Act prohibits a
member bank of the Federal Reserve System from making loans to any of its
executive officers in an amount exceeding $2,500 and for loans under this authorization only with the prior approval of a majority of the bank's board of directors.
The bill presently before your Committee, S. 714, would raise the present
$2,500 limitation on loans to executive officers of Federal Reserve member banks
to $5,000 and would authorize home mortgage loans to such officers up to $30,000.
However, we would recommend that language be inserted to clarify that in no
case shall the amount loaned be in excess of the legal lending limit of any bank.
In addition, any loan of a member bank to its executive officers could only be
made on terms not more favorable than those extended to other borrowers.
Conditions have changed since the initial restrictions were written into law
(Banking Act of 1933). For one thing, the purchasing power of the dollar has
decreased about 60 percent. Thus, a $2,500 limitation as contained in the 1933
Banking Act would be equivalent to about a $6,000 limitation today if allowance
is made for price increases. In addition, methods of financing and the types of
goods financed have drastically changed over this period. Loans for automobiles
and other types of consumer goods, as well as homes, has become universal practice among U.S. banks.
The American Bankers Association believes that the $5,000 limitation contained
in the bill now before you appears to be reasonable and equitable for all concerned. Similarly, the A.B.A. believes that home mortgage loans by banks to
their executive officers should be allowed, provided such loans are made on the
same terms as those offered to other borrowers. The $30,000 limitation is in
line with current provisions pertaining to FHA-insured mortgages and seems to
be an appropriate amount.
The American Bankers Association recommends that your Subcommittee give
favorable consideration to the provisions of S. 714 relating to Federal Reserve
member banks.
Senator PROXMIRE. Our last witness is Richard Grant, vice president of GUNA International.
Mr. Grant, I might say that Senator Mclntyre is very sorry he cannot be here. I understand you are a constituent of his, sir.
STATEMENT OF RICHARD H. GRANT, VICE PRESIDENT OF CUNA
INTERNATIONAL, INC., ACCOMPANIED BY J. 0 R R I N SHIPE, MANAGING DIRECTOR
Mr. GRANT. That is correct.
Senator PROXMIRE. The same thing applies to you; your statement
will be printed in full in the record. If you would like to make any
additional remark or highlight any part of it, please proceed.
Mr. GRANT. First of all, I would like to introduce Mr. J. Orrin
Shipe, managing director.
Senator PROXMIRE. He needs no introduction. He is familiar to this
committee. We are delighted to have you here, Mr. Shipe.
Mr. GRANT. The statement we submitted, Mr. Chairman, is still
reasonably acceptable. However, in view of the position presented by
the Bureau of Federal Credit Unions this morning, I would like to
make an additional comment, if I may.
76-439 O—67
3
14
MISCELLANEOUS BANKING AND CREDIT UNION BILLS
First of all, while the position taken in our statement is still our
position, we do not think the liberalization as contained in section 2
of S. 714 goes far enough. We prefer to have the restriction removed
and to substitute a disclosure requirement which would fully inform
the board of directors and members of the credit committee of the
borrowings of credit union officials. In this regard, we fully support
the statement that the Bureau of Federal Credit Unions has presented. We would urge the committee to amend section 2 of S. 714
by substituting the following language:
Subsection 5 of Section 8 of the Federal Credit Union Act (12 U.S.C. 1757)
is amended by striking out all that part of the first sentence beginning with
the word "except" and inserting, in lieu thereof, the following:
"Except that loans made to a director or member of the supervisory or credit
committee shall not exceed $5,000 and any such loans shall be approved by
the credit committee and by the board of directors."
If we may be permitted to
Senator PROXMIRE. Tell me how this would change it.
Mr. GRANT. The first section of the bill, which does not refer to
credit unions, establishes a $5,000 limit for bank officers
Senator PROXMIRE. YOU want credit unions included in this bill
along with the banks.
Mr. GRANT. That is correct. The present bill provides that credit
union officials could borrow up to the unsecured loan limit, in addition
to the present authority for loans secured by shares in the credit
union, but we do not feel that really goes far enough.
Senator PROXMIRE. I see. Very good. Well, we appreciate that.
Senator Hickenlooper?
Senator HICKENLOOPER. I do not think I have any questions. I
do not know if I quite understand this but—I am trying to read the
statement here
Senator PROXMIRE. Can you spell out exactly what the present
amount would be and exactly what the future amount would be?
Mr. GRANT. Under the present bill, as it reads now ?
Senator PROXMIRE. Let us do it in three ways: The law at present,
the bill as it reads now, and the proposal that you have.
Mr. GRANT. All right. The present law, Mr. Chairman, limits
officials of credit unions to a loan that does not exceed their own share
amount plus the additional amount that might be pledged by a cosigner.
Senator HICKENLOOPER. NO unsecured loan.
Mr. GRANT. NO unsecured loan and no loan secured by anything
other than shares within the credit union, itself, either by the borrowing official or by a cosigner. That is the present law which, of course,
is very, very restrictive.
Section 2 of the bill, S. 714, that is before us, would permit unsecured loans to officials up to $750, because this is the unsecured limit
in the act, in addition to the passbook loans now permitted.
Senator PROXMIRE. Up to $750.
Mr. GRANT. That is right. We do not feel this goes far enough
and while we feel it would be an alleviation of the problem that exists,
where a credit union official might need a larger loan, which is en-
15
MISCELLANEOUS
BANKING
AND
CREDIT U N I O N
BILLS
tirely possible in today's economy, we are still going to have the problem of credit union officials being forced by this provision to resign
or else express reluctance to accept an official position, so we would
hope we could go a little further than that by allowing them the
privilege
Senator HICKENLOOPER. Can they not go someplace else and borrow
the money ?
Mr. G R A N T . Certainly they can, but in their own member organization, we would hope their privileges would be expanded to equal those
of the rest of the membership.
Senator HICKENLOOPER. Y O U want them to have the same borrowing privileges and rights as other members, is that what you are
saying?
Mr. G R A N T . Except that it would have a $ 5 , 0 0 0 limitation which
the general membership does not have, plus the provision that the
loan would be reviewed not only by the credit committee but by the
board of directors as well. With the exception of these two restrictions, they would be permitted to use the credit union as does the
general membership.
Senator PROXMIRE. That sounds reasonable to me.
Senator HICKENLOOPER. D O you want to change the maturity date
period on these loans in any way; longer maturity period?
Mr. G R A N T . Well, the Federal Credit Union Act has a 5-year
amortization period in it.
Senator HICKENLOOPER. D O you want to extend that?
Mr. G R A N T . That is another piece of legislation on which we may
take a position when it is before us.
I would say yes, the credit union movement would be most favorable to this.
Senator HICKENLOOPER. S O at the present time and under this bill,
you are limited to a loan where the maturity would occur within a
short period of time rather than a longer period of time.
Mr. G R A N T . Yes. The Federal Credit Union Act now limits all
loans, whether to officials or anyone else in the membership, to 5 years.
This, of course, is another of the restrictive areas.
Senator HICKENLOOPER. D O you w^ant to become a bank ? Is that it ?
Mr. G R A N T . N O , I would certainly not think that, Senator. We
have a completely different philosophy and I doubt that any change
in the present restrictions that are on us would cause us to be banking
institutions.
Senator HICKENLOOPER. Well, I think the credit unions do a wonderful job and I have no objection to them, but I just do not know how
far they are going here in this or how far they want to go. I think
that is all.
Senator PROXMIRE. It is my understanding from the committee
counsel, Mr. Hale, that we will check out this suggestion with the
Budget Bureau, because we are not clear as yet what their position
is on this.
16
MISCELLANEOUS BANKING AND CREDIT UNION BILLS
(The prepared statement of Mr. Grant follows:)
STATEMENT OF RICHARD H . G R A N T , VICE PRESIDENT,
CUNA
INTERNATIONAL, I N C .
Mr. Chairman and members of the committee, my name is Richard H. Grant.
I am a Vice President of CUNA International, Inc., and Treasurer-Manager of
the Pease Air Force Base Federal Credit Union, Portsmouth, New Hampshire.
CUNA International, Inc., was formerly known as the Credit Union National
Association and is the voice of the organized credit union movement. I appear
here today to speak on behalf of the Federal credit unions who are vitally interested in this legislation.
Since the main concern of CUNA International is with Section 2 of S. 714, I
will limit my remarks to that Section.
Section 2 of S. 714 would amend Section 8 of the Federal Credit Union Act to
modify the loan provisions relating to directors, members of the supervisory
committee, and members of the credit committee of Federal credit unions.
Under the present law, members of Federal credit unions serving on the board
of directors, the supervisory committee, and the credit committee are severely
limited as to the amount that they may borrow from their own Federal credit
union. At the present time, these officials may borrow only up to their unencumbered shares, which they must pledge as security, and up to the unencumbered
shares of a co-maker, which also must be pledged as security for the loan. In
other words, no Federal credit union official may make a loan from the credit
union which he serves unless he pledges his own shares and the shares of a
co-signer in an amount equivalent to the amount of the loan that he desires.
Section 2 of S. 714 would liberalize the present law in that it would permit
these officials to borrow from their own Federal credit unions up to the unsecured
loan limit plus their own unencumbered pledged shares and those of a co-signer.
The unsecured loan limit is $750 for Federal credit unions with at least $7,500
in paid-in and unimpaired shares and surplus. When its shares are between
$2,000 and $7,500, the maximum unsecured loan is 10 per cent of the unimpaired
shares and surplus. When it has less than $2,000 in shares, the maximum
unsecured limit is $200.
The restriction on officer borrowing was first enacted into law in the original
Federal Credit Union Act which was passed by Congress in 1934. At that time,
the restriction was even more onerous than it is today. In the original Act,
officials could not borrow in excess of their own pledged shareholdings. In 1959,
the limit was extended to include the unencumbered shares of a co-signer.
The present restriction makes it extremely difficult for Federal credit unions
to recruit volunteers to serve in an official capacity because many of the volunteers are unwilling to accept the borrowing restriction. W e have found that in
some cases officials have been forced to resign after taking office because they
found it necessary to borrow and were unable to do so. The restriction of
course automatically limits the number of persons eligible for office. The restriction is particularly onerous on young people who would like to get involved in an
official capacity with a particular Federal credit union but who are unable to do
so since their borrowing needs are so great during their family-formative years.
CUNA International therefore endorses Section 2 of S. 714 and urges this
Committee to report favorably thereon.
Thank you for the opportunity of appearing before your Committee.
Senator PROXMIRE. Thank you very much. That concludes the
hearing. We have additional credit union bills that Senator Sparkman has introduced that we will be taking up a little later on at a
later session.
Might I ask if anyone else would like to be heard on these three
bills ? If not, I want to thank those who appeared this morning and
thank Senator Hickenlooper.
(The bills and letters referred to by the chairman on p. 1 follow:)
17 MISCELLANEOUS BANKING AND CREDIT UNION BILLS
H CONGRESS
1 ST SESSION
^
* F
/
*
I
A
£JL
IN T H E SENATE OE THE U N I T E D STATES
JANUARY
Mr.
PROXMIRE
30,1967
introduced the following bill; which was read twice and referred
to the Committee on Banking and Currency
A BILL
To amend section 22 (g) of the Federal Reserve Act relating to
loans to executive officers by member banks of the Federal
Reserve System, and to amend the Federal Credit Union
Act to modify the loan provisions relating to directors, members of the supervisory committee, and members of the credit
committee of Federal credit unions.
1
Be it enacted by the Senate and House of Representa-
2
tives of the United States of America in Congress assembled,
3
That subsection (g) of section 22 of the Federal Reserve
4
Act (12 U.S.C. 375a) is amended by striking out the first
5
two sentences thereof and inserting in lieu thereof the
6
following:
7
" (g) No executive officer of any member bank shall
18
MISCELLANEOUS BANKING AND CREDIT UNION BILLS
2
1
borrow from or otherwise become indebted to any member
2
bank of which he is an executive officer, and no member
3
bank shall make any loan or extend credit in any other
4
manner to any of its own executive officers: Provided, That
5
any member bank may extend credit, on terms not more
6
favorable than those extended to other borrowers, to any
7
executive officer thereof, and such officer may become in-
8
debted thereto, in an amount not exceeding $5,000, or, in the
9
case of a first mortgage loan on a home owned and occupied
10
or to be owned and occupied by such officer, in an amount
11
not exceeding $30,000, but any such indebtedness shall be
12
promptly reported by such officer to the board of directors
13
of the bank of which he is an officer.
14
of any member bank borrows from or if he be or become
15
indebted ,to any other bank or banks in an aggregate amount
16
exceeding that which he could lawfully borrow from the
17
member bank of which he is an executive officer under this
18
section, he shall make a written report to the board of diree-
19
tors of such member bank, stating the date and amount of
20
such loan or loans or indebtedness, the security therefor, and
21
the purpose for which the proceeds have been or are to be
22
used."
23
If any executive officer
SEC. 2. That subsection (5) of section (8) of the Fed-
19 MISCELLANEOUS BANKING AND CREDIT UNION BILLS
3
1
eral Credit Union Act (12 U.S.C. 1757) is amended by
2
inserting the following in thefirstsentence after the words
3
"shall exceed" and before the words "the amount": "the
4
amount of the unsecured loan limit under this Act plus".
20
MISCELLANEOUS BANKING AND CREDIT UNION BILLS
B O A R D OF GOVERNORS OF T H E
FEDERAL RESERVE S Y S T E M ,
Washington, D.C., Marcli 1,1967.
H o n . JOHN
SPARKMAN,
Chairman, Committee on Banking and Currency,
U.S. Senate, Washington, D.C.
D E A R M R . C H A I R M A N : The Board of Governors wishes to recommend certain
amendments to the provisions of section 2 2 ( g ) of the Federal Reserve Act regarding loans by member banks of the Federal Reserve System to their executive
officers.
These provisions presently prohibit a member, bank from making loans to any
of its executive officers, except in an amount not exceeding $2,500 and then only
with the prior approval of a majority of the bank's board of directors. In addition, an executive officer is required to make a written report to his bank with
respect to any loan obtained by him from any other bank.
The Board believes that these restrictions, first enacted in 1933, are unrealistically severe in the light of changed economic conditions and that they should
be liberalized.
In 1956, in connection with the then proposed "Financial Institutions Act",
the Board recommended that the $2,500 exemption be increased to $5,000. This
change was included in that bill as it passed the Senate in 1957; and the bill
would have also relieved executive officers from the burden of reporting borrowings from other banks where they would not exceed $15,000 in the case of home
mortgage loans or $5,000 in the case of other loans. The Report of the President's Committee on Financial Institutions in April 1963 recognized the desirability of increasing the $2,500 ceiling on the amount an executive officer may
borrow from his bank.
The underlying purpose of restrictions on loans by member banks to their
executive officers is unquestionably sound. However, the Board believes that
some liberalization of these restrictions would not be contrary to the public
interest. In addition to an increase in the basic ceiling on exempted loans, the
law should provide a special exemption with respect to mortgage loans covering
the purchase of an executive officer's home.
Accordingly, the Board recommends (1) that an executive officer of a member bank be permitted to borrow from his own bank up to $5,000, or, in the case
of home mortgage loans, up to $30,000; (2) that, in lieu of the present requirement for prior approval by the bank's board of directors with respect to
exempted borrowings by an executive officer from his own bank, the officer be
required to report any such borrowing to the board of directors ; and (3) that
reports as to borrowing from other banks be required only where they would
exceed in the aggregate the amount an executive officer could borrow from his
own bank. In connection with these changes, certain obsolete provisions of the
law should be repealed.
To preclude favoritism, these changes should be accompanied by a requirement
that any loan to a bank's executive officer shall be made on terms not more favorable than those extended to other borrowers.
There is enclosed a draft of a bill that would amend section 2 2 ( g ) of the
Federal Reserve Act along the lines above described. The Board urges favorable consideration of such a bill by your Committee and by the Congress. This
is identifical with S. 1558, which passed the Senate in the last Congress.
Sincerely yours,
W M . M c C . MARTIN, JR.
DRAFT
A B I L L T o a m e n d section 2 2 ( g ) of the Federal Reserve A c t r e l a t i n g to loans to executive
officers by member banks of the Federal Reserve System, and f o r other purposes
Be it enacted by the Senate and House of Representatives of the United States
of America in Congress assembled, That subsection (g) of section 22 of the
Federal Reserve Act (12 U.S.C. 375a) is amended by striking out the first two
sentences thereof and inserting in lieu thereof the following:
" ( g ) No executive officer of any member bank shall borrow from or otherwise
become indebted to any member bank of which he is an executive officer, and no
21 MISCELLANEOUS BANKING AND CREDIT UNION BILLS
member bank shall make any loan or extend credit in any other manner to any
of its own executive officers: Provided, That any member bank may extend
credit, on terms not more favorable than those extended to other borrowers, to
any executive officer thereof, and such officer may become indebted thereto, in
an amount not exceeding $5,000, or, in the case of a first mortgage loan on a
home owned and occupied or to be owned and occupied by such officer, in an
amount not exceeding $30,000, but any such indebtedness shall be promptly reported by such officer to the board of directors of the bank of which he is an
officer. If any executive officer of any member bank borrows from or if he be
or become indebted to any other bank or banks in an aggregate amount exceeding that which he could lawfully borrow from the member bank of which he is an
executive officer under this section, he shall make a written report to the board
of directors of such member bank, stating the date and amount of such loan or
loans or indebtedness, the security therefor, and the purpose f o r which the proceeds have been or are to be used."
FEDERAL DEPOSIT I N S U R A N C E
CORPORATION,
Washington,, March IS, 1961.
Hon.
JOHN
SPARKMAN,
Chairman, Committee on Banking and Currency,
U.S. Senate, Washington, D.C.
D E A R M R . C H A I R M A N : Reference is made to your request for the views of this
Corporation on S. 714, 90th Congress, a bill " T o amend section 22(g) of the
Federal Reserve Act relating to loans to executive officers by member banks of
the Federal Reserve System, and to amend the Federal Credit Union Act to
modify the loan provisions relating to directors, members of the supervisory
committee, and members of the credit committee of Federal credit unions".
The purpose of the bill is to liberalize current restrictions on loans by member
banks to their executive officers and by Federal credit unions to their directors
and members of their supervisory and credit committees.
Section 2 2 ( g ) of the Federal Reserve Act, as amended (12 U.S.C. 375a),
presently permits a member bank, with the prior approval of a majority of its
board of directors, to extend credit in an amount not exceeding $2,500 to any
executive officer thereof. Additionally, the section requires an executive officer
of a member bank to report to the board of directors of the bank of which he is
an executive officer any loan obtained by him from any other bank.
Section 1 of S. 714 would permit a member bank to extend credit to an executive
officer thereof in an amount not exceeding $5,000, or, in the case of a home
mortgage loan, in an amount not exceeding $30,000. Any such loan could be
made only on terms not more favorable than those extended to other borrowers,
and the officer to whom the loan was made would be required to report the loan
to the bank's board of directors. Reports as to loans from other banks would be
required only where they would exceed in the aggregate the amount an executive
officer could borrow from his own bank.
Section 8 ( 5 ) of the Federal Credit Union Act, as amended (12 U.S.C. 1757(5)),
prohibits a Federal credit union from making any loan to a director or member
of the supervisory or credit committee in an amount exceeding the amount of
his holdings in the credit union plus the holdings of any member pledged as
security for the loan. Section 2 of S. 714 would increase the amount which a
Federal credit union might loan to such a person to an amount not exceeding
the amount of the unsecured loan limit under the Federal Credit Union Act
($750) plus the amount of his holdings in the credit union plus the holdings
of any member pledged as security for the loan.
In the light of changed economic conditions and increases in the cost of living
since they were established, we believe that current restrictions on loans by
member banks to their executive officers are quite unrealistic and that the
liberalization contemplated by S. 714 is fully justified and desirable. The Corporation therefore recommends the enactment of the bill.
The Bureau of the Budget has advised that it has no objection from the
standpoint of the Administration's program to the submission of this letter.
Sincerely yours,
K . A. R A N D A L L , Chairman.
76-439 O—67
4
22
MISCELLANEOUS BANKING AND CREDIT UNION BILLS
THE
Hon.
JOHN
G E N E R A L C O U N S E L OF T H E
TREASURY,
Washington, D.C., March 13,1967.
SPARKMAN,
Chairman, Committee on Banking and Currency,
U.S. Senate, Washington, D.C.
D E A B M R . C H A I R M A N : Reference is made to your request for the views of
this Department on S. 714, " T o amend section 22(g) of the Federal Reserve
Act relating to loans to executive officers by member banks of the Federal
Reserve System, and to amend the Federal Credit Union Act to modify the loan
provisions relating to directors, members of the supervisory committee, and
members of the credit committee of Federal credit unions."
The first section of the bill would increase from $2,500 to $5,000 the amount
of a loan that a member bank of the Federal Reserve System may make to
any of its executive officers; permit loans by a member bank to an executive
officer up to $30,000 in the case of a home mortgage loan; and revise the approval
and reporting requirements with respect to loans to executive officers of member
banks.
With respect to section 2 of the bill, existing law limits the amount that a
director or member of a supervisory or credit committee of a Federal credit
union may borrow from a Federal credit union to the amount of his shares in
the credit union plus the shares of any cosigner. Section 2 would permit additional borrowing by such persons in the amount of the unsecured loan limit,
which is $750 at the present time.
The Department has no objection to the first section of the proposed legislation. The Department defers to the views of the Department of Health,
Education, and Welfare as to the merits of section 2 of the bill.
The Department has been advised by the Bureau of the Budget that there
is no objection from the standpoint of the Administration's program to the
submission of this report to your Committee.
Sincerely yours,
F R E D B . S M I T H , General
Counsel.
FIRST NATIONAL
CITY
BANK,
New York, N.Y., March 8,1967.
H o n . WILLIAM
PROXMIRE,
Chairman, Subcommittee on Financial Institutions, Senate Banking and Currency Committee, New Senate Office Building, Washington, D.C.
D E A R S E N A T O R : W e were pleased to learn of your introduction of S . 714 dealing
with loans to executive officers of member banks, and that your subcommittee
will consider this bill soon.
The increase in the individual loan limit from $2,500 to $5,000 is helpful.
For example, it will enable a member bank to finance an officer's purchase of
an automobile. However, there is a special category of loans which we think
should be further liberalized. This is, loans to executive officers for the purpose
of financing the education of their children.
We suggest a limit of $10,000 on this type of loan. Under your bill, of course,
the loans could not be made on more favorable terms than to other borrowers
and they would have to be reported to the board of directors. We cannot conceive that this larger loan limit would be subject to abuse.
You are aware, of course, of the increase in costs of education over the past
several years. W e make many loans f o r this purpose and, frankly, it is embarrassing to us and, we think, needlessly discriminatory to have to deny our
officers the privilege of borrowing from their own bank f o r such a salutary
purpose.
Very truly yours,
CARL
DESCH,
Senior Vice President and Cashier.
23 MISCELLANEOUS BANKING AND CREDIT UNION BILLS
90TH CONGBESS
1ST SESSION
C%
X
IN T H E S E N A T E OF T H E U N I T E D
FEBRUARY
Mr.
PROXMIRE
STATES
15,1967
introduced the following bill; which was read twice and referred
to the Committee on Banking and Currency
A BILL
To amend the Federal Reserve Act to enable Federal Reserve
banks to invest in certain obligations of foreign governments.
1
Be it enacted by the Senate and House of Representa-
2
tives of the United States of America in Congress assembled,
3
That thefirstsentence of subsection (e) of section 14 of
4
the Federal Reserve Act (12 U.S.C. 358) is amended to
5
read as follows:
6
"(e) To establish accounts with other Federal Reserve
7
banks for exchange purposes and, with the consent or upon
8
the order and direction of the Board of Governors of the
9
Federal Reserve System and under regulations to be pre-
10
scribed by said Board, to open and maintain accounts in
11
foreign countries, appoint correspondents, and establish
24
MISCELLANEOUS BANKING AND CREDIT UNION BILLS
2
1
agencies in such countries wheresoever it may be deemed
2
best for the purpose of purchasing, selling, and collecting
3
bills of exchange, and to buy and sell, with or without its
4
endorsement, through such correspondents or agencies, bills
5
of exchange (or acceptances) arising out of actual commer-
6
cial transactions which have not more than ninety days to
7
run, exclusive of days of grace, and which bear the signature
8
of two or more responsible parties, and to buy and sell any
9
securities which are direct obligations of, or fully guaranteed
10
as to principal and interest by, any foreign government or
11 monetary authority, and wThich have maturities from date
12
of purchase not exceeding twelve months and are denom-
13
mated payable in any convertible currency; and, with the
14
consent of the Board of Governors of the Federal Reserve
15
System, to open and maintain banking accounts for such
16
foreign correspondents or agencies, or for foreign banks or
17 bankers, or for foreign states as defined in section 25 (b)
18 of this Act."
25 MISCELLANEOUS BANKING AND CREDIT UNION BILLS
B O A R D OF G O V E R N O R S OF T H E
FEDERAL RESERVE S Y S T E M ,
Washington, March 1,1967.
T h e H o n . JOHN
SPARKMAN,
Chairman, Committee on Banking and Currency,
U.S. Senate, Washington, D.C.
D E A R M R . C H A I R M A N : Since February 1 9 6 2 , the Federal Reserve Bank of New
York has engaged in foreign currency operations on behalf of the System Open
Market Account and under directions of the Federal Open Market Committee.
These operations have been encouragingly successful in accomplishing their basic
purposes, and have thus helped to safeguard the value of the dollar in international exchange markets.
These operations have been implemented in part by the establishment of reciprocal credit balances or "swap" arrangements between the New York Reserve
Bank and foreign central banks. The authorization f o r System foreign currency operations adopted by the Federal Open Market Committee requires that
foreign currency holdings in excess of minimum working balances be invested
insofar as practicable, and that such investments be in accordance with the provisions of section 14(e) of the Federal Reserve Act.
.Under section 14(e), idle amounts held by the Reserve Bank in an account
with a foreign bank may be invested in bills of exchange and acceptances that
arise out of actual commercial transactions and have maturities of not more
than 90 days, or they may be placed in an interest-bearing time account with
the same or some other foreign bank. However, in certain instances there has
been a scarcity of such paper for investment, time deposit facilities have not
always been conveniently available, and, under present law, such idle funds
could not be invested in obligations of foreign governments, such as foreign
treasury bills. On the other hand, a foreign central bank having a balance or
reciprocal credit or "swap" arrangement with the Federal Reserve Bank of New
York may invest idle funds in its account with the Reserve Bank in interestbearing United States securities.
The disadvantage in this respect under which the Reserve Bank must operate
would be remedied by an amendment to section 14(e) of the Federal Reserve
Act that would specifically authorize Federal Reserve Banks to buy and sell
securities with maturities not exceeding 12 months that are issued or guaranteed
by foreign governments.
The Board recommends the enactment of such an amendment to the law. A
suggested draft of a bill for this purpose is enclosed. This draft is identical
with S.1557, which passed the Senate in the last Congress, and S.965, introduced this year by Senator Proxmire.
Sincerely yours,
W M . M C C . MARTIN, JR.
DRAFT
A B I L E TO amend the Federal Reserve A c t to enable Federal Reserve banks to invest in
certain obligations of foreign g o v e r n m e n t s
Be it enacted by the Senate and House of Representatives
of the United States
of America in Congress assembled, That the first sentence of subsection (e) of
section 14 of the Federal Reserve Act (12 U.S.C. 358) is amended to read as
follows:
" ( e ) To establish accounts with other Federal reserve banks for exchange
purposes and, with the consent or upon the order and direction of the Board of
Governors of the Federal Reserve System and under regulations to be prescribed
by said board, to open and maintain accounts in foreign countries, appoint correspondents, and establish agencies in such countries wheresoever it may be
deemed best for the purpose of purchasing, selling, and collecting bills of exchange, and to buy and sell, with or without its endorsement, through such
correspondents or agencies, bills of exchange (or acceptances) arising out of
actual commercial transactions which have not more than ninety days to run,
exclusive of days of grace, and which bear the signature of two or more responsible parties, and to buy and sell any securities which are direct obligations of,
or fully guaranteed as to principal and interest by, any foreign government or
monetary authority, and which have maturities from date of purchase not ex-
26
MISCELLANEOUS BANKING AND CREDIT UNION BILLS
ceeding twelve months and are denominated payable in any convertible currency ; and, with the consent of the Board of Governors of the Federal Reserve
System, to open and maintain banking accounts for such foreign correspondents
or agencies, or f o r foreign banks or bankers, or for foreign states as defined in
section 25(b) of this Act."
THE
Hon.
JOHN
G E N E R A L C O U N S E L OF T H E
Washington,
TREASURY,
D.C., March 13, 1967.
SPARKMAN,
Chairman, Committee on Banking and Currency,
U.S. Senate, Washington, D.C.
D E A R M R . C H A I R M A N : Reference is made to your request f o r the views of this
Department on S. 965, " T o amend the Federal Reserve Act to enable Federal
Reserve banks to invest in certain obligations of foreign governments."
S. 965 would amend section 14(e) of the Federal Reserve Act (12 U.S.C. 358)
to authorize the investment of funds held by Federal Reserve banks in foreign
central banks in securities which are direct obligations of, or fully guaranteed
as to principal and interest by, any foreign government or monetary authority,
and which have maturities from the date of purchase not exceeding twelve
months and are denominated payable in any convertible currency.
The Department believes that the enactment of the proposed legislation would
improve the operation of the Federal Reserve foreign currency program which
is designed to safeguard the value of the dollar in international exchange
markets. Consequently, the Department recommends favorable consideration
of S. 965.
The Department has been advised by the Bureau of the Budget that there
is no objection from the standpoint of the Administrations' program to the submission of this report to your Committee.
Sincerely yours,
FRED B .
SMITH,
General
Counsel.
27 MISCELLANEOUS BANKING AND CREDIT UNION BILLS
90TH C O N G R E S S
1ST SESSION
GL
F \ F % F %
\
IN T H E S E N A T E O F T H E U N I T E D
FEBRUARY
Mr.
PROXMIRE
STATES
15,1967
introduced the following bill; which was read twice and referred
to the Committee on Banking and Currency
A BILL
To amend the Federal Reserve Act in order to enable the Federal
Reserve banks to extend credit to m e m b e r banks and others
in accordance with current economic conditions, and for other
purposes.
1
Be it enacted by the Senate and House of Representa-
2
tives of the United States of America in Congress assembled,
3
That the following new section is inserted in the Federal
4
Reserve Act immediately preceding section 14:
5
"SEC. 13A. (a) A n y Federal Reserve bank m a y make
6
advances to any of its m e m b e r banks on the time or demand
7
notes of such banks secured to the satisfaction of such Fed-
8
eral Reserve bank, subject to such limitations, restrictions,
134 MISCELLANEOUS BANKING AND CREDIT UNION BILLS
2
1
and regulations as the Board of Governors of the Federal
2 Reserve System m a y prescribe.
3
"(b) In making advances pursuant to this section, each
4
Federal Reserve bank shall give due regard to the mainte-
5
nance of sound credit conditions and the accommodation of
6
commerce, industry, and agriculture. Each Federal Reserve
7
bank shall keep itself informed of the general character and
8
amount of the loans and investments of its member banks
9
with a view to ascertaining whether undue or inappropriate
10
use is being made of bank credit for the speculative carrying
11
of or trading in securities, real estate, or commodities, or for
12
any other purpose inconsistent with the maintenance of
13
sound credit conditions; and, in determining whether to
14
grant or refuse advances, the Federal Reserve bank shall
15
give consideration to such information. Whenever the
16
Board of Governors of the Federal Reserve System, in the
17
light of any reports made to it by a Federal Reserve bank,
18 determines that any member bank is making such undue
19
or inappropriate use of bank credit, the Board may, in its
20
discretion, after reasonable notice and an opportunity for a
21 hearing, suspend such bank from the use of the credit facil22 ities of the Federal Reserve System and may terminate such
23
24
suspension or m a y renew it from time to time.
"(c) A n y Federal Reserve bank may make advances to
25 any individual, partnership, or corporation, on its promis-
MISCELLANEOUS BANKING AND CREDIT UNION BILLS
29
3
1
sory notes, secured by direct obligations of the United States,
2
subject to such limitations, restrictions, and regulations as
3
the Board of Governors of the Federal Reserve System m a y
4
prescribe."
®
SEC. 2. The following provisions of the Federal Reserve
6
Act are hereby repealed: section 10(a) (12 U.S.C. 347a) ;
7
section 10 (b) (12 U.S.C. 347b) ; section 11 (b) (12 U.S.C.
®
248 (b) ) ; the second, third, fourth, fifth, sixth, eighth, tenth,
®
and thirteenth paragraphs of section 13 (12 U.S.C. 343,
10
344, 345, 346, 347, 361, 347c) ; section 13a (12 U.S.C.
^
348-352) ; and the last sentence of the third paragraph of
12
section 24 (12 U.S.C. 371).
^
^
15
16
17
18
SEC. 3. The eighth paragraph of section 4 of the Federal
Reserve Act (12 U.S.C. 301) is amended to read as follows:
"Said board of directors shall administer the affairs of
said bank fairly and impartially and without discrimination
in favor of or against any member bank or banks."
SEC. 4. The thirteenth paragraph of section 9 of the
1Q
Federal Reserve Act
20
21
(12 U.S.C. 330) is amended by
changing the colon after the words "member banks" in the
second sentence to a period and by striking out, commencing
22
with the words "Provided, however,", the remainder of the
24
paragraph.
SEC. 5. In the last sentence of section 11 (c) of the
25
Federal Reserve Act (12 U.S.C. 248(c)) the words "and
136 MISCELLANEOUS BANKING AND CREDIT UNION BILLS
4
1
discount fixed by the Board of Governors of the Federal
2
Reserve System" are changed to read "charged by the
3
Reserve bank on advances under section 13A (a) of this
4
Act".
5
SEC. 6. In the last sentence of section 11 (m) of the
6 Federal Reserve Act (12 U . S . C . 248 (m)) the words "of all
7
rediscount privileges at Federal reserve banks" are changed
8 to read "from the use of the credit facilities of the Federal
9
Reserve banks."
10
SEC. 7. In the second paragraph of section 12 of the
11
Federal Reserve Act (12 U . S . C . 202) the words "discount
12
rates, rediscount business" are changed to read "advances
13
under section 13A of this Act, rates of interest charged by
14
the Federal Reserve banks on such advances".
15
16
SEC. 8. The first paragraph of section 14 of the Federal
Reserve Act (12 U . S . C . 353) is amended to read as follows :
17
"Any Federal Reserve bank may, subject to the regula-
18
tions of the Federal Open Market Committee, purchase and
19
sell in the open market, at home or abroad, either from or to
20 domestic or foreign banks, firms, corporations, or individuals,
21
cable transfers, bankers' acceptances, and bills of exchange,
22 with or without the endorsement of a member bank."
23
SEC. 9. Section 14 (c) of the Federal Reserve Act (12
24
U.S.C. 356) is amended by striking out the words "arising
25
out of commercial transactions, as hereinbefore defined".
31
MISCELLANEOUS BANKING AND CREDIT UNION BILLS
5
1
2
SEC. 10. Section 14(d) of the Federal Eeserve Act (12
U.S.C. 357) is amended to read as follows:
3
" (d) To establish from time to time, subject to review
4
and determination of the Board of Governors of the Federal
5
Reserve System, (1) rates of interest to be charged by the
6
Federal Reserve bank on advances under section 13A (a) of
7
this Act, which shall be fixed with a view of accommodating
8
commerce, business, and agriculture, and of maintaining
9
sound credit conditions; and different rates m a y be fixed for
10
different classes of paper or according to such other basis or
11
bases as may be deemed necessary in order to accomplish
12
such purposes; but each such bank shall establish such rates
13
every fourteen days, or oftener if deemed necessary by the
14
Board; and (2) rates of interest to be charged by the Fed-
,;>
era! Reserve bank on advances under section 13A (c) of
this Act;".
SEO. 11. The second paragraph of section 16 of the Fed-
18
era! Reserve Act (12 U.S.C. 412) is amended by striking
19
out the third sentence and substituting therefor the following: "The collateral security thus offered shall be notes of
21
member banks or others acquired under the provisions of
22
section 13A of this Act, or bills of exchange or bankers' ac-
23
ceptances purchased under section 14 of this Act, or gold
24
certificates, or direct obligations of the United States."
25
SEC. 12. The second sentence of the ninth paragraph of
32
MISCELLANEOUS BANKING AND CREDIT UNION BILLS
6
1
section 19 of the Federal Reserve Act (12 U.S.C. 463) is
2
amended by changing the word "discounts" in such sentence
3
to read "advances".
4
SBC. 13. The second paragraph of section 23A of the
5
Federal Reserve Act
6
striking out the words "drafts," and "for rediscount or" from
7
the clause beginning with the word
(12 U.S.C. 371c) is amended by
"Provided".
8
SEC. 14. Section 201 (e) of the Act of July 21, 1932, as
9
amended (12 U.S.C. 1148) is amended by striking out the
10
words "various Federal Reserve banks and" from that
11 section.
33 MISCELLANEOUS BANKING AND CREDIT UNION BILLS
B O A R D OF GOVERNORS OF T H E
FEDERAL RESERVE S Y S T E M ,
Washington, March
T h e H o n . JOHN
SPARKMAN,
1,1961.
Chairman, Committee on Banking and Currency,
U.S. Senate, Washington, D.C.
D E A R M R . C H A I R M A N : The Board of Governors again wishes to recommend
legislation that would permit member banks of the Federal Reserve System
to borrow from the Federal Reserve Banks on the security of any sound assets
without paying a "penalty" rate of interest whenever technically ineligible paper
is presented. This legislation would replace present provisions of the Federal
Reserve Act that permit borrowings without a penalty interest rate only on the
security of Government obligations or paper that meets certain outmoded
"eligibility" requirements. These restrictive provisions should be amended so as
to facilitate rather than penalize efforts by banks to meet the public's changing
credit needs.
The original Federal Reserve Act authorized the Reserve Banks to discount
only certain types of paper arising out of "actual" commercial or agricultural
transactions, subject to specified maturity limitations. The concept underlying
this limited authority was that the liquidity of commercial banks could be assured only if the loans made by them were short term and self-liquidating in
character. Related to this concept was the assumption that the pledging of such
discounted paper by the Reserve Banks as security for the issuance of Federal
Reserve notes would serve as the basis for an elastic currency; it was expected
that the volume of currency would expand and contract directly in response to
the varying credit needs of the economy, as reflected by the volume of shortterm borrowing by commercial and agricultural enterprises.
The principle that Federal Reserve credit should be extended only on the basis
of short-term, self-liquidating paper was departed from as early as 1916, during
the First World War, when the law was amended to authorize the Reserve Banks
to make 15-day advances to member banks, not only on the security of "eligible
paper" but also on the security of direct obligations of the United States. A
more significant departure occurred in 1932, when Congress authorized the
Reserve Banks to make advances to member banks in exceptional and unusual
circumstances on any security satisfactory to the Reserve Banks, although at
a penalty rate of interest. This authority, at first temporary, was made
permanent in 1935, and it is no longer limited to exceptional and unusual circumstances, although such advances continue to carry a penalty rate of interest.
The concept that limitation of discounts to short-term, self-liquidating paper
would serve automatically to regulate the volume of Federal Reserve notes in
circulation has also been departed from by amendments to the law and has been
refuted by experience. In 1932, Congress authorized the issuance of Federal
Reserve notes on the security of Government obligations in addition to eligible
paper and gold. This authority was originally of a temporary nature, but it
was made permanent in 1945. The volume of Federal Reserve notes today
fluctuates with the changing demands of the economy without regard to the
nature of the paper offered as collateral for Federal Reserve credit or pledged
as security for Federal Reserve notes.
Each of these legislative changes took place during a period of economic stress
that served to make clear the inadequacy of the original framework for Federal
Reserve credit extension. The credit needs of American businessmen, farmers,
and consumers were evolving in many ways that could not be adequately handled
by the old instrument of short-term, commercial-type paper; and the rapid growth
of both private and Governmental economic activity generated credit requirements far in excess of those that could be supported by the relatively small volume of "eligible paper". For example, farmers today make much greater use of
mechanized equipment; a modern combine represents a big investment, and requires longer-term financing. Another example is the entry of banks into consumer lending in response to credit needs created by the mass marketing of automobiles and other durable consumer goods. Banks are now making term loans
to business, too, in substantial volume, partly in response to economic changes
and partly in recognition that a two-year loan may be sounder than a 90-day loan
made in the expectation of repeated renewals.
Despite changes in the character of paper held by commercial banks and the
repeated and necessary departures from the original concept that discounts
34
MISCELLANEOUS BANKING AND CREDIT UNION BILLS
should be based only on short-term, self-liquidating paper, the law continues to
impose unduly restrictive requirements as to the nature and maturity of the paper
that may be discounted by the Reserve Banks or offered as security for advances
by the Reserve Banks without payment of a penalty rate of interest.
For many years, it has been generally recognized that the concept of an elastic
currency based on short-term, self-liquidating paper is no longer in consonance
with banking practice and the needs of the economy. It has long been apparent
that the narrow requirements of the law regarding "eligible paper" serve no useful purpose and that it would be preferable to place emphasis on the soundness
of the paper offered as security for advances and the appropriateness of the purposes for which member banks borrow. The one-year paper of many bank customers that is not now eligible for discount may be as satisfactory collateral as
the 90-day notes of other customers. Moreover, the nature of the collateral provides no assurance that the borrowing bank will use the proceeds for an appropriate purpose
As long as member banks hold a large enough volume of Government securities,
they need not, of course, be particularly concerned as to the eligibility for discount with the Reserve Banks of customers' paper held by them. Since World
War II, however, there has been a sharp net decline in the aggregate holdings of
Government securities by member banks. Consequently, a number of banks are
being obliged to tender other kinds of collateral when they seek to obtain Federal
Reserve credit, and this development will be sharply accelerated if a further substantial increase in economic activity should cause banks further to reduce their
holdings of Government securities in order to meet increased credit demands.
In such a situation, the Reserve Banks can accept technically "ineligible"
paper as collateral f o r advances to their member banks only under section 10(b)
of the Federal Reserve Act at a rate of interest one-half of one percent above the
regular discount rate. However, the necessity for distinguishing between
"eligible" and "ineligible" paper gives rise to cumbersome administrative procedures that are not warranted by the exigencies of current banking conditions. In
order to avoid these problems, it would clearly be preferable to revise and update the law so as to eliminate the existing restrictions with respect to "eligible
paper".
The Board of Governors and the Federal Reserve Banks believe that such a
revision of the law would be desirable so that the Reserve Banks will always be
in a position to perform promptly and efficiently one of their principal responsibilities—the extension of appropriate credit assistance to member banks to
enable the latter to meet the legitimate credit needs of the economy.
Accordingly, the Board again urges that legislation of the kind here proposed
be given favorable consideration by your Committee and by the Congress. A
draft of the bill in the form as passed by the Senate in the last Congress is enclosed herewith, along with a section-by-section explanation and a document
showing textual changes that would be made in present law. This draft is
identical with S. 966, which we note has been introduced this year by Senator
Proxmire.
Sincerely yours,
W M . MCC. MARTIN, Jr.
D R A F T OF PROPOSED B I L L REGARDING ADVANCES BY FEDERAL RESERVE
BANKS
A B I L L T o amend the Federal Reserve A c t in order to enable the Federal Reserve Banks
to extend credit to member banks and others in accordance with current economic conditions, and f o r other purposes
Be it enacted by the Senate and House of Representatives in Congress assembled, That the following new section is inserted in the Federal Reserve Act immediately preceding section 14 :
"SEC. 13A. (a) Any Federal Reserve Bank may make advances to any of its
member banks on the time or demand notes of such banks secured to the satisfaction of such Federal Reserve Bank, subject to such limitations, restrictions,
and regulations as the Board of Governors of the Federal Reserve System may
prescribe.
" ( b ) In making advances pursuant to this section, each Federal Reserve
Bank shall give due regard to the maintenance of sound credit conditions and
the accommodation of commerce, industry, and agriculture. Each Federal
Reserve Bank shall keep itself informed of the general character and amount of
the loans and investments of its member banks with a view to ascertaining
35 MISCELLANEOUS BANKING AND CREDIT UNION BILLS
whether undue or inappropriate use is being made of bank credit for the speculative carrying of or trading in securities, real estate, or commodities, or for any
other purpose inconsistent with the maintenance of sound credit conditions; and,
in determining whether to grant or refuse advances, the Federal Reserve Bank
shall give consideration to such information. Whenever the Board of Governors
of the Federal Reserve System, in the light of any reports made to it by a Federal Reserve Bank, determines that any member bank is making such undue or
inappropriate use of bank credit, the Board may, in its discretion, after reasonable notice and an opportunity for a hearing, suspend such bank from the use
of the credit facilities of the Federal Reserve System and may terminate such
suspension or may renew it from time to time.
" ( c ) Any Federal Reserve Bank may make advances to any individual, partnership, or corporation, on its promissory notes, secured by direct obligations of
the United States, subject to such limitations, restrictions, and regulations as
the Board of Governors of the Federal Reserve System may prescribe."
SEC. 2. The following provisions of the Federal Reserve Act are hereby repealed: section 10(a) (12 U . S . C . 347a) ; section 10(b) (12 U . S . C . 347b) ; section
11(b) (12 U . S . C . 248(b)) ; the second, third, fourth, fifth, sixth, eighth, tenth,
and thirteenth paragraphs of section 13 (12 U . S . C . 343, 344, 345, 346, 347, 361,
347c) ; section 13a (12 U . S . C . 348-352) ; and the last sentence of the third paragraph of section 24 (12 U . S . C . 371).
SEC. 3. The eighth paragraph of section 4 of the Federal Reserve Act (12
U . S . C . 301) is amended to read as follows :
"Said board of directors shall administer the affairs of said bank fairly and
impartially and without discrimination in favor of or against any member bank
or banks."
SEC. 4. The thirteenth paragraph of section 9 of the Federal Reserve Act (12
U . S . C . 330) is amended by changing the colon after the words "member banks"
in the second sentence to a period and by striking out, commencing with the
words "Provided, however", the remainder of the paragraph.
SEC. 5. In the last sentence of section 11(c) of the Federal Reserve Act (12
U.S.C. 2 4 8 ( c ) ) the words "and discount fixed by the Board of Governors of the
Federal Reserve System" are changed to read "charged by the Reserve Bank
on advances under section 13A of this Act".
SEC. 6. In the last sentence of section 11 (IN) of the Federal Reserve Act (12
U . S . C . 2 4 8 ( m ) ) the words "of all rediscount privileges at Federal reserve
banks" are changed to read "from the use of the credit facilities of the Federal
Reserve Banks."
SEC. 7. In the second paragraph of section 12 of the Federal Reserve Act (12
U . S . C . 262) the words "discount rates, rediscount business" are changed to read
"advances under section 13A of this Act, rates of interest charged by the Federal
Reserve Banks on such advances".
SEC. 8. The first paragraph of section 14 of the Federal Reserve Act (12 U . S . C .
353) is amended to read as follows:
"Any Federal Reserve Bank may, subject to the regulations of the Federal
Open Market Committee, purchase and sell in the open market, at home or
abroad, either from or to domestic or foreign banks, firms, corporations, or individuals, cable transfers, bankers' acceptances, and bills of exchange, with or
without the indorsement of a member bank."
SEC. 9. Section 14(c) of the Federal Reserve Act (12 U . S . C . 356) is amended
by striking out the words "arising out of commercial transactions, as hereinbefore defined".
' SEC. 10. Section 14(d) of the Federal Reserve Act (12 U.S.C. 357) is amended
to read as follows:
" ( d ) To establish from time to time, subject to review and determination of
the Board of Governors of the Federal Reserve System, (1) rates of interest
to be charged by the Federal Reserve Bank on advances under section 13A(a)
of this Act, which shall be fixed with a view of accommodating commerce, business, and agriculture, and of maintaining sound credit conditions; and different
rates may be fixed for different classes of paper or according to such other basis or
bases as may be deemed necessary in order to accomplish such purposes; but each
such bank shall establish such rates every fourteen days, or oftener if deemed
necessary by the Board; and (2) rates of interest to be charged by the Federal
Reserve Bank on advances under section 13A(c) of this A c t ; "
36
MISCELLANEOUS BANKING AND CREDIT UNION BILLS
SEC. 11. The second paragraph of section 16 of the Federal Reserve Act (12
U.S.C. 412) is amended by striking out the third sentence and substituting therefor the following: "The collateral security thus offered shall be notes of member
banks or others acquired under the provisions of section 13A of this Act, or
bills of exchange or bankers' acceptances purchased under section 14 of this
Act, or gold certificates, or direct obligations of the United States."
SEC. 12. The second sentence of section 19(e) of the Federal Reserve Act
(12 U.S.C. 374) is amended by changing the word "discounts" in such sentence
to read "advances".
SEC. 13. The second paragraph of section 23A of the Federal Reserve Act
(12 U . S . C . 371c) is amended by striking out the words "drafts," and "for
rediscount or" from the clause beginning with the word
"Provided".
SEC. 14. Section 201(e) of the Act of July 21, 1932, as amended (12 U.S.C.
1148) is amended by striking out the words "various Federal reserve banks
and" from that section.
E X P L A N A T I O N OF PROPOSED B I L L REGARDING ADVANCES B Y FEDERAL R E S E R V E B A N K S
In general, the first section of this bill would confer upon the Federal Reserve
Banks broad authority to make advances on any satisfactory security; and the
remaining sections of the bill are largely of a conforming nature.
Section 1.—A new section 13A would be inserted in the Federal Reserve Act.
It would authorize any Federal Reserve Bank to make advances to any of its
member banks on the note of the member bank secured to the satisfaction of the
Reserve Bank, subject to such limitations, restrictions, and regulations as the
Board of Governors of the Federal Reserve System may prescribe. In making
such advances, the Reserve Bank would be required to give due regard to the
"maintenance of sound credit conditions and the accommodation of commerce,
industry, and agriculture" and to keep itself informed as to the character and
amount of the loans and investment of its member banks, with a view to determining whether undue or inappropriate use is being made of bank credit for
speculative purposes or for purposes inconsistent with the maintenance of sound
credit conditions. These requirements are substantially the same as those now
prescribed by the eighth paragraph of section 4 of the Federal Reserve Act.
In addition to advances to member banks, the Reserve Banks would be authorized to make advances to individuals, partnerships, and corporations on the security of obligations of the United States, an authority similar to that now contained in the last paragraph of section 13 of the Federal Reserve Act, although
the new authority, like that with respect to advances to member banks, would
not specify any maturity limitation. As under present law, the authority to
make advances to "corporations" would cover advances to nonmember banks.
Section 2.—Because they would be superseded or rendered obsolete by the authority conferred by the new section 13A, the provisions of the Federal Reserve
Act hereafter described would be repealed.
Section 10(a) of the Act (12 U.S.C. 347a), enacted in 1932, authorizes advances to groups of five or more member banks. This authority has never been
utilized and would be unnecessary in the light of the new authority.
Section 10(b) (12 U.S.C. 347b), containing authority for advances to member
banks on any satisfactory security but at a one-half of one percent penalty
interest rate, would likewise be rendered unnecessary by the new legislation.
Section 11(b) of the Act (12 U.S.C. 2 4 8 ( b ) ) , authorizing the Board of Governors to permit or require a Federal Reserve Bank to rediscount the discounted
paper of other Reserve Banks, has not been used since 1933 and is of no practical
importance today.
The second, third, fourth, fifth, sixth, eighth, tenth, and thirteenth paragraphs
of section 13 of the Act (12 U.S.C. 343, 344, 345, 346, 347, 361, and 347c, respectively), contain the basic provisions of present law regarding discounts and advances by the Federal Reserve Banks. These provisions limit "eligible paper"
to paper "issued or drawn for agricultural, industrial, or commercial purposes,
or the proceeds of which have been used, or are to be used, for such purposes";
provide emergency authority (never used) for the discounting of "eligible paper"
for individuals, partnerships, and corporations; authorize the discounting of
"sight" drafts in certain limited circumstances; authorize the discounting of
bankers' acceptances and "dollar exchange" acceptances of the kinds described
in paragraphs 7 and 12 of section 13; limit the amount of paper of one obligor
37 MISCELLANEOUS BANKING AND CREDIT UNION BILLS
that may be discounted for a member bank; authorize advances (as distinguished
from "discounts") to member banks secured by Government obligations or "eligible paper"; provide for the regulation of discounts by the Board; authorize advances* to individuals, partnerships, and corporations on the security of Government obligations; authorize the discounting of agricultural paper, paper held
by Federal intermediate credit banks, and paper of cooperative marketing associations ; and provide that certain types of real estate loans by national banks
shall be regarded as "commercial" paper for discount purposes. All of these
provisions would either be superseded or covered by the new section 13A added
by section 1 of the present bill.
Section 3.—-The eighth paragraph of section 4 of the Act (12 U.S.C. 301)
presently requires each Federal Reserve Bank to consider the maintenance
of sound credit conditions and and the accommodation of commerce, industry,
and agriculture in extending credit to member banks, and to keep itself informed
regarding undue uses of bank -credit for speculative purposes; and the Board
of Governors is authorized to suspend any member bank from access to Federal
Reserve credit for any such undue use of bank credit. These provisions would
be retained in substance in the new section 13A. Accordingly, the similar provisions of section 4 would be repealed, so that the eighth paragraph of that section would provide only—as it does now—that the board of directors of each
Federal Reserve Bank shall administer its affairs "fairly and impartially and
without discrimination in favor of or against any member bank or banks."
Section 4.—The thirteenth paragraph of section 9 of the Act (12 U.S.C. 330)
would be amended to repeal the proviso limiting the amount of paper of one
obligor that may be discounted for any member bank. This limitation, like the
similar limitation in section 9 of the Act, appears unnecessary in view of the fact
that most State laws limit the amount of loans that may be made to one borrower
by State banks, in terms similar to those applicable to national banks under
section 5200 of the Revised Statutes.
Section 5.—The last sentence of section 11(c) of the Act (12 U.S.C. 2 4 8 ( c ) ) ,
regarding the addition to the "discount" rate of any tax paid by the Reserve
Banks on deficiencies in their reserves against Federal Reserve notes, would
be modified to refer to the "interest" rate charged on advances under the new
section 13A.
Section 6.—The language of the last sentence of section 11 (m) of the Act
(12 U.S.C. 2 4 8 ( m ) ) , regarding suspension of "rediscount privileges" for certain
increases in loans secured by stock or bond collateral, would be conformed to
refer to suspension of "use of the credit facilities" of the Federal Reserve Banks.
Section 7.—The provision of section 12 of the Act (12 U.S.C. 262), authorizing
the Federal Advisory Council to make recommendations in regard to "discount
rates" and "rediscount business", would be changed to refer to advances under
the new section 13A and interest rates on such advances.
Section 8.—The First paragraph of section 14 of the Act (12 U.S.C. 353)
would be amended to eliminate a reference to paper "eligible for rediscount" and,
at the same time, to omit a reference to regulation of Federal Reserve Bank
open market operations by the Board of Governors, a function that has been subject to regulation since 1935 by the Federal Open Market Committee.
Section 9.—A conforming change would be made in section 1 4 ( c ) of the Act
(12 U.S.C. 356) to eliminate a reference to paper "arising out of commercial
transactions, as hereinbefore defined".
Section 10.—Section 14(d) of the Act (12 U.S.C. 357), relating to the fixing
of "discount" rates, would be amended to refer to "interest" rates under the new
section 13A. At the same time, this provision would be broadened to authorize
the fixing of different rates, not only for different classes of paper, but also
"according to such other basis or bases as may be deemed necessary" to accomplish the purposes of this provision. The amended provision would also include
separate authority as to rates on advances to individuals, partnerships, and corporations under subsection ( c ) of the new section 13A.
Section 11.—The provision of section 16 of the Act (12 U.S.C. 412) authorizing
the use of paper acquired under section 13 as security for Federal Reserve notes
would be modified to refer to "notes of member banks or others acquired under
the provisions of [the newl section 13A of this Act."
Section 12.—The provision of section 19 of the Act (12 U.S.C. 374), prohibiting
member banks from, acting as agents for nonmember banks in obtaining, Federal
Reserve "discounts," without the Board's permission, would be conformed to
refer to "advances" instead of discounts.
38
MISCELLANEOUS BANKING AND CREDIT UNION BILLS
Section 13.—A provision of section 23A of the Act, relating to security for
loans to affiliates of member banks, would be conformed to eliminate a reference
to drafts "eligible for rediscount."
Section 14.—A provision of the Act of July 21, 1932 (12 U.S.C. 1148), authorizing agricultural credit corporations to rediscount "eligible paper" with the
Federal Reserve Banks, would be repealed.
T E X T U A L C H A N G E S I N P R E S E N T L A W T H A T W O U L D B E M A D E BY PROPOSED B I L L
R E G A R D I N G A D V A N C E S BY FEDERAL RESERVE B A N K S
(Italic words indicate new matter to be added to the law ; bracketed words
indicate provisions of the law currently in effect to be stricken from the law.)
Federal Reserve Act, section 4, par. 8; 12 U.S.C. 301, par. 3
Said board of directors shall administer the affairs of said bank fairly and
impartially and without discrimination in favor of or against any member bank
or banks, [and may, subject to the provisions of law and the orders of the
Board of Governors of the Federal Reserve System, extend to each member
bank such discounts, advancements, and accommodations as may be safely and
reasonably made with due regard for the claims and demands of other member
banks, the maintenance of sound credit conditions, and the accommodation of
commerce, industry, and agriculture. The Board of Governors of the Federal
Reserve System may prescribe regulations further defining within the limitations of this Act the conditions under which discounts, advancements, and the
accommodations may be extended to member banks. Each Federal reserve bank
shall keep itself informed of the general character and amount of the loans and
investments of its member banks with a view to ascertaining whether undue
use is being made of bank credit for the speculative carrying of or trading
in securities, real estate, or commodities, or for any other purpose inconsistent
with the maintenance of sound credit conditions; and, in determining whether
to grant or refuse advances, rediscounts or other credit accommodations the
Federal reserve bank shall give consideration to such information. The chairman of the Federal reserve bank shall report to the Board of Governors of the
Federal Reserve System any such undue use of bank credit by any member bank,
together with his recommendation. Whenever, in the judgment of the Board
of Governors of the Federal Reserve System, any member bank is making such
undue use of bank credit, the Board may, in its discretion, after reasonable
notice and an opportunity for a hearing, suspend such bank from the use of
the credit facilities of the Federal Reserve System and may terminate such
suspension or may renew it from time to time.]
Federal Reserve Act, section 9, par. 13; 12 U.S.C. 330
Bank becoming members of the Federal Reserve System under authority of this
section shall be subject to the provisions of this section and to those of this Act
which relate specifically to member banks, but shall not subject to examination
under the provisions of the first two paragraphs of section fifty-two hundred and
forty of the Revised Statutes as amended by section twenty-one of this Act.
Subject to the provisions of this Act and to the regulations of the board made
pursuant thereto, any bank becoming a member of the Federal Reserve System
shall retain its full character and statutory rights as a State bank or trust company, and may continue to exercise all corporate powers granted it by the State
in which it was created, and shall be entitled to all privileges of member banks
[ : Provided, however, That no Federal reserve bank shall be permitted to discount for any State bank or trust company notes, drafts, or bills of exchange
of any one borrower who is liable for borrowed money to such State bank or trust
company in an amount greater than that which could be borrowed lawfully from
such State bank or trust company were it a national banking association. The
Federal reserve bank, as a condition of the discount of notes, drafts, and bills of
exchange for such State bank or trust company, shall require a certificate or
guaranty to the effect that the borrower is not liable to such bank in excess of
the amount provided by this section, and will not be permitted to become liable
in excess of this amount while such notes, drafts, or bills of exchange are under
discount with the Federal reserve bank].
39 MISCELLANEOUS BANKING AND CREDIT UNION BILLS
Federal Reserve Act, section 10(a) (entire); 12 U.S.C. 347a
Par. 1
[Upon receiving the consent of not less than five members of the Board of
Governors of the Federal Reserve System, any Federal reserve bank may make
advances, in such amount as the board of directors of such Federal reserve bank
may determine, to groups of five or more member banks within its district, a
majority of them independently owned and controlled, upon their time or demand promissory notes, provided the bank or banks which receive the proceeds
of such advances as herein provided have no adequate amounts of eligible and
acceptable assets available to enable such bank or banks to obtain sufficient
credit accommodations from the Federal reserve bank through rediscounts or
advances other than as provided in section 1 0 ( b ) . The liability of the individual
banks in each group must be limited to such proportion of the total amount
advanced to such group as to deposit liability of the respective banks bears to
the aggregate deposit liability of all banks in such group, but such advances m^ay
be made to a lesser number of such member banks if the aggregate amount of
their deposit liability constitutes at least 10 per centum of the entire deposit
liability of the member banks within such district. Such banks shall be authorized to distribute the proceeds of such loans to such of their number and
in such amount as they may agree upon, but before so doing they shall require
such recipient banks to deposit with a suitable trustee, representing the entire
group, their individual notes made in favor of the group protected by such collateral security as may be agreed upon. Any Federal reserve bank making such
advance shall charge interest or discount thereon at a rate not less than 1 per
centum above its discount rate in effect at the time of making such advance. No
such note upon which advances are made by a Federal reserve bank under this
section shall be eligible under section 10 of this Act as collateral security for
Federal reserve notes. J
Par. 2
[ N o obligations of any foreign government, individual, partnership, association, or corporation organized under the laws thereof shall be eligible as collateral security for advances under this section.]
Par. 8
[Member banks are authorized to obligate themselves in accordance with
the provisions of this section.]
Federal Reserve Act, section 10(b) ; 12 U.S.C. 347b
[ A n y Federal Reserve bank, under rules and regulations prescribed by the
Board of Governors of the Federal Reserve System, may make advances to
any member bank on its time or demand notes having maturities of not more
than four months and which are secured to the satisfaction of such Federal
Reserve bank. Each such note shall bear interest at a rate not less than one
half of 1 per centum per annum higher than the highest discount rate in effect
at such Federal Reserve bank on the date of such note.]
Federal Reserve
and (m)
Act, section
11, pars. 3, 4, and 13; 12 U.S.C. 248(b),
(c),
Par. 3
[ ( b ) To permit, or, on the affirmative vote of at least five members of the
Board of Governors of the Federal Reserve System to require Federal reserve
banks to rediscount the discounted paper of other Federal reserve banks at
rates of interest to be fixed by the Board of Governors of the Federal Reserve
System.]
Par. 4
(c) * * *
t a x s h a l l b e p a i ( j b y t h e R e s e r v e bank, but the Reserve bank
shall add an amount equal to said tax to the rates of the interest [ a n d discount fixed by the Board of Governors of the Federal Reserve System] charged
by the Reserve bank on advances under section 13A (a) of this Act.
Par. 13
(m) * * * The Board of Governors of the Federal Reserve System shall have
power to direct any member bank to refrain from further increase of its loans
secured by stock or bond collateral for any period up to one year under penalty
40
MISCELLANEOUS BANKING AND CREDIT UNION BILLS
of suspension [ o f all rediscount privileges a t ] from the use of the credit
ties of the Federal [ r ] Reserve banks.
facili-
Federal Reserve Act, section 12, par. 2; 12 U.S.C 262
The Federal Advisory Council shall have power, * * * (3) to call for information and to make recommendations in regard to [discount rates, rediscount business! advances under section ISA of this Act, rates of interest charged
by the Federal Reserve banks on such advances, * * *.
Rederal Reserve Act, section IS, pars. 2-6, 8, 10, and 13; 12 XJ.S.C. 343-3471
S61, 347c
Par. 2; 12 U.S.C. 343
[Upon the endorsement of any of its member banks, which shall be deemed a
waiver of demand, notice and protest by such bank as to its own endorsement
exclusively, any Federal reserve bank may discount notes, drafts, and bills of
exchange arising out of actual commercial transactions; that is, notes, drafts,
and bills of exchange issued or drawn for agricultural, industrial, or commercial
purposes, or the proceeds of which have been used, or are to be used, for such
purposes, the Board of Governors of the Federal Reserve System to have the
right to determine or define the character of the paper thus eligible for discount,
within the meaning of this Act. Nothing in this Act contained shall be construed
to prohibit such notes, drafts, and bills of exchange, secured by staple agricultural
products, or other goods, wares, or merchandise from being eligible for such discount, and the notes, drafts, and bills of exchange of factors issued as such making
advances exclusively to producers of staple agricultural products in their raw
state shall be eligible for such discount; but such definition shall not include
notes, drafts, or bills covering merely investments or issued or drawn for the
purpose of carrying or trading in stocks, bonds, or other investment securities,
except bonds and notes of the Government of the United States. Notes, drafts,
and bills admitted to discount under the terms of this paragraph must have a
maturity at the time of discount of not more than 90 days, exclusive of grace.]
Par. 3; 12 U.S.C. S43
[ I n unusual and exigent circumstances, the Board of Governors of the Federal
Reserve System, by the affirmative vote of not less than five members, may authorize any Federal reserve bank, during such periods as the said board may determine, at rates established in accordance with the provisions of section 14, subdivision ( d ) , of this Act, to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange of the kinds and maturities made eligible
for discount for member banks under other provisions of this Act when such
notes, drafts, and bills of exchange are endorsed or otherwise secured to the
satisfaction of the Federal Reserve bank: Provided, That before discounting any
such note, draft, or bill of exchange for an individual or a partnership or corporation the Federal reserve bank shall obtain evidence that such individual, partnership, or corporation is unable to secure adequate credit accommodations from
other banking institutions. All such discounts for individuals, partnerships, or
corporations shall be subject to such limitations, restrictions, and regulations as
the Board of Governors of the Federal Reserve System may prescribe.]
Par. 4 ; 12 U.S.C. 344
[Upon the indorsement of any of its member banks, which shall be deemed a
waiver of demand, notice, and protest by such bank as to its own indorsement
exclusively, and subject to regulations and limitations to be prescribed by the
Board of Governors of the Federal Reserve System, any Federal reserve bank
may discount or purchase bills of exchange payable at sight or on demand which
grow out of the domestic shipment or the exportation of nonperishable, readily
marketable agricultural and other staples and are secured by bills of lading or
other shipping documents conveying or securing title to such staples: Provided,
That all such bills of exchange shall be forwarded promptly for collection, and
demand for payment shall be made with reasonable promptness after the arrival
of such staples at their destination: Provided further, That no such bill shall in
any event be held by or for the account of a Federal reserve bank for a period
in excess of ninety day. In discounting such bills Federal reserve banks may
compute the interest to be deducted on the basis of the estimated life of each
bill and adjust the discount after payment of such bills to conform to the actual
life thereof.]
41 MISCELLANEOUS BANKING AND CREDIT UNION BILLS
Par. 5; 12 U.S.C. 345
[ T h e aggregate of notes, drafts, and bills upon which any person, copartnership, association, or corporation is liable as maker, acceptor, indorser, drawer,
or guarantor, rediscounted for any member bank, shall at no time exceed the
amount for which such person, copartnership, association, or corporation may
lawfully becomes liable to a national banking association under the terms of
section 5200 of the Revised Statutes, as amended: Provided, however, That nothing in this paragraph shall be construed to change the character or class of
paper now eligible for rediscount by Federal reserve banks.]
Par. 6; 12 U.S.C. 346
[ A n y Federal reserve bank may discount acceptances of the kinds hereinafter
described, which have a maturity at the time of discount of not more than 90
days' sight, exclusive of days of grace, and which are indorsed by at least one
member bank: Provided, That such acceptances if drawn f o r an agricultural purpose and secured at the time of acceptance by warehouse receipts or other such
documents conveying or securing title covering readily marketable staples may be
discounted with a maturity at the time of discount of not more than six months'
sight Exclusive of days of grace.]
Par. 8; 12 U.S.C. 347
[ A n y Federal reserve bank may make advances for periods not exceeding fifteen
days to its member banks on their promissory notes secured by the deposit or
pledge of bonds, notes, certificates of indebtedness, or Treasury bills of the United
States, or by the deposit or pledge of debentures or other such obligations of
Federal intermediate credit banks which are eligible for purchase by Federal
reserve banks under section 13(a) of this Act, or by the deposit or pledge of
bonds issued under the provisions of subsection (e) of section 4 of the Home
Owners' Loan Act of 1933, as amended, and any Federal reserve bank may make
advances for periods not exceeding ninety days to its member banks on their
promissory notes secured by such notes, drafts, bills of exchange, or bankers'
acceptances as are eligible for rediscount or f o r purchase by Federal reserve
banks under the provisions of this Act. All such advances shall be made at rates
to be established by such Federal reserve banks, such rates to be subject to the
review and determination of the Board of Governors of the Federal Reserve
System. If any member bank to which any such advance has been made shall,
during the life or continuance of such advance, and despite an official warning of
the reseuve bank of the district or of the Board of Governors of the Federal
Reserve System to the contrary, increase its outstanding loans secured by collateral in the form of stocks, bonds, debentures, or other such obligations, or
loans made to members of any organized stock exchange, investment house, or
dealer in securities, upon any obligation, note, or bill, secured or unsecured, for
the purpose of purchasing and/or carrying stocks, bonds, or other investment
securities (except obligations of the United States) such advance shall be deemed
immediately due and payable, and such member bank shall be ineligible as a
borrower at the reserve bank of the district under the provisions of this paragraph for such period as the Board of Governors of the Federal Reserve System
shall determine: Provided, That no temporary carrying or clearance loans made
solely for the purpose of facilitating the purchase or delivery of securities offered
for public subscription shall be included in the loans referred to in this
paragraph.]
Par. 10; 12 U.S.C. 361
[ T h e discount and rediscount and the purchase and sale by any Federal reserve
bank of any bills receivable and of domestic and foreign bills of exchange, and
of acceptances authorized by this Act, shall be subject to such restrictions, limitations, and regulations as may be imposed by the Board of Governors of the Federal Reserve System.]
Par. 13; 12 U.S.C. 347c
[Subject to such limitations, restrictions and regulations as the Board of
Governors of the Federal Reserve System may prescribe, any Federal reserve
bank may make advances to any individual, partnership or corporation on the
promissory notes of such individual, partnership or corporation secured by direct
obligations of the United States. Such advances shall be made for periods not
42
MISCELLANEOUS BANKING AND CREDIT UNION BILLS
exceeding 90 days and shall bear interest at rates fixed from time to time by
the Federal reserve bank, subject to the review and determination of the Board
of Governors of the Federal Reserve System.]
Federal Reserve Act, section 13a (entire)
Par. 1;12 U.S.C. 348
[Upon the indorsement of any of its member banks, which shall be deemed a
waiver of demand, notice, and protest by such bank as to its own indorsement
exclusively, any Federal reserve bank may, subject to regulations and limitations to be prescribed by the Board of Governors of the Federal Reserve System,
discount notes, drafts, and bills of exchange issued or drawn for an agricultural
purpose, or based upon live stock, and having a maturity, at the time of discount,
exclusive of days of grace, not exceeding nine months, and such notes, drafts, and
bills of exchange may be offered as collateral security f o r the issuance of Federal
reserve notes under the provisions of section 16 of this A c t : Provided, That
notes, drafts, and bills of exchange with maturities in excess of six months shall
not be eligible as a basis for the issuance of Federal reserve notes unless secured
by warehouse receipts or other such negotiable documents conveying or securing
title to readily marketable staple agricultural products or by chattel mortgage
upon live stock which is being fattened for market.]
Par. 2; 12 U.S.C. 349
[ T h a t any Federal reserve bank may, subject to regulations and limitations to
be prescribed by the Board of Governors of the Federal Reserve System, rediscount such notes, drafts, and bills for any Federal Intermediate Credit Bank,
except that no Federal reserve bank shall rediscount f o r a Federal Intermediate
Credit Bank any such note or obligation which bears the indorsement of a nonmember State bank or trust company which is eligible for membership in the
Federal reserve system, in accordance with section 9 of this Act. Any Federal
reserve bank may also, subject to regulations and limitations to be prescribed by
the Board of Governors of the Federal Reserve System, discount notes payable
to and bearing the indorsement of any Federal intermediate credit bank, covering
loans or advances made by such bank pursuant to the provisions of section
202(a) of Title II of the Federal Farm Loan Act, as amended (U.S.C. title 12,
ch. 8, sec. 1031), which have maturities at the time of discount of not more than
nine months, exclusive of days of grace, and which are secured by notes, drafts,
or bills of exchange eligible for rediscount by Federal Reserve banks.]
Par. S; 12 U.S.C. 350
[ A n y Federal reserve bank may also buy and sell debentures and other such
obligations issued by a Federal Intermediate Credit Bank or by a National Agricultural Credit Corporation, but only to the same extent as and subject to the
same limitations as those upon which it may buy and sell bonds issued under
Title I of the Federal Farm Loan A c t . ]
Par. 4; 12 U.S.C. 351
[Notes, drafts, bills of exchange or acceptances issued or drawn by cooperative
marketing associations composed of producers of agricultural products shall be
deemed to have been issued or drawn for an agricultural purpose, within the
meaning of this section, if the proceeds thereof have been or are to be advanced
by such association to any members thereof for an agricultural purpose, or have
been or are to be used by such association in making payments to any members
thereof on account of agricultural products delivered by such members to the
association, or if such proceeds have been or are to be used by such association to
meet expenditures incurred or to be incurred by the association in connection
with the grading, processing, packing, preparation for market, or marketing of
any agricultural product handled by such association for any of its members:
Provided, That the express enumeration in this paragraph of certain classes of
paper of cooperative marketing associations as eligible for rediscount shall not be
construed as rendering ineligible any other class of paper of such associations
which is now eligible for rediscount.]
Par. 5; 12 U.S.C. 352
[ T h e Board of Governors of the Federal Reserve System may, by regulation,
limit to a percentage of the assets of a Federal reserve bank the amount of notes,
drafts, acceptances, or bills having a maturity in excess of three months, but not
43 MISCELLANEOUS BANKING AND CREDIT UNION BILLS
exceeding six months, exclusive of days of grace, which may be discounted by
such bank, and the amount of notes, drafts, bills, or acceptances having a maturity
in excess of six months, but not exceeding nine months, which may be rediscounted by such bank. J
Federal Reserve Act, section ISA (new)
Sec. 13A. {a) Any Federal Reserve dank may make advances to any of its member banks on the time or demand notes of such banks secured to the satisfaction
of such Federal Reserve bank, subject to such limitations, restrictions, and
regulations as the Board of Governors of the Federal Reserve System may
prescribe.
(b) In making advances pursuant to this section, each Federal Reserve bank
shall give due regard to the maintenance of sound credit conditions, and the accommodation of commerce, industry and agriculture.
Each Federal
Reserve
bank shall keep itself informed of the general character and amount of the loans
and investments of its member banks with a view to ascertaining whether undue
or inappropriate use is being made of bank credit for the speculative carrying of
or trading in securities, real estate, or commodities, or for any other purpose
inconsistent with the maintenance of sound credit conditions; and, in determining
whether to grant or refuse advances, the Federal Reserve bank shall give consideration to such information. Whenever the Board of Governors of the Federal
Reserve System, in the light of any reports made to it by a Federal Reserve bank,
determines that any member bank is making such undue or inappropriate use of
bank credit, the Board may, in its discretion, after reasonable notice and an
opportunity for a hearing, suspend such bank from the use of the credit facilities
of the Federal Reserve System and may terminate such suspension or may renew
it from time to time.
(O Any Federal Reserve bank may make advances to any individual, partnership, or corporation, on its promissory notes, secured by direct obligations of the
United States, subject to such limitations, restrictions, and regulations as the
Board of Governors of the Federal Reserve System may prescribe.
Federal Reserve Act, section 14
Par. 1; 12 U.S.C. 353
Any Federal [ r ] # e s e r v e bank may, [under rules a n d ] subject to the regulations
[prescribed by the Board of Governors] of the Federal [Reserve System] Open
Market Committee, purchase and sell in the open market, at home or abroad,
either from or to domestic or foreign banks, firms, corporations, or individuals,
cable transfers, [ a n d ] bankers' acceptances, and bills of exchange, [ o f the kinds
and maturities by this Act made eligible for rediscount,] with or without the
indorsement of a member bank.
Par. Jf; 12 U.S.C. 356
To purchase from member banks and to sell, with or without its endorsement, bills of exchange [arising out of commercial transactions, as hereinbefore
defined];
Par. 5; 12 U.S.C. 357
( d ) To establish from time to time, subject to review and determination of the
Board of Governors of the Federal Reserve System, (1) rates of [ d i s c o u n t ]
interest to be charged by the Federal [r].Reserve bank [ f o r each class of paper]
on advances under section 13A (a) of this Act, which shall be fixed with a view of
accommodating commmerce [ a n d ] , business, and agriculture, and of maintaining
sound credit conditions; and different rates may be fixed for different classes of
paper or according to such other basis or bases as may be deemed necessary in
order to accomplish such purposes: but each such bank shall establish such rates
every fourteen days, or oftener if deemed necessary by the Board; and (2)
rates of interest to be charged by the Federal Reserve bank on advances under
section 13A(c) of this Act;
Federal Reserve Act, section 16, par. 2; 12 U.S.C. 412
* * * The collateral security thus offered shall be notes [ , drafts, bills of exchange, or acceptances] of member banks or others acquired under the provisions
of section [ 1 3 ] ISA of this Act, or bills of exchange [endorsed by a member bank
of any Federal Reserve district and purchased under the provisions of section
14 of this A c t , ] or banker's acceptances purchased under [ t h e provision of s a i d ]
section 14 of this Act, or gold certificates, or direct obligations of the United
States. * *
44
MISCELLANEOUS BANKING AND CREDIT UNION BILLS
Federal Reserve Act, section 19, par. 9; 12 U.S.C. 463, 314
* * * No member bank shall act as the medium or agent of a nonmember bank
in applying for or receiving [discounts] advances from a Federal reserve bank
under the provisions of t h ^ Act, except by permission of the Board of Governors
of the Federal Reserve System.
Federal Reserve Act, section 23A, par. 2; 12 U.S.C. 311c
* * * Provided, That the provisions of this paragraph shall not apply to loans
or extensions of credit secured by obligations of the United States Government, . . . or by such notes, [ d r a f t s , ] bills of exchange or bankers' acceptances
as are eligible [ f o r rediscount o r ] for purchase by Federal reserve banks. * * *
Federal Reserve Act, section 24, par. 3; 12 U.S.C. 311
* * * [Notes representing loans made under this section to finance the construction of residential or farm buildings and having maturities of not to exceed
nine months shall be eligible for discount as commercial paper within the
terms of the second paragraph of section 13 of this Act if accompanied by a
valid and binding agreement to advance the full amount of the loan upon this
completion of the building entered into by an individual, partnership, association, or corporation acceptable to the discounting bank.]
Act of July 21, 1932, Sec. 201(e) (12 U.S.C. 1148)
* * * Such corporations* are hereby authorized . . . to rediscount with the
Farm Credit Administration and the [various Federal reserve banks a n d ]
Federal intermediate credit banks any paper that they acquire which is eligible
f o r such purpose.
FEDERAL DEPOSIT I N S U R A N C E
CORPORATION,
Washington, March 13, 1961.
HON.
JOHN
SPARKMAN,
Chairman, Committee on Banking and Currency, U.S. Senate, Washington, D.C.
D E A R M R . C H A I R M A N : You have requested the views of this Corporation on
S. 966, 90th Congress, a bill to amend the Federal Reserve Act in order to enable
the Federal Reserve banks to extend credit to member banks and others in
accordance with current economic conditions, and for other purposes.
Under present law, only United States Government obligations and shortterm, self-liquidating commercial or agricultural loans are eligible as security
against advances obtained at regular discount rates from Federal Reserve banks
by member banks. Federal Reserve banks are also authorized to make advances
to member banks on any security satisfactory to the Reserve banks, but at
"penalty" rates of interest of one-half of one percent above the regular discount
rate. S. 966 would insert a new section 13A in the Federal Reserve Act which
would authorize any Federal Reserve bank to make advances to any of its
member banks on any satisfactory security, subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System
may prescribe, without charging "penalty" rates of interest. In making such
advances, a Federal Reserve bank would be required to give due regard to the
"maintenance of sound credit conditions and the accommodation of commerce,
industry, and agriculture" and to keep itself informed as to the character and
amount of the loans and investments of its member banks, with a view to determining whether undue or inappropriate use is being made of bank credit for
purposes inconsistent with the maintenance of sound credit conditions. These
provisions of the bill would replace present requirements of the Federal Reserve
Act relating to the "eligibility" of paper for discount or as security for advances
by Federal Reserve banks and would, in effect, make such recently expanding
loans as consumer loans on automobiles and other durables, long-term farm
equipment loans, term loans to businesses, and perhaps other types of loans
eligible as security against borrowings at regular discount rates.
In addition to advances to member banks, Federal Reserve banks would be
authorized under the provisions of the proposed section 13A(c) of the Federal
Reserve Act to make advances of individuals, partnerships, and corporations on
the security of obligations of the United States. Similar authority is now con•Regional agricultural credit corporations.
45 MISCELLANEOUS BANKING AND CREDIT UNION BILLS
tained in section 13 of the Federal Reserve Act, but with maturity and interest
rate limitations.
Banks are continually developing new credit instruments to meet the demands
of businessmen and consumers. These are, f o r the most part, represented by
sound assets and could as safely serve as security f o r member bank borrowings
as so-called "eligible" paper. The enactment of S. 966 would provide the credit
system with much needed flexibility and would enable the Federal Reserve
System to function more effectively.
As originally conceived in the Federal Reserve Act, "eligible" paper had to be
"self-liquidating," short-term paper; that is, it had to be based on loans which
would automatically generate funds for repayment. It was reasoned that paper
originating from current short-term transactions would rise and fall with business. Consequently, it could never be superfluous nor create inflationary pressures. This concept is unrealistic today. First, there is no connection between
the character of the paper offered for discount and the use to which the banks put
the credit. Member banks generally borrow to build up their reserves, and they
use the reserves in varying patterns. In the second place, this theory disregards
the fact that banks can expand loans at a multiple rate on the basis of any
Federal Reserve credit. Thus, funds obtained by discounts or borrowings can
be used to multiply credit to several times the value of the discounts and in loans
of perhaps an entirely different character from the original paper.
Section 2 of the Act of February 27, 1932, ch. 58 (47 Stat. 56) authorized a
temporary departure from the original concept by providing that all sound securities and loans in a bank's portfolio were acceptable as security against borrowings, though, except for United States Government securities and "eligible"
paper, at "penalty" rates of interest. This provision was made permanent by
section 204 of the Banking Act of 1935 (12 U.S.C. 347b). The term "eligible" as
used in present law has thus lost its real significance. Advances to member
banks may be made on any security satisfactory to the Reserve banks. The
higher interest rate charge is the only distinction between "eligible" and
"ineligible" paper. There is no real justification f o r placing penalty rates on
certain types of assets vis-a-vis other types. Emphasis should be placed on the
soundness of the paper and the purpose of the member bank's borrowing, not
on whether the paper meets an outmoded "eligible" classification.
Other changes in the pattern of banking and bank policy since enactment of
the original Federal Reserve Act have made the existing law on "eligible" paper
both somewhat redundant and unnecessarily restrictive. The stepped-up reliance on open market operations in the 1920's and the granting to the Board of
Governors of the Federal Reserve System of discretionary power to change
member bank reserve requirement percentages, temporarily by section 46 of the
Emergency Farm Mortgage Act of 1933 (48 Stat. 54) and permanently by section
207 of the Banking Act of 1935, as amended (12 U.S.C. 462b), have combined to
diminish the relative importance of discounts and advances as a tool of monetary
policy. Thus, to rely on a restrictive definition of eligible paper for discounts
and advances appears to be an outmoded requirement of monetary policy.
Another advantage to the banks of extending the regular discount and advance
privileges to all sound assets would be the elimination of the tedious burden of
reviewing portfolios to determine what is, and what is not, eligible. The distinction is meaningless in today's credit patterns and policies, and this Corporation favors its elimination by the enactment of S. 966.
The Bureau of the Budget has advised that enactment of this legislation would
be consistent with the Administration's program.
Sincerely yours,
K. A. R A N D A L L , Ch airmail.
T H E G E N E R A L C O U N S E L OF T H E T R E A S U R Y ,
Washington, B.C., March IS, 1967.
H o n . JOHN
SPARKMAN,
Chairman, Committee on Banking and Currency,
U.S. Sena!te, Washington, D.C.
D E A R M R . C H A I R M A N : Reference is made to your request for the views of this
Department on S. 966, "To amend the Federal Reserve Act in order to enable
the Federal Reserve banks to extend credit to member banks and others in accordance with current economic conditions, and for other purposes."
46
MISCELLANEOUS BANKING AND CREDIT UNION BILLS
The purpose of the proposed legislation is to boarden substantially the kinds
of security on which the Federal Reserve Banks may extend credit. Such liberalization of existing eligibility requirements, in the judgment of this Department, is highly desirable inasmuch as it will assure the continuing capacity of
the Federal Reserve to discharge effectively its responsibility for providing
credit to its member banks in timely fashion and adequate amounts. Retention
of the present restrictive eligibility requirements not only might inhibit the
ability of the Federal Reserve to lend to its members freely in time of need,
but also could potentially create a growing impediment in the flexible distribution of bank credit among competing uses.
S. 966 would provide the Federal Reserve Banks, subject to such limitations,
restrictions, and regulations as the Board of Governors may prescribe, with
broad authority to make advances to member banks secured by any collateral
satisfactory to it. This would, in turn, permit elimination of existing outmoded
and restrictive eligibility requirements. Appropriately administered in the manner suggested by the Federal Reserve, these provisions of the proposed legislation would appear to achieve fully the purposes sought, with which the Treasury
is in agreement.
The objective of liberalizing these requirements, thus protecting the ability of
the Federal Reserve to discharge effectively its function of lending to its member banks in accordance with the needs of the economy and enhancing the
flexible distribution of bank credit among competing uses, is clearly in the public
interest. The Treasury Department strongly urges affirmative action in this
respect.
The Department has been advised by the Bureau of the Budget that there
is no objection from the standpoint of the Administration's program to the submission of this report to your Committee.
Sincerely yours,
FRED B .
SMITH,
General
Counsel.
INDEPENDENT B A N K E R S A S S O C I A T I O N OF A M E R I C A ,
Washington, B.C., March 15,1967.
Senator W I L L I A M P R O X M I R E ,
Chairman, Subcommittee on Financial Institutions of the Senate Banking and
Currency Committee, New Senate Office Building, Washington, B.C.
D E A R M R . C H A I R M A N : The Independent Bankers Association of America, as
the representative of some 6500 member community banks, takes this opportunity to record its support for S. 714, S. 965 and S. 966, which are the subject
of hearings before the Subcommittee on Financial Institutions of the Senate
Committee on Banking and Currency.
S. 965, intended to facilitate Federal Reserve System operations in foreign
currencies by permitting investment of such currencies in the obligations of
foreign governments, and S. 966, intended to modernize the laws and requirements relating to borrowings by member banks from the Federal Reserve Banks,
are companion measures that are identical with bills passed by the Senate in the
89th Congress.
S. 714, to expand the limits for loans by member banks to their executive officers, on terms not more favorable than those extended to other borrowers,
was likewise passed by the Senate in 1965.
We are confident that these measures have the support of the banking community, the business community, and are in accord with the sound business
practices of the day and times. S. 966 was specifically the subject of reexamination by our Federal Legislative Committee, at our recent convention in New
Orleans, and was specifically approved. We believe the amending language
to the Federal Reserve Act update the lending authority of the Reserve banks
in keeping with modern banking practices.
Our Association has given previous approval, by action of our Federal Legislative Committee, and in statements filed with your Committee, to the objectives
of S. 714 and S. 965, as considered in previous legislative proposals. With
regard to S. 714, we confine our comment to Section 1, of Section 2 2 ( g ) of the
Federal Reserve Act, to increase the present $2,500 limitation on loans to
executive officers of Fed member banks to $5,000, and authorize home mortgage
47 MISCELLANEOUS BANKING AND CREDIT UNION BILLS
loans to officers up to $30,000. This is in line with current provisions of FHAinsured mortgages.
W e 40 not comment on Section 2 in this bill, which modifies loan provisions
of the Federal Credit Union Act.
Sincerely and respectfully,
S T A N L E Y K . BARBER,
President.
Senator PROXMIRE. T h e subcommittee will recess.
( W h e r e u p o n , at 10:30 a.m., the subcommittee recessed subject to the
call of the Chair.)
O
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