83D CONGRESS ed Session

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SENATE

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REPORT No. 1505

AMENDMENT TO SECTIONS 23A AND 24A OF THE FEDERAL RESERVE ACT, AS AMENDED

JUNE 3 (legislative day, MAY 13), 1954.-Ordered to be printed

Mr. BRICKER, from the Committee on Banking and Currency, submitted the following

REPORT

[To accompany S. 3481]

The Committee on Banking and Currency, to whom was referred the bill (S. 3481) to amend sections 23A and 24A of the Federal Reserve Act, as amended, having considered the same, report favorably thereon without amendment and recommend that the bill do pass.

GENERAL STATEMENT

Section 24A of the Federal Reserve Act provides, among other things, that no national bank and no State member bank may invest an amount greater than the amount of its capital stock in bank premises, or in the securities or obligations of a corporation holding the bank premises without the approval of the Comptroller of the Currency or the Board of Governors of the Federal Reserve System, as the case may be. By virtue of this provision, there is no question as to the right of a national bank to invest up to the amount of its capital stock in bank premises which it owns directly. However, where the bank premises are not owned directly by the bank but instead are owned by an affiliated corporation, the question as to the permissible investment by the bank is complicated by the provisions of section 23A of the Federal Reserve Act.

Section 23A contains a general prohibition against a national bank's investing in any one affiliate an amount exceeding 10 percent of its capital and surplus. As originally enacted in the Banking Act of 1933, a number of exceptions were provided, the first of which covered an affiliate "engaged solely in holding the bank premises." The Banking Act of 1935 deleted the word "solely" but added the words "on June 16, 1934," so that the exception now applies only to affiliates "engaged on June 16, 1934, in holding the bank premises."

This amendment has made it difficult to interpret sections 23A and 24A in a harmonious manner, for there appears to be no possible construction which does not result in a partial disregard of the expressed or implied purpose of one section or the other.

After thorough consideration of this problem, the Office of the Comptroller of the Currency took the position that, in view of the specific exemption from section 23A of affiliates which were engaged in holding the bank premises on June 16, 1934, the provisions of that section must be applied to an affiliate which began holding the bank premises subsequently to that date. Thus while a bank may invest an amount not greater than 100 percent of its capital stock directly in a bank building which it owns, it may not invest more than 10 percent of its capital and surplus in the securities or obligations of an affiliated corporation engaged in holding the bank premises if that corporation acquired the premises after June 16, 1934.

As would seem inevitable, the conflicting statutory provisions have created confusion among bankers who read section 24A as authorizing them to make an investment amounting to not more than 100 percent of their capital stock in bank premises either by direct ownership of the premises or through the ownership of stock in an affiliated corporation holding the bank premises. Accordingly, it is deemed desirable to propose legislation to eliminate the statutory conflict.

There would seem to be no real reason why if banks can invest amounts up to 100 percent of their capital stock in bank premises directly, they should not be allowed to do so indirectly through ownership of stock in a corporation owning the bank premises provided that the activities of that corporation are so restricted that it cannot engage in any activities other than owning and operating the building or buildings in which are housed the offices of the bank.

Your committee is of the opinion that the conflict should be removed by making section 23A of the Federal Reserve Act completely inapplicable in corporations engaged solely in holding the bank premises. This would restore to section 24A its full effectiveness and permit a bank to invest amounts up to 100 percent of its capital stock in a corporation holding the bank premises but engaging in no other activities. The provisions of section 23A would thus remain applicable to corporations engaged in holding the bank premises and also engaged in other activities, but not to those corporations engaged solely in holding the bank premises.

The bill deletes from section 23A the words "or in maintaining and operating properties for banking purposes prior to such date."

These words were evidently put in the statute to make it clear that a corporation holding the bank premises could maintain and operate the buildings in which the bank offices were located, even though the buildings might have other tenants. It is believed that these words are unnecessary. By the words "engaged solely in holding the bank premises" is meant a corporation which does nothing except whatever is necessary in connection with the ownership, management, and operation of the building or buildings in which are housed the offices of the bank, whether or not such building or buildings have other tenants. In other words, the use of the word "solely" would not exclude from the exception to section 23A a corporation owning and operating & multistoried building of which the bank occupied only a few floors. It has long been customary practice for bank buildings to contain office

space which it is contemplated will be rented out to other tenants, and certainly it would be an uneconomical use of land in crowded cities for it to be otherwise.

Some banks have attempted to avoid the limitations contained in section 24A of the Federal Reserve Act by setting up controlled subsidiary corporations which, with funds borrowed from other sources, could construct and hold bank premises costing far in excess of the bank's capital stock. Such arrangements would be inconsistent with the spirit and intent of section 24A of the Federal Reserve Act, which limits investments in bank premises by national banks and State member banks to the amount of their capital stock, except with the consent of the Comptroller of the Currency or the Board of Governors of the Federal Reserve System, as the case may be. Accordingly, in order to avoid this possibility section 24A of the Federal Reserve Act is amended by the bill to require the consent of the appropriate supervisory authorities in cases of this kind.

The bill was proposed by the Treasury Department and the Bureau of the Budget entertained no objection to the bill.

CHANGES IN EXISTING LAW

In compliance with subsection (4) of the rule XXIX of the Standing Rules of the Senate, changes in existing law made by the bill, as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italics, existing law in which no change is proposed is shown in roman):

SECTION 23A OF THE FEDERAL RESERVE ACT

SEC. 23A. No member bank shall (1) make any loan or any extension of credit to, or purchase securities under repurchase agreement from, any of its affiliates, or (2) invest any of its funds in the capital stock, bonds, debentures, or other such obligations of any such affiliate, or (3) accept the capital stock, bonds, debentures, or other such obligations of any such affiliate as collateral security for advances made to any person, partnership, association, or corporation, if, in the case of any such affiliate, the aggregate amount of such loans, extensions of credit, repurchase agreements, investments, and advances against such collateral security will exceed 10 per centum of the capital stock and surplus of such member bank, or if, in the case of all such affiliates, the aggregate amount of such loans, extensions of credits, repurchase agreements, investments, and advances against such collateral security will exceed 20 per centum of the capital stock and surplus of such member bank.

Within the foregoing limitations, each loan or extension of credit of any kind or character to an affiliate shall be secured by collateral in the form of stocks, bonds, debentures, or other such obligations having a market value at the time of making the loan or extension of credit of at least 20 per centum more than the amount of the loan or extension of credit, or of at least 10 per centum more than the amount of the loan or extension of credit if it is secured by obligations of any State, or of any political subdivision or agency thereof: Provided, That the provisions of this paragraph shall not apply to loans or extensions of credit secured by obligations of the United States Government, the Federal intermediate credit banks, the Federal land banks, Federal Home Loan Banks, or the Home Owners' Loan Corporation, or by such notes, drafts, bills of exchange, or bankers' acceptances as are eligible for rediscount or for purchase by Federal Reserve banks. A loan or extension of credit to a director, officer, clerk, or other employee or any representative of any such affiliate shall be deemed a loan to the affiliate to the extent that the proceeds of such loan are used for the benefit of, or transferred to, the affiliate.

For the purpose of this section, the term "affiliate" shall include holdingcompany affiliates as well as other affiliates, and the provisions of this section shall not apply to any affiliate (1) engaged [on June 16, 1934,] solely in holding the

bank premises of the member bank with which it is affiliated [or in maintaining and operating properties acquired for banking purposes prior to such date]; (2) engaged solely in conducting a safe-deposit business or the business of an agricultural credit corporation or livestock loan company; (3) in the capital stock of which a national banking association is authorized to invest pursuant to section 25 of this Act, as amended, or a subsidiary of such affiliate, all the stock of which (except qualifying shares of directors in an amount not to exceed 10 per centum) is owned by such affiliate; (4) organized under section 25 (a) of this Act, as amended, or a subsidiary of such affiliate, all the stock of which (except qualifying shares of directors in an amount not to exceed 10 per centum) is owned by such affiliates; (5) engaged solely in holding obligations of the United States or obligations fully guaranteed by the United States as to principal and interest, the Federal intermediate credit banks, the Federal land banks, the Federal Home Loan Banks, or the Home Owners' Loan Corporation; (6) where the affiliate relationship has arisen out of a bona fide debt contracted prior to the date of the creation of such relationship; or (7) where the affiliate relationship exists by reason of the ownership or control of any voting shares thereof by a member bank as executor, administrator, trustee, receiver, agent, depositary, or in any other fiduciary capacity, except where such shares are held for the benefit of all or & majority of the stockholders of such member banks; but as to any such affiliate, member banks shall continue to be subject to other provisions of law applicable to loans by such banks and investments by such banks in stocks, bonds, debentures, or other such obligations. The provisions of this section shall likewise not apply to indebtedness of any affiliate for unpaid balances due a bank on assets purchased from such bank or to loans secured by, or extensions of credit against, obligations of the United States or obligations fully guaranteed by the United States as to principal and interest.

SECTION 24A OF THE FEDERAL RESERVE ACT

SEC. 24A. Hereafter no national bank, without the approval of the Comptroller of the Currency, and no State member bank, without the approval of the Board of Governors of the Federal Reserve System, shall (1) invest in bank premises, or in the stock, bonds, debentures, or other such obligations of any corporation holding the premises of such bank or (2) make loans to or upon the security of the stock of any such corporation, if the aggregate of all such investments and loans, together with the amount of any indebtedness incurred by any such corporation which is an affiliate of the bank, as defined in section 2 of the Banking Act of 1933, as amended, will exceed the amount of the capital stock of such bank.

JUNE 3 (legislative day, MAY 13), 1954-Ordered to be printed

Mr. CORDON, from the Committee on Appropriations, submitted the following

REPORT

[To accompany H. R. 8680]

The Committee on Appropriations, to whom was referred the bill (H. R. 8680) making appropriations for the Department of the Interior for the fiscal year ending June 30, 1955, and for other purposes, report the same to the Senate with various amendments and present herewith information relative to the changes made:

Amount of bill passed by House.
Amount added by Senate (net).

Total of bill as reported to Senate.

Amount of 1955 budget estimates.

Amount of 1954 appropriations, including the Supplemental Appropriation Act, 1954; and the Third Supplemental Appropriation Act, 1954.

The bill as reported to the Senate:

Under the budget estimates..

Under appropriations for fiscal year 1954_..

Includes $118,000 submitted in H. Doc. 370, and $5,514,680 submitted in 8. Doc. 113.

SUMMARY OF THE BILL

439, 363, 050

150, 104

11,762, 004

The committee considered budget estimates totaling $427,751,110 for the activities of the Department of the Interior, the Virgin Islands Corporation, and the Federal Coal Mine Safety Board of Review. The total budget estimates included $118,000 submitted in House Document No. 370, and $5,514,680 submitted in Senate Document No. 113.