LOANING POWERS OF FEDERAL RESERVE MEMBER BANKS FEBRUARY 25, 1930.-Referred to the House Calendar and ordered to be printed Mr. MCFADDEN, from the Committee on Banking and Currency, submitted the following REPORT [To accompany H. R. 9046] The Committee on Banking and Currency, to whom was referred the bill (H. R. 9046) to amend the fourth paragraph of section 13 of the Federal reserve act, as amended, having considered the same, report favorably thereon with the recommendation that the bill do pass without amendment. Concisely stated, the purpose of this bill is to permit a member bank to rediscount with a Federal reserve bank as much paper of a single borrower as a national bank is permitted to acquire from a single borrower under the provisions of section 5200 of the Revised Statutes, and no more. It is not intended to change the character or class of paper eligible for rediscount, but pertains only to the amount of paper of a single borrower which may be rediscounted. Under the eight exceptions to section 5200, national banks are now permitted to make loans to single borrowers in rather liberal amounts exceeding 10 per cent of their capital and surplus on certain classes of paper; but under section 13 of the Federal reserve act, they are not permitted to rediscount for the Federal reserve bank paper of a single borrower in amounts exceeding 10 per cent of their capital and surplus, with the one exception that this restriction does not apply to the discount of bills of exchange drawn in good faith against actually existing values; and it causes much confusion and dissatisfaction when the Federal reserve banks decline to rediscount as much paper of a single borrower as national banks are permitted to acquire under the provisions of section 5200. Officers of member banks can not understand why a line of credit which they are expressly permitted to extend to a single borrower under section 5200 is considered excessive when the same paper is offered to the Federal reserve bank The reason is quite technical and it is difficult to explain it satis factorily to officers of member banks, who are inclined to regard it as a needless technicality. It increases the feeling that rediscounting with Federal reserve banks involves much "red tape" and technicalities, and there is no doubt but that this feeling is one of the reasons why many country banks prefer to deal with city correspondents instead of Federal reserve banks. In order that there may be a better understanding of the effect which will be brought about if this legislation is enacted, your committee outlines briefly the recent history of section 5200 of the Revised Statutes and the relation of section 13 of the Federal reserve act thereto. Prior to the enactment of the McFadden Act (February 25, 1927), section 5200 of the Revised Statutes placed a limitation of 10 per cent of a national bank's capital and surplus on the total liabilities to any such bank of any one person, company, firm, or corporation, but this limitation was subject to a number of specific exceptions. Section 13 of the Federal reserve act provided then, as it does now, that the amount of notes, drafts, and bills bearing the signature or indorsement of any one borrower rediscounted by a Federal reserve bank for any one bank should not exceed 10 per cent of the capital and surplus of the bank, except that this limitation does not apply to the discount of bills of exchange drawn in good faith against actually existing values. Both the Federal Reserve Board in construing this provision of section 13 and the Comptroller of the Currency in construing the provisions of section 5200 had interpreted the law as applying only to direct liabilities such as those of maker or acceptor and not to indirect liabilities such as those of drawer, indorser, or guarantor. The McFadden Act greatly increased the difference between these two sections, because it left section 13 as it was but amended section 5200. It increased the difference between these sections in these two important respects: (1) It greatly liberalized and broadened the eight exceptions to the 10 per cent limitation of section 5200, but did not add to or broaden the single exception to the 10 per cent limitation of section 13; and (2) it made indirect liabilities as drawer, indorser, or guarantor subject to the limitations of section 5200, but left the limitations of section 13 applicable only to the direct liabilities as maker or acceptor. To indicate explicitly what are the exceptions now contained in section 5200, as amended by the McFadden Act, there is made a part of this report a circular issued by the Comptroller of the Currency showing the provisions of the law and a table of the amounts loanable to one person by a national bank. As a result of this situation, the chief differences now existing between the limitations on the paper of one person which a Federal reserve bank may discount for a member bank and on the loans to one person by a national bank are (1) in the case of loans by national banks the basic limitation of 10 per cent is subject to a number of liberal exceptions, whereas the basic limitation as to rediscounts is subject to only one exception; and (2) the limitation on loans of a national bank applies to indirect liabilities as well as to direct liabilities, but the limitation on rediscounts for one person under the interpretation of the Federal Reserve Board, which has been in exist ence for years, applies only to direct liabilities, those of maker and acceptor. As indicated above, the purpose of the proposed bill, H. R. 9046, is to make the limitations contained in section 13 of the Federal reserve act on the paper of one person which may be rediscounted by a Federal reserve bank conform as closely as possible to the limitations on loans to one person by national banks under section 5200 of the Revised Statutes. If H. R. 9046 should be enacted, the limitation on rediscounts for one person would be subject to all of those exceptions which are now contained in section 5200 of the Revised Statutes with reference to loans to one person by national banks and would be applicable not only to liabilities incurred directly as maker or acceptor, but also to those incurred indirectly as drawer, indorser, or guarantor. One of the practical results of the proposed amendment may be illustrated as follows: A national bank may now loan to a single borrower an amount equal to 25 per cent of its capital and surplus on paper secured by shipping documents or chattel mortgages covering livestock, but may rediscount with a Federal reserve bank the notes of such borrower only in an amount equal to 10 per cent of the capital stock and surplus of such national bank. If the law were amended, the Federal reserve bank might take the entire 25 per cent. Under the now existing provision of section 13, some question might be raised as to whether the limitation prescribed applies both to the rediscount of paper under the authority of section 13 and under the authority of section 13a, or only to the rediscount of paper under section 13. The enactment of the proposed bill would clarify this ambiguity so as to make the limitation applicable broadly to any paper, including that acquired under section 13a as well as that acquired under section 13. It will be noted also that the bill provides that it is not to be construed "to change the character or class of paper now eligible for rediscount by Federal reserve banks." There was at one time in the McFadden bill a provision similar to that contained in the bill under discussion and objection was made on the ground that it was intended to change the character of paper eligible for rediscount, and this provision was finally stricken out of the McFadden bill because of opposition aroused by this unwarranted contention. There is nothing in the bill upon which to base the opinion that the character or class of paper eligible for rediscount is in any way to be affected; but, in order to anticipate any similar objection to this bill, this provision that the character or class of paper eligible for rediscount is not to be affected has been included. The circular of the Comptroller of the Currency, mentioned above, is as follows: [Recent amendments to sec. 5200, U. S. R. S.] TREASURY DEPARTMENT, OFFICE OF THE COMPTROLLER OF THE CURRENCY, Washington. LOANING POWERS OF NATIONAL BANKS UNDER THE AMENDMENT TO SECTION 5200, U. S. R. S., WHICH BECAME EFFECTIVE FEBRUARY 25, 1927 SEC. 5200. The total obligations to any national banking association of any person, copartnership, association, or corporation shall at no time exceed 10 per cent of the amount of the capital stock of such association actually paid in and unimpaired and 10 per cent of its unimpaired surplus fund. The term "obligations" shall mean the direct liability of the maker or acceptor of paper discounted with or sold to such association and the liability of the indorser, drawer, or guarantor who obtains a loan from or discounts paper with or sells paper under his guaranty to such association and shall include in the case of obligations of a copartnership or association the obligations of the several members thereof. Such limitation of 10 per cent shall be subject to the following exceptions: (1) Obligations in the form of drafts or bills of exchange drawn in good faith against actually existing values shall not be subject under this section to any limitation based upon such capital and surplus. (2) Obligations arising out of the discount of commercial or business paper actually owned by the person, copartnership, association, or corporation negotiating the same shall not be subject under this section to any limitation based upon such capital and surplus. (3) Obligations drawn in good faith against actually existing values and secured by goods or commodities in process of shipment shall not be subject under this section to any limitation based upon such capital and surplus. (4) Obligations as indorser or guarantor of notes, other than commercial or business paper excepted under (2) hereof, having a maturity of not more than six months, and owned by the person, corporation, association, or copartnership indorsing and negotiating the same, shall be subject under this section to a limitation of 15 per cent of such capital and surplus in addition to such 10 per cent of such capital and surplus. (5) Obligations in the form of banker's acceptances of other banks of the kind described in section 13 of the Federal reserve act shall not be subject under this section to any limitation based upon such capital and surplus. (6) Obligations of any person, copartnership, association, or corporation, in the form of notes or drafts secured by shipping documents, warehouse receipts, or other such documents transferring or securing title covering readily marketable nonperishable staples when such property is fully covered by insurance, if it is customary to insure such staples, shall be subject under this section to a limitation of 15 per cent of such capital and surplus in addition to such 10 per cent of such capital and surplus when the market value of such staples securing such obligation is not at any time less than 115 per cent of the face amount of such obligation, and to an additional increase of limitation of 5 per cent of such capital and surplus in addition to such 25 per cent of such capital and surplus when the market value of such staples securing such additional obligation is not at any time less than 120 per cent of the face amount of such additional obligation, and to a further additional increase of limitation of 5 per cent of such capital and surplus in addition to such 30 per cent of such capital and surplus when the market value of such staples securing such additional obligation is not at any time less than 125 per cent of the face amount of such additional obligation, and to a further additional increase of limitation of 5 per cent of such capital and surplus in addition to such 35 per cent of such capital and surplus when the market value of such staples securing such additional obligation is not at any time less than 130 per cent of the face amount of such additional obligation, and to a further additional increase of limitation of 5 per cent of such capital and surplus in addition to such 40 per cent of such capital and surplus when the market value of such staples securing such additional obligation is not at any time less than 135 per cent of the face amount of such additional obligation, and to a further additional increase of limitation of 5 per cent of such capital and surplus in addition to such 45 per cent of such capital and surplus when the market value of such staples securing such additional obligation is not at any time less than 140 per cent of the face amount of such additional obligation, but this exception shall not apply to obligations of any one person, copartnership, association, or corporation arising from the same transactions and/or secured upon the identical staples for more than 10 months. (7) Obligations of any person, copartnership, association, or corporation in the form of notes or drafts secured by shipping documents or instruments transferring or securing title covering livestock or giving a lien on livestock when the market value of the livestock securing the obligation is not at any time less than 115 per cent of the face amount of the notes covered by such documents shall be subject under this section to a limitation of 15 per cent of such capital and surplus in addition to such 10 per cent of such capital and surplus. (8) Obligations of any person, copartnership, association, or corporation in the form of notes secured by not less than a like amount of bonds or notes of the United States issued since April 24, 1917, or certificates of indebtedness of the United States, shall (except to the extent permitted by rules and regulations prescribed by the Comptroller of the Currency, with the approval of the Secretary of the Treasury) be subject under this section to a limitation of 15 per cent of such capital and surplus in addition to such 10 per cent of such capital and surplus. Obligations (A) Accommodation or straight loans, whether or not single name, including liability as indorser or guarantor (where indorser or guarantor receives the proceeds from bank) of paper not coming within exceptions 2 and 4. Loans secured by stocks, bonds, and authorized real estate mortgages. (1) Drafts or "bills of exchange drawn in good faith against actually existing values." (2) Commercial or business papers (of other makers) actually owned by the person, copartnership, association, or corporation negotiating the same. (3) Obligations secured by goods or commodities in process of shipment. (4) Obligations as indorser or guarantor of notes (other than commercial or business paper) maturing within 6 months, owned by indorser. (5) Bankers' acceptances of the kinds described in section 13 of (6) Obligations secured by shipping documents, warehouse re- (7) Obligations secured by shipping documents or instruments Amounts loanable Maximum limit, 10 per cent of bank's paid-up and unimpaired capital and surplus. No limit imposed by law. Do. Do. 15 per cent in addition to 10 per cent (A). No limit imposed by law. 15 per cent, secured by 115 per cent. 15 per cent in addition to regular 10 per cent loan (A). 15 per cent of bank's capital and surplus, in addition to the amount allowed under (A), or if the full amount allowed under (A) is not loaned, then the amount which may be loaned in the manner described under (8) is increased by the loanable amount not used under (A). In other words, the amount loaned under (A) must never be more than 10 per cent, but the aggregate of (A) and (8) may equal, but not exceed, 25 per cent. CHARLES W. COLLINS, In conformity with section 2a, of Rule XIII, of the House Rules, there is herewith printed section 13 of the Federal reserve act, with the proposed added amendment printed in italics, and the language to be stricken out in brackets, as follows: SEC. 13. Any Federal reserve bank may receive from any of its member banks, and from the United States, deposits of current funds in lawful money, nationalbank notes, Federal reserve notes, or checks, and drafts, payable upon presentation, and also, for collection, maturing notes and bills; or, solely for purposes of exchange or of collection, may receive from other Federal reserve banks deposits of current funds in lawful money, national-bank notes, or checks upon other Federal reserve banks, and checks and drafts, payable upon presentation within its district, and maturing notes and bills payable within its district; or, solely for the purposes of exchange or of collection, may receive from any nonmember bank or trust company deposits of current funds in lawful money, national-bank notes, Federal reserve notes, checks and drafts payable upon presentation, or maturing notes and bills: Provided, Such nonmember bank or trust company maintains with the Federal reserve bank of its district a balance sufficient to offset the items in transit held for its account by the Federal reserve bank: Provided further, HR-71-2-VOL 235 |