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F E D E R A L R E S E R V E B O A R D V COPY x-6172 November 3, 1928

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To Federal Reserve Board.

Prom Governor Young

In view of the recent developments in reference to the granting of f iduciary powers, wherein the Board may be in the embarrassing posi t ion of having granted f iduc ia ry powers to one i n s t i t u t i on in one d i s t r i c t and almost simultaneous-ly considering the r e fu sa l of the applicat ion of another nat ional bank in another d i s t r i c t surrounded by the same circumstances and conditions, I bel ieve i t i s time for the Board to review the whole matter and lay down cer ta in d e f i n i t e pr inc ip les regarding the granting of f iduc iary powers.

Br i e f ly , the law s ta tes that nat ional banks may exercise t ru s t pow-ers if not in contravention of State law, when so authorized and empowered by the Federal Reserve Board. The law i s spec i f ic about many legal requirements, and with these the Board and the banks have had no d i f f i c u l t y because we", have been able to be spec i f i c . The law also s t a t e s , however, that the Board, in granting permission to exercise t r u s t powers, may take into consideration the amount of cap i t a l and sur-plus of the applying bank, the needs of the community to be served, and any other f a c t s and circumstances that seem to i t proper. This i s the discre t ionary par t of the law. Just what i s meant by i t may be debated. The h i s to ry of the l eg i s l a t ion , however, leads me to bel ieve that Congress intended to give to nat ional banks, r i gh t s equal to those enjoyed by State banks. When the law spec i f i c a l l y mentioned capi ta l i t obviously placed discret ion with the Board as to whether or not a na-t ional bank with a capi ta l of $100,000, located in a community of two hundred thou-sand or more inhabi tants , should be granted f iduc iary powers. Also, i t obviously l e f t d iscre t ion with the Federal Reserve Board as to whether or not a nat ional bank with a cap i t a l of $25*000 in any community i s en t i t l ed to f iduc ia ry powers.

Past majori ty performance of the Federal Reserve Board has demon-s t ra ted conclusively to me that cap i ta l has been given l i t t l e if any consideration by the Board and I believe i t acted wisely, because if we assume that cap i ta l r e -quirements of nat ional banks are su f f i c i en t under exis t ing law to meet the needs, of the business of the bank and of the community, and recognize the f a c t demonstrat-ed by information in our possession that in the great majori ty of cases nat ional banks voluntar i ly increase thei r capi ta l as thei r business expands, we must arr ive a t the conclusion that the cap i ta l requirements as establ ished by the Rational Bank Act are s u f f i c i e n t fo r the exercise of f iduciary powers, and i f they become insu f f i c i en t the nat ional banks voluntar i ly wi l l increase thei r cap i t a l with the growth of their business.

The law i s also spec i f i c in s ta t ing that the Board shal l take into consideration the needs of the community to be served. Outside of a few isolated pnd crossroad communities in the United States , the need, in my opinion, exists in every community; in f a c t , the r igh t to exercise f iduciary powers i s one of the most valuable asse t s tha t can be acquired by any banking i n s t i t u t i on if i t expects to continue in business. The national banks of America have not been thoroughly awakened to the p o s s i b i l i t i e s of fu tu re p r o f i t s from th i s business. Sooner or l a t e r they wi l l discover i t , and I am going to venture the predict ion that within the next ten years f iduciary funct ions wi l l be a house-to-house canvass with the strongest

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competition between a l l banks that are permitted to exercise t r u s t funct ions. In other words, not a t the moment but in the years to come, t rus t business i s going to be a source of p r o f i t fo r banks which, in periods of depression wi l l contribute very mater ia l ly toward thei r successful existence as well as being a safeguard to depositors and a possible fac tor for the continuation of our independent un i t bank-ing system which i s rapidly sl ipping.

The law also s t a t e s that the Board can take into consideration any other f a c t s and circumstances that seem to i t proper. When I was in Minneapolis my in terpre ta t ion of t h i s pa r t of the law was that if a bank was properly conducted o r , i f i t got into d i f f i c u l t i e s and because of the resourcefulness of i t s management was able to put i t s e l f in good condition, i t was en t i t l ed to everything Congress intended to give i t . That was about a l l the consideration I did give to the ap-p l ica t ion because I assumed that Congress intended that na t iona l banks should be

: granted f iduc ia ry powers under such conditions.

I have since learned that some people associated with the Federal Reserve System f e e l tha t the exercise of t r u s t powers i s of f a r more importance than the exerqise of the ordinary banking powers. In one way there i s s t rength in thei r argument, but from a p rac t i ca l standpoint, experience has taught mo that when a bank i s performing both banking and t r u s t funct ions , the combined i n s t i t u t i o n wi l l f a i l quicker because of i t s banking mistakes than i t wi l l because of mistakes in i t s t ru s t funct ions . This i s because there are no l imi t s as to how a bank can lend i t s money except the amount i t may lend upon r ea l es ta te securi ty or the amount i t may lend to any one person, f i rm or corporation, while the investment of t r u s t funds, in the great majori ty of c a s e s , . i s safeguarded by wi l l s , deeds of t r u s t , State laws, court orders, e tc . If f raud, embezzlement, or other criminal ac ts are to be taken into consideration, i t seems to me that with the survei l lance exercised • over nat ional banks, the opportunit ies for culpable ac ts are greater in the bank-ing department than they are in the t rus t department.

In the case of new banks applying fo r f iduciary powers so that they can open the i r doors under the t i t l e o f , " Bank and Trust Company" , J be-l ieve any bank that i s en t i t l ed to banking powers i s also e n t i t l e d to t r u s t powers. Others f e e l that in the majori ty of cases the organizers of new banks should demon-s t r a t e thei r a b i l i t y to successful ly conduct a banking business before f iduciary powers are granted. I take the posi t ion tha t if an organizing bank requests f i -duciary powers a t the s t a r t , i f there i s anything in the p ic tu re that would prompt the Board to re fuse such powers, the reasons for the r e fu sa l should apply jus t as

. strongly to the applicat ion for banking powers.

I have therefore arr ived a t the conclusion that i t should be the policy of the Board to grant f iduciary powers in every case where i t s appointed Agent has recommended the granting of banking powers and where the Board i s s a t i s -f i e d that the applying in s t i t u t i on i s en t i t l ed to banking powers. With exis t ing banks I bel ieve powers should be granted in a l l cases upon application where the repor t of examination discloses a well-managed ins t i tu t ion and the information r e -ceived from other sources leads the Board to believe that there i s no question of the app l ican t ' s honesty and in teg r i ty .

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x i . j J u K A i i K J S b i i i i V J S B O A R I . COPY X-5172-a

November 5, 1928.

To Governor Young SUBJECT: Granting of t rus t powers to

From Mr. Wyatt- General Counsel new nat ional banks.

You have aslced me to give you a memorandum of my views with regard to the Board's general policy of waiting a year a f t e r the organization of a new nat ional bank before granting t r u s t powers to i t .

In my opinion, t h i s policy i s contrary to the pol icy of Congress in granting t ru s t powers to nat ional banks.

The purpose of Congress in granting t ru s t powers to nat ional banks was to preserve the existence of the National Banking System by enabling nat ional banks to. meet the competition of State banks and t ru s t companies which had the advantage of being able to combine the exercise of t r u s t powers with the exercise of ordinary commercial banking powers. Whether th i s was sound in theory or not i s immaterial. Congress was confronted with a s i tua t ion and adopt-ed t h i s means of meeting i t . National banks were converting into State banks in order to engage in the t ru s t business and persons or-ganizing new banks were taking State charters instead of nat ional charters in order to be able to combine the exercise of t r u s t powers with the commercial banking business.

In order to meet th i s s i tua t ion , Congress authorized the Federal Reserve Bdard to grant t ru s t powers to nat ional banks under cer ta in conditions. The conditions prescribed were intended p r inc ipa l -ly to enable nat ional banks to exercise t ru s t powers on a bas i s of sub-s t a n t i a l equal i ty with competing corporations exercising such powers.

This purpose i s defeated to a cer ta in extent by the Board's policy of requir ing newly organized nat ional banks to wait a year a f -ter the i r organization before obtaining t rus t powers. Under the Board's present pol icy, persons desir ing to organize a new i n s t i t u t i o n to exercise both banking and t ru s t funct ions can obtain a State charter and immediately embark upon the exercise of both functions; but i f they take a nat ional charter they must wait a year before they can exercise thei r t ru s t funct ions . The natural r e su l t of t h i i pol icy i s to cause such persons to se lect a State charter instead of a nat ional charter ; and t h i s defeats the purpose which Congress had in mind when i t granted t r u s t powers to nat ional banks. I t encourages the organization of State banks and t r u s t companies in l i eu of nat ional banks.

This memorandum was prepared very has t i ly , because you asked me th i s morning to l e t you have i t in time fo r today's Board meeting; but i t contains a concise expression of my views on t h i s matter.

Respectfully,

Walter Wyatt, General Counsel. Digitized for FRASER

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