C O P Y X-6718

September 20, 1930#

The Federal Reserve Board. P u b l i c a t i o n of Notice t h a t Member Bank in t ends to Withdraw

Mr. Wyatt - General Counsel. from Federal Reserve System.

Mr. McClelland adv i ses me tha t the Board des i r e my opinion as to any quest ions of law which may be involved in the proposal t h a t , whenever a S ta te member bank f i l e s w r i t t e n n o t i c e of i t s i n t e n t i o n to withdraw from membership i n the Federal Reserve System a t the e x p i r a t i o n of s i x months, the Board pub l i sh t h i s f a c t i n the Federal Reserve B u l l e t i n , i n order t h a t the d e p o s i t o r s and the p u b l i c gene ra l l y may have advance in format ion of the member bank ' s i n t e n t i o n to withdraw. I a l s o unders tand t h a t the Board des i r e s my views as to the i n t e n t i o n of Congress i n r e q u i r i n g such s i x months' w r i t t e n n o t i c e .

SUMMARY OF OPINION.

1. The law does not express ly r equ i r e the Board to pub l i sh the f a c t whenever a member bank f i l e s w r i t t e n n o t i c e of i t s i n t e n t i o n to withdraw from membership i n the Federal Reserve System, and no such requirement can be impl ied; bu t there i s no l e g a l reason why the Board should not pub-l i s h such in format ion i f in the Board 's judgment i t would be in the p u b l i c i n t e r e s t to do so .

2 . The purpose of the requirement t ha t s ix .months ' w r i t t e n n o t i c e s h a l l be f i l e d with the Board before a S t a t e bank withdraws from membership was not to p r o t e c t the depos i to r s of such member banks but t o p r o t e c t the Federal r e s e rve banks aga in s t the too sudden r e d a c t i o n of t h e i r own c a p i t a l .

3 . I t a l so a f f o r d s such member banks an oppor tuni ty to th ink the mat ter over and p o s s i b l y to change t h e i r minds be fo re they a c t u a l l y withdraw from the System.

4. I f the p u b l i c i s e n t i t l e d to n o t i c e when a S ta t e member bank v o l u n t a r i l y decides to withdraw from membership in the Federal Reserve Sys-tem a t the e x p i r a t i o n of s ix months, then i t would seem t h a t the p u b l i c i s a l so e n t i t l e d to n o t i c e whenever the Federal Reserve Board n o t i f i e s a S ta t e member bank to appear b e f o r e i t and show cause why i t s membership i n the Federal Reserve System should not be f o r f e i t e d fo r v i o l a t i o n of law; b u t , to pub l i sh such n o t i c e in the l a t t e r case probably would close the bank before i t had the hea r ing to which i t i s e n t i t l e d under s e c t i o n 9 of the Federal Reserve Act .

5. I f the Board should adopt the p r a c t i c e of g iv ing p u b l i c i t y to no t i ce s of withdrawal from the System fo r the purpose of g iv ing the p u b l i c advance in fo rma t ion , i t might a l s o be expected to pub l i sh o ther in format ion a f f e c t i n g the we l fa re of depos i to r s ; and I r e s p e c t f u l l y suggest t h a t the Board give c a r e f u l cons ide ra t i on to the p o s s i b l e r a m i f i c a t i o n s of t h i s p r i n c i p l e be fore deciding whether to adopt i t i n t h i s case .

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THE STATUTE.

The e n t i r e law wi th r e f e r e n c e to the withdrawal of S t a t e hanks from the Federa l Reserve System i s conta ined i n the fo l lowing paragraph of Sec-t i on 9 of the Federal Reserve Act as amended:

"Any S t a t e bank or t r u s t company d e s i r i n g to withdraw from membership i n a Federal r e s e r v e "bank may do so , a f t e r s i x months' w r i t t e n n o t i c e s h a l l have "been f i l e d wi th the Federa l Reserve Board, upon the su r render and c a n c e l l a t i o n of a l l of i t s ho ld ings of c a p i t a l s t o c k i n the Federal r e -se rve bank: PROVIDED, THAT THE FEDEEAL RESERVE BOARD, IN ITS DISCRETION AND SUBJECT TO SUCH CONDITIONS AS IT MY PRESCRIBE, MAY WAIVE SUCH SIX MONTHS1 NOTICE IN INDIVIDUAL CASES AND MAY PERMIT ANY SUCH STATE BANK OR TRUST COMPANY TO WITHDRAW FROM MEMBERSHIP IN A FEDERAL RESERVE BANK PRIOR TO THE EXPIRATION OF SIX LiONTHS FROM THE DATE OF THE WRITTEN NOTICE OF ITS INTENTION TO WITHDRAW: Provided, however, That no Federal r e s e r v e bank s h a l l , except under express a u t h o r i t y of the Federa l Reserve Board, cancel w i t h i n the same calendar year more than twen ty - f i ve per centum of i t s c a p i t a l s tock f o r the purpose of e f f e c t i n g v o l u n t a r y w i t h -drawals dur ing t h a t y e a r . A l l such a p p l i c a t i o n s s h a l l be d e a l t wi th i n the o rder in which they a r e f i l e d wi th the Board. Whenever a member bank s h a l l su r render i t s s t o c k ho ld ings i n a Federa l r e se rve bank, or s h a l l be ordered to do so by the Federa l Reserve Board, under a u t h o r i t y of law, a l l of i t s r i g h t s and p r i v i l e g e s as a member bank s h a l l thereupon cease and de te rmine , and a f t e r due p r o v i s i o n has been made f o r any indebtedness due or to become due to the Federa l r e s e r v e bank i t s h a l l be e n t i t l e d to a r e f u n d of i t s cash p a i d sub-s c r i p t i o n wi th i n t e r e s t a t the r a t e of one-hal f of one per centum p e r month from date of l a s t d iv idend , i f ea rned , the amount r e funded i n no event to exceed the book va lue of the s t o c k a t t h a t t ime, and s h a l l l i kewi se be e n t i t l e d to repay-ment of d e p o s i t s and of any o the r ba lance due from the Federal r e s e r v e bank."

The o r i g i n a l Federa l Reserve Act conta ined no p r o v i s i o n a u t h o r i z i n g S t a t e banks to withdraw from membership i n the Federal Reserve System; a l l of the above pa ragraph , except the p a r t p r i n t e d in c a p i t a l l e t t e r s , was i n -s e r t e d by the Act of June 21, 1917; and the words i n c a p i t a l l e t t e r s were i n s e r t e d by the Act of A p r i l 17, 1930.

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HJRP0S2 OF iTOTICE.

The Act of June 21, 1917, amended and reenac ted a l l of Sec t ion 9 of the Federal Reserve Act f o r t h e purpose of making membership i n the Federa l Re-serve System more a t t r a c t i v e to S t a t e "banks. In a r e p o r t submi t ted "by the Banking and Currency Committee of the Senate on May 9 , 1917, the fo l lowing s ta tement was made wi th r e f e r e n c e t o t h i s amendment. (Cong. Record, Vol. 55, p . 1981) s

"This s e c t i o n makes more convenient and d e s i r a b l e to the S t a t e banks and t r u s t companies membership i n the Fed-e r a l Reserve System and throws reasonable sa feguards around the admission of S t a t e banks, r e q u i r i n g them to comply wi th the o rd ina ry sa feguards of the n a t i o n a l banks , bu t enables the S t a t e banks or t r u s t companies which become members to withdraw wi thou t l o s s i n case they f i n d the membership u n -d e s i r a b l e . These wi thdrawals , however, a re not to be p e r -mi t t ed i n such a way as to cause any sudden d i s tu rbance of the r e s e r v e bank to which the withdrawing S t a t e banks or t r u s t companies a r e a t t a c h e d . "

The words u n d e r l i n e d c l e a r l y i n d i c a t e t h a t the purpose of the requirement of s i x months' w r i t t e n n o t i c e b e f o r e withdrawing from the Federal Reserve Sys-tem i s to p r o t e c t the Federa l r e se rve banks r a t h e r than the d e p o s i t o r s of such member banks .

This purpose i s f u r t h e r e f f e c t e d by the p r o v i s i o n t h a t , except under ex-p r e s s a u t h o r i t y of the Federa l Reserve Board, no Federa l r e se rve bank s h a l l cancel w i t h i n the same ca lendar year more than 25 pe r cen t of i t s c a p i t a l s tock f o r the purpose of e f f e c t i n g vo lun t a ry wi thdrawals .

PUBLICATION NOT REQUIRED OR FORBIDDEN.

The s t a t u t e s does no t r e q u i r e any p u b l i c a t i o n of the n o t i c e of a member bank ' s i n t e n t i o n to withdraw from t h e Federal Reserve System, and t h e r e i s nothing i n the s t a t u t e from which a requirement t h a t the Federal Reserve Board p u b l i s h such a n o t i c e could be impl i ed . On the c o n t r a r y , the f a i l u r e to r equ i r e such p u b l i c a t i o n i n d i c a t e s t h a t Congress d id no t expect such n o t i c e to be pub-l i s h e d .

When Congress d e s i r e s i n fo rma t ion to be pub l i shed fo r the b e n e f i t of the p u b l i c i t u s u a l l y p rov ides e x p r e s s l y f o r the p u b l i c a t i o n of such in fo rma t ion and s p e c i f i e s the manner and du ra t i on of such p u b l i c a t i o n . Thus, Sec t ion 11(a) of the Federa l Reserve Act r e q u i r e s the Federal Reserve Board to p u b l i s h each week a s t a t ement showing the cond i t ion of each Federa l r e s e r v e bank and a con-s o l i d a t e d s t a t ement f o r a l l Federal r e s e r v e banks; Sec t i on 5211 of the Revised S t a t u t e s r e q u i r e s r e p o r t s of the cond i t ion of n a t i o n a l banks to be pub l i shed im a newspaper i n the p l a c e where the n a t i o n a l bank i s l o c a t e d ; Sec t ion 5170 of t h e Revised S t a t u t e s r e q u i r e s a newly organized n a t i o n a l bank to p u b l i s h i t s c e r t i f -i c a t e of a u t h o r i t y to commence b u s i n e s s i n a newspaper p r i n t e d i n the c i t y o r

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county where the "bank i s l o c a t e d f o r a t l e a s t s i x t y days; Sect ion 5221 of the Revised S t a t u t e s r e q u i r e s n o t i c e of the vo lun ta ry l i q u i d a t i o n of a n a t i o n a l bank to be pub l i shed f o r two months i n a newspaper p u b l i s h e d i n the City of Hew York and a l s o i n a newspaper pub l i shed i n the c i t y or town i n which the bank i s l o c a t e d ; and Sec t ion 5235 of the Revised S t a t u t e s r e q u i r e s the Comptroller to p u b l i s h n o t i c e of the appointment of a r e c e i v e r f o r a n a t i o n a l bank f o r t h r e e consecu t ive months. The f a i l u r e to r e q u i r e p u b l i c a t i o n of no t i c e of i n t e n t i o n of a S t a t e bank to withdraw from the Federa l Reserve System i s s t rong evidence t h a t Congress d id not expect or i n t end such n o t i c e to be p u b l i s h e d .

On the o the r hand, the law does no t f o r b i d the Federa l Reserve Board to p u b l i s h such n o t i c e and I know of no l e g a l reason why the Board should not do so i f i n the Board ' s judgment i t would be i n the p u b l i c i n t e r e s t .

POSSIBLE RAMIFICATION.

I unde r s t and from Mr. McClel land 's memorandum t h a t i t i s proposed to give p u b l i c i t y to the f i l i n g of a n o t i c e by a member bank of i t s i n t e n t i o n to withdraw from the Federa l Reserve System, " i n order t h a t the d e p o s i t o r s and the p u b l i c g e n e r a l l y may have advance in fo rmat ion of the member b a n k ' s i n t e n t i o n to wi thdraw". I assume t h a t t h i s i s f o r the purpose of enabl ing d e p o s i t o r s to t r a n s f e r t h e i r accounts to o the r banks b e f o r e the withdrawal becomes e f » f e c t i v e , i f they a r e u n w i l l i n g to do bus ine s s wi th a nonmember bank; and, viewing the ma t t e r from t h i s s t andpo in t a lone , i t would seem e n t i r e l y p rope r to g ive the d e p o s i t o r s such in fo rma t ion and a f f o r d them such an o p p o r t u n i t y .

I f such i n fo rma t ion i s pub l i shed on t h i s p r i n c i p l e , however, t he Board might be expected to p u b l i s h o ther i n fo rma t ion a f f e c t i n g the w e l f a r e of de-p o s i t o r s , and I r e s p e c t f u l l y suggest t h a t the Board g ive c a r e f u l c o n s i d e r a t i o n to the p o s s i b l e r a m i f i c a t i o n s of t h i s p r i n c i p l e b e f o r e dec id ing whether to adopt i t i n t h i s c a s e .

I f t he p u b l i c i s e n t i t l e d to n o t i c e when a S ta t e member bank f i l e s no t i c e of i t s i n t e n t i o n to withdraw from membership i n the Federa l Reserve System a t the e x p i r a t i o n of s i x months, then on the same theory i t would seem t h a t the p u b l i c i s e n t i t l e d to n o t i c e whenever the Federal Reserve Board n o t i f i e s a member bank to appear b e f o r e i t t o show cause why i t s membership should not be f o r f e i t e d f o r v i o l a t i o n of law. To p u b l i s h such in fo rma t ion i n the l a t t e r c l a s s of c a se s , however, would s e r i o u s l y i n j u r e the b u s i n e s s of the bank probably would cause a run r e s u l t i n g i n the c los ing of the bank. Sec t ion 9 of the Federa l Reserve Act r equ i r e s the Board to a f f o r d a bank a h e a r i n g be-fo re f o r f e i t i n g i t s membership i n the Federal Reserve System f o r v i o l a t i o n of law; and, i f n o t i c e of such hear ing were made p u b l i c , the bank p robab ly would be depr ived of the b e n e f i t of any hea r ing by being f o r c e d i n t o the hands of a r e c e i v e r b e f o r e the h e a r i n g could take p l a c e .

I f the p u b l i c i s e n t i t l e d to n o t i c e t h a t a member bank i s about to wi th -draw from the Federal Reserve System then i t would seem t h a t i t i s a l s o en-t i t l e d to n o t i c e when a member bank ' s c a p i t a l i s impaired, when i t i s con t in -u a l l y d e f i c i e n t i n r e s e r v e s , or when the re i s any o the r s i t u a t i o n a f f e c t i n g

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the i n t e r e s t s of i t s d e p o s i t o r s . Such n o t i c e has never "been p u b l i s h e d , how-ever , and i t i s obvious t h a t the p u b l i c a t i o n of such n o t i c e s would produce runs on banks , p r e c i p i t a t e t h e i r i n so lvency , and i n the long run do more harm than good. Other methods have been provided f o r meeting such s i t u a t i o n s . When a n a t i o n a l b a n k ' s c a p i t a l i s impaired the Comptroller of the Currency i s a u t h o r i z e d to l evy an assessment , and when i t i s i n s o l v e n t he i s a u t h -o r i zed t o appoint a r e c e i v e r . When a member bank f a i l s t o comply wi th the r e s e r v e requi rements the Federa l Reserve Board i s a u t h o r i z e d to a s s e s s p e n a l t i e s ; when a S t a t e member bank f a i l s to comply wi th the p r o v i s i o n s of the Federa l Reserve Act arid the Board ' s r e g u l a t i o n s the Board i s a u t h o r i z e d to f o r f e i t i t s membership i n the Federa l Reserve System; and when a n a t i o n a l bank f a i l s to comply wi th the p r o v i s i o n s of the Federal Reserve Act or the Nat ional Bank Act the Comptroller of the Currency i s a u t h o r i z e d to i n s t i t u t e s u i t f o r the f o r f e i t u r e of i t s c h a r t e r .

In dec id ing whether or no t to g ive p u b l i c i t y to the f i l i n g of n o t i c e by a S t a t e bank of i t s i n t e n t i o n to withdraw from membership, however, I do no t f e e l t h a t the Board needs to be s t r o n g l y i n f l u e n c e d by the p o s s i b i l i t y of f i n d i n g i t neces sa ry to apply t h a t p r i n c i p l e to o the r cases i n order to be c o n s i s t e n t . I n o the r words, I t h ink the Board could a f f o r d to be inconr s i s t e n t i f i t b e l i e v e s t h a t the p u b l i c a t i o n of n o t i c e of i n t e n t i o n t o w i th -draw v o l u n t a r i l y would be i n the p u b l i c i n t e r e s t bu t t h a t p r a c t i c a l con-s i d e r a t i o n s would p reven t the p u b l i c a t i o n of i n fo rma t ion p e r t a i n i n g to p r o -ceedings to f o r f e i t the membership of a S t a t e member bank or to the o t h e r f a c t s and c i rcumstances to which I have a l l u d e d above.

OTHER PRACTICAL CONSIDERATIONS.

The requirement t h a t S t a t e member banks f i l e w r i t t e n n o t i c e of t h e i r i n t e n t i o n s i x months b e f o r e withdrawing from the Federa l Reserve System has the e f f e c t of a f f o r d i n g them a "cool ing o f f pe r iod" dur ing which they have an o p p o r t u n i t y to t h ink the mat ter over and p o s s i b l y decide not to withdraw from the Federa l Reserve System. There have been a number of cases where member banks , because of some f r i c t i o n wi th the Federal r e se rve banks or f o r o the r temporary cause , have f i l e d n o t i c e of i n t e n t i o n to withdraw and have changed t h e i r minds b e f o r e the e x p i r a t i o n of the s i x months' p e r i o d .

To p u b l i s h the f a c t t h a t a S t a t e bank has f i l e d n o t i c e of i t s i n t e n t i o n to withdraw might have the e f f e c t of p reven t ing i t from l a t e r changing i t s mind; b u t , on the o ther hand, i t might a l so have the e f f e c t of causing i t s d e p o s i t o r s to b r i n g p r e s s u r e on the bank to remain i n the System. I t i s impossible to prophesy what the e f f e c t might be , and might not opera te un i fo rmly i n a l l c a s e s . I p e r s o n a l l y b e l i e v e t h a t the e f f e c t of p u b l i s h i n g such n o t i c e w i l l depend upon the amount of p u b l i c i t y given/ ' the newspapers of t h e p l a c e i n which the bank i s l o c a t e d , upon the a t t i t u d e of the p u b l i c a t the time toward the bank and toward the Federal Reserve System, and upon numerous o the r f a c t o r s which w i l l va ry i n each i n d i v i d u a l case . I f the re have been rumors r e s p e c t i n g the bank ' s solvency, the p u b l i c a t i o n of such a no t i c e might conceivably cause a run on the bank. I f the people i n the l o c a l i t y should have a h igh regard f o r the Federal Reserve System and p l a c e g r e a t importance on membership i n the System, the p u b l i c a t i o n of such a n o t i c e

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might r e a a l t i n the t r a n s f e r of t h e i r accounts to o the r banks i n an o rde r ly manner, and. t h i s might cause the member bank to dec ide no t to withdraw from the System. I f the member bank were h i g h l y regarded by the p u b l i c and i f the p u b l i c were h o s t i l e or i n d i f f e r e n t to the Federa l Reserve System, the p u b l i c a t i o n of such n o t i c e probably would have no e f f e c t whatever , except p o s s i b l y to reduce the chances of the bank ' s o f f i c e r s and d i r e c t o r s changing t h e i r minds about withdrawing from the. System.

CONCLUSION.

In the l a s t a n a l y s i s , the ques t ion whether the Board should adopt the p r a c t i c e of g iv ing p u b l i c i t y to the f i l i n g of n o t i c e by a member bank of i t s i n t e n t i o n to withdraw from the Federal Reserve System i s a ques t ion of p o l i c y f o r the Board to decide i n accordance with the d i c t a t e s of i t s own judgment. The above memorandum i s no t i n t ended as an argument i n f avo r of or a g a i n s t the adopt ion of such p o l i c y , but i s in tended to c a l l to the Board ' s a t t e n t i o n the v a r i o u s d i f f e r e n t f a c t o r s which the Board may d e s i r e to cons ide r be fo r e reaching a d e c i s i o n on t h i s ques t i on .

R e s p e c t f u l l y ,

Walter Wyatt, General Counsel*

WW -omc~sad

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