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CONFIDENTIAL  -  Tentat ive Draft  of  March  2 5 ,  1933..

March  25 , 1933

Curt i ss  -  Young  -  Boston

Case

  -

  Harrison

  - New

  York

Austin  -  Morris  -  Phi ladelphia

Williams  -  Fancher  -  Cleveland

Hoxton  -  Seay  -  Richmond

Newton  -  Black  -  Atlanta

Stevens  -  McDougal  -  Chicago

Wood

  -

  Martin

  - S t .

  Louis

Bailey  -  Geery  -  Minneapolis

McClure  -  Hamilton  -  Kansas City

Walsh  -  McKinney  -  Dallas

Newton  -  Calkins  - San  Francisco

H. 3 .

  3757 pro vid ing

  f o r

  d i rect loans

  by

  Feder al r es er ve banks

  t o n o n -

member Sta te banks  and  trust companies, which  was  quoted  i n o u r  Trans.

1722 of  March  24 and was  signed  by p res iden t  on  same date,  h a s  been given

preliminary study here  and  fol lowing t en ta t ive in t e rp re t a t ions  and  procedure

a r e

  suggested;

  (1) A

  nonmember bank

  may

  apply

  f o r

  loans only

  t o

  Federal

reserve bank

  of

  d i s t r i c t

  i n

  which

  i t i s

  loca ted .

  ( 2 )

  Suggest t ha t your

Counsel prepare forms  of  app lic at i ons , promissory notes , reso lut ion s  of

d i r ec t o r s  and  other papers along lines  of  those used  i n  connection with

loans  t o  ind iv iduals , par tnersh ips  and  corporat ions;  b u t  applicat ion forms

should also include provision that  a n y  f a i l u r e  t o  comply with  an y  applicable

provis ion

  of law or

  regu la t ions

  of the

  Federal Reserve Board

  or of

  agreement

with Federal reserve bank shall constitute  a  default u£on  a l l  loans made

b y  Federal reserve bank  t o  appl ican t  and  ap pl i ca n t ' s en t i r e indebtedness

t o  Federal reserve bank shall thereupon become  due and  payable .  ( 3 )  Each

application must  b e  accompanied  b y  wri t ten approval  of  S ta t e au tho r i t i es

having supervision over applicant bank

  and

  statement from such authorities

that  i t i s i n  sound condition.  (4 )  Before making f i r s t advance  to any

nonmember bank , Fede ra l r es er ve bank should make thorough examinat ion  of

applying bank, after making necessary arrangement  t o  insure payment  of

expenses therefor .  ( 5 ) I f  examination di sc lo se s that app lic ant bank  i s

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so lvent , that

  i t h a s

  capi ta l requi red

  of

  member banks, that

  i t h a s

no  branches unlawful  f o r  member banks,  and  tha t  i t s  condi t ion  i s

otherwise satisfactory, Federal reserve bank should inspect

  c o l -

l a t e r a l  and  advise applicant bank whether  o r n o t  loan wil l  b e

granted.  ( 6 )  Before being permi tted  t o  withdraw proceeds  of

advance-, ap pl ic an t bank should  b e  required  t o  es t ab l i sh ac tua l

realized balance with Federal reserve bank

  i n

  amount equal

  t o

reserve balance which would

  b e

  requi red

  o f i t

  under Section

19 and  Regulation  D i f i t  were  a  member bank.  ( 7 )  Advances

t o

  nonmember banks

  may be

  made

  on the

  same terms

  an d

  condit ions,

and on the

  same col lateral

  a s

  f i f t e e n

  d a y

  advances

  t o

  member banks

under eighth paragraph Section  13. (8)  Af t e r nonmember bank  h a s

exhausted  a l l  co l l a t e r a l e l i g i b l e  f o r  advances under Section  1 3 , i t

may

  obtain advances

  on

  ine l ig ib le asse t s

  on

  same terms

  a n d

  condit ions

  a s

member banks ob ta in advances under pr ov is io ns s ec ti on 10( b) , Fed era l

  R e-

serve  A c t , a s  amended March  9 , 193 3. (9)  Bates  on a l l  advances  of

ei ther class should  b e  same  a s  r a t e s  on  similar advances  t o  member

banks.

  ( 10)

  Notes re pr es en ti ng advances

  t o

  nonmember banks (whether

on  e l i g i b l e  o r  i n e l i g i b l e co l l a t e r a l )  may be  used  a s  s ecu r i t y  f o r

issuance  of  Fed era l res er ve bank not es under Section  401 Ac t  March

9, 1933, to  same extent  a s  paper acquired under Federal Reserve

A c t , b u t may no t be

  used

  a s

  s ecu r i t y

  f o r

  Federal reserve notes.

( 1 1 )  Making  of  advances  to  nonmember banks  i s  d iscret ionary wi th

Federal reserve bank  and in  exerc i s ing  i t s  d iscret ion Federal

reserve bank should consider whether proceeds

  of

  advance will

  b e

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used  f o r  purpose  of  paying  o f f  exist ing indebtedness  t o  other tanking

i n s t i t u t i o n s  and  should also have  due  regard  to  claims  a n d  demands  of

member banks,  a s  requi red  by  Section  4  Federal Reserve  A c t . (12 ) In

making advances, Federal reserve banks should  n o t  make  a n y  commitment

t o

  renew

  o r

  extend,

  or to

  grant fur ther

  o r

  addi t ional advances.

  (13)

Federal reserve bank should advise each nonmember bank applying

  f o r

advances that, while

  i t i s

  indebted

  in any way to

  Federal reserve bank,

i t

  mast comply wi th re qui rement s

  of

  Federal Reserve

  Act and

  Board's

regulat ions appl icable  t o  member State banks, including  t h e  following:

( a ) I t  nrast maintain reserve balance required  by  sect ion  19  Federal

Reserve  Act and  Board's Regulation  D and  w i l l  be  subject  to  pena l t i es

f o r  d e f i c i en c i e s  i n  reserves;  ( b ) i t  mast remit  a t p a r f o r  checks drawn

on i t and  presented  f o r  payment  by  Federal reserve bank  a s  requi red  of

member banks  b y  Federal Reserve  Act and  Board 's regalat ions;  ( c ) i t

w i l l  be  subject  t o  examination  a t any  time  by  Federal reserve bank  o r

Federal Reserve Board

  and

  w i l l

  be

  subject

  t o

  assessments

  f o r

  expenses

of

  such examinations

  t o

  same extent

  a s

  member banks;

  ( d ) i t

  must make

same reports

  of

  condi t ion

  and of

  payment

  of

  dividends

  a s

  requi red

  of

member State banks  a n d  w i l l  be  subject  t o  same penalties  f o r  f a i l u r e

to do so ; (e)  before becoming indebted  t o  Federal reserve bank, such

bank must relinquish  any  branch  o r  branches established after February

25, 1927,  beyond limits city, town  o r  v i l l ag e  i n  which parent bank  i s

s i tua t ed  a n d  mast  n o t  es t ab l i sh  any  such branches while indebted  t o

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such Federal reserve bank;  ( f )  such bank must comply wi th ca p i t a l

requirements regarding e l ig ibi l i ty  of  State banks  f o r  membership

and

  must conform

  t o

  provis ions

  of law

  which prohibit national

banks from lending

  on or

  purchasing their

  own

  stock, which relate

to  withdrawal  o r  impairment  of  capi ta l s tock  and  which relate  t o

payment  of  unearned dividends.  (14 )  Suggest t h at your coun sel  and

o f f i c e r s  who a r e to  handle applications  of  nonmember banks rea d

careful ly debates  i n  Congressional Record  on  t h i s  Act and  espec ia l ly

Senate debates  of  March  22 and 23,  which indicate clearly that  F e d -

eral reserve banks  a r e n o t  expected  t o  make loans  t o  insolvent banks

nor to  give nonmember banks more faverable treatment than member

banks.

Morr i l l .

(Governors

  and

  Agents)