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Federa l Reserve Board

ROM Governor Young

X-6173

FEDERAL RESERVE

BOARD

DATE October 12, 1928

SUBJEGT: Examination of State Member

Banks

I believe the resolution adopted by th e Board last Wednesday morning i s

n excellent statement of the r e spons ib i l i t i e s of the Federal Reserve Board with

to State member bank examinations, and i t seems to me that i t i s now the

of the Board to consider th e mechanics by which i t will discharge i t s responsi-

i t was not th e intent ion of Congress that th e detailed work was

actually done by members of the Federal Reserve Board, b u t that they could

o r delegate appointees to see that th e r e spons ib i l i t i e s a re ad -

prop erly. Therefore, th e problem from now on is one of mechanical ad -

and in an e f f o r t to avoid duplications, tr iplications and unnecessary

of operation which now exis t , I make th e following proposals:

1 . That the present set-up of the Federal Reserve Board, known as the

Department of State Bank Examination, be abolished.

2 . That the Federal reserve agents be acquainted by le t ter with the

r e spons ib i l i t i e s of the Federal Reserve Board as the Board sees them,

an d that th e agents be charged with th e duty of seeing t o i t that the

Board's views a r e carr ied o u t .

3. As protect ion to the Board that th e agents function properly, I p ro -

pose that this responsibili ty be placed under th e Chief Examiner, who

now does a good deal of this work, and that a qu al if ie d tiaan tr av el with

th e examining force and spend sufficient time in t he agents« departments

of the reserve banks visited to investigate th e agents' bank examina-

tion departments to see that the instruct ions of the Board a r e being

carr ied o u t .

4 . That th e Federal reserve agents be instructed to discontinue their

present practice of furnishing th e Board with reports of examination

of State member banks, except i n extreme cases where the agents may

wish t o a s k fo r advice o r request th e Board to cancel membership. I n

l i e u of the complete report of examination, I suggest that th e agents

furn ish th e Board with a modified analysis of the bank's condition, a

written statement

a s t o i t s

general condition,

a

l i s t

of

vio la t ions

of

the law, and

other viola t ions affec t ing

th e

terms

of

membership

of the

bank. This re po rt should al so

be

accompanied,

i f

necessary,

by a l e t -

t e r

from

th e

agent stating

th e

corrective measures that have been taken

by

Sta te author i t ies

or by the

Federal reserve agent himself.

5 .

That

a

l e t t e r

of

ins t ruc t ion

be

given

to Mr.

Herson

as to

what

the

Board wants

him to

watch particularly,

and a t any

time

he has a

case

where

he

feels everything

i s n o t

being done that could

be

done

by the

agent,

or

where

h e

f e e l s

th e

State member bank

i s i n

such

a

condition

that i t s membership i s no t desirable, he should bring such situation to

th e

a t ten t ion

of

e i the r

th e

Governor

or the

Vice Governor

f o r

determina-

t ion

as to

whether

or not the

matter should

go

before

th e

Federal Reserve

Board.

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x - e ^ %

HUERAL HESERVB

BOARD

I n order t o carry this program ou t , I propose that th e attached l e t -

ter be sent to the Federal reserve agents.

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X-6173-a'V *^^3

October 12, 1928

S i ? :

The Federal Reserve Act requires that t h e cost of examinations

f

member banks made

by the

Federal reserve banks

o r t he

Federal Reserve Board

th e Federal reserve agents, be assessed against th e member bank examined.

Board h a s already recommended to Congress that the law be amended i n such a

make th e charges f o r member bank examinations discretionary with the

I t will again present th e amendment a t the opening of Congress i n Decem-

r .

Upon several occasions

in the

past

th e

Board

h a s

attempted,

by c i r -

to define a credit invest igat ion, b u t after several years exper-

i t h a s

ar r ived

a t t h e

conclusion that

a fa r t oo

l ibera l in te rpre ta t ion

has

en placed upon cr edi t inv est iga tio ns by the agents; in fact, those we have i n

ur

possession bear such

a

close resemblance

to an

examination that

we are

unable

o dist inguish th e difference, except by the la be l. This procedure h a s developed

n

expense

of

approximately $630,000

a

year with reimbursement

f o r

assessments

of approximately $24,000.

The Board ha s had this matter under review f o r some time and on

10 passed th e following resolutions which deal with th e responsibi l i ty of

h e

Federal Reserve Board

i n

reference

to

member banks

a s i t

in terpre t s

the law:

33 IT

RESOLVED, That

th e

Federal Reserve Board recognizes

i t s duty under t h e Federal Reserve Act to keep itself informed as to

th e

condition

o f a l l

member banks;

BE IT

FURTHER RESOLVED, That

th e

Board

i s of the

opinion that

i t i s j u s t i f i e d i n relying upon t h e Comptroller of the Currency f o r

such information as t o National banks;

BE IT FURTHER RESOLVED, That whenever th e reports of examina-

t ion

of

State member banks furnished

by the

State authori t ies

a re no t

deemed satisfactory either to t he Federal reserve bank of the d i s t r i c t

concerned

or to the

Federal Reserve Board,

th e

Federal reserve bank

or the

Board shall cause to be made a t leas t on e examination o r invest igat ion

each year

of

such character

as to

furnish sat isfactory information,

the

cost of such examinations to be assessed against th e member banks examin-

e d .

I n order to avoid duplications, triplications, unnecessary expense

f operation, which now ex i s t , th e Board h as ins t ructed me to advise you that the

of State Bank Examination, now in operation in t he Board's quarters i n

be

abolished

and

that

you are

charged with

th e

duty

of

seeing

to

t that th e Board's views, a s covered i n t h e above resolutions, a r e carr ied out

n

your d i s t r i c t . This does

n o t

mean that

th e

Board

i s

attempting

to

rel ieve

i t -

o f a l l respons ib i l i ty , and you ar e advised that through i t s examining force

t

will check carefully your bank examination department.

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X-6173-a

—2—

Die following instructions will serve a s a guide to you in perform-

n g your duties:

1. The Comptroller of the Currency i s a member of the Federal

Reserve Board and under the law i s charged with th e respons ib i l i ty of

enforcing t h e terms of the National Bank Act and also of the Federal

Reserve A ct . The Board therefore relies upon the Comptroller of the

Currency

to

perform

h i s

duties

and i t

wil l

not he

necessary

fo r t he Fed -

eral reserve agents to duplicate th e work.

2 . In ou r opinion, State reports of examination can he rel ied

upon

in t he

great majority

of

cases

to

furnish

th e

necessary information

to the agents.

3. I f a State examination i s unsat is factory, a credit invest

t igat ion wi l l not he sufficient information fo r t h e agents t o a c t i n t e l -

ligently upon and a complete examination should he made f o r which the

member bank should be charged. This does n o t prohibit invest igat ions of

member banks

by

Federal reserve banks

o r

Federal reserve agents without

cost, because th e Board realizes that unusual situations require unusual

action. Therefore,

th e

Board will

a c t

promptly

by

approving

o r

disapprov-

ing the request of any Federal reserve bank or any Federal reserve agent

f o r

permission

to

make

an

investigation without cost.

The

Federal

r e -

serve banks, however, and the Federal reserve Agents, i n making such r e -

quest

f o r

investigation without cost must bear

i n

mind that

i f t he

inves-

tigation contemplates anything covered by th e following language, which

appears

i n

Section

21 of the

Federal Reserve

Act , the

Board cannot waive

th e cost : The expense of such examinations fhall be borne by the bank

examined. Such examination shal l be so conducted as to inform th e Feder-

a l

reserve bank

of the

condition

of i t s

member banks

and of the

l ines

of

credit which a r e being extended by them.

4 . I f Federal reserve agents have evidence i n t h e form of l e t -

t e r s

o r

otherwise, that officers

and

directors

of

State member banks

have h a d thei r a t tent ion cal led t o violat ions of the law and unsound

banking practices

by

State authori t ies ,

i t i s n o t

necessary

f o r

agents

to duplicate this work.

5 . I f this supervision i s no t conducted by f ta te au thor i t i es

Federal reserve agents a r e directed to take such action, as i n the i r op-

inion, will discharge

th e

respons ib i l i t i es

of the

Board.

6 .

When

a

State member bank fails

to

show

any

disposition what-

ever to correct these irregulari t ies within a reasonable time so as to

show improvement

i n i t s

condition,

th e

Federal reserve agent will

be ex-

pected to l ay the information before th e directors o f h i s bank and as}c

them

to

make

a

formal recommendation

to the

Federal Reserve Board, with

reasons, as to whether or not the State member bank should continue a s

a member.

7 . Federal reserv e agents a r e ins t ructed to discontinue their

present pract ice

of

furnishing

th e

Federal Reserve Board with reports

of

examination of State member banks, except i n extreme cases where they

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—3—

X-6173-a

may wish to a sk fo r adviee o r request the Board to cancel membership.

In l i e u of these repo rts , agonts wi ll fur nis h th e Board with an analy-

s i s o f each report received o r made by them (form of analysis enclosed).

The Federal reserve agents a r e advised that th e Board thoroughly

real izes tha t i t i s utterly impossible to l ay down uniform, de tai le d procedure i n

each

and

every d i s t r i c t because

of the

local conditions which exist

i n the 48

s t a t e s .

I t

does believe, however, th at ce r tai n fundamental po l i c i es

can be

laid

down

and

asks your cooperation toward that

end.

Yours very truly,

R, A.

Young,

Governor.

$0 ALL

EEEBRAL RESERVE AGENTS.