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PY
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.