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F EDERAL

E ~ ~ ' . i i j i V ~

B O , A R D

STATEMENT

FOR

THE

PRESS

X-1478

For

i n r u ~ d i a t e

release

Wednesday,

April

16,1919.

The F e d e r ~ l Reserve Bod.rd ~ k e s public

the following

instructions to

F e d e r ~ l

Reserve Eunks, b e ~ r i n g on the rediscount of ~ p e r secured

by

Government obligations.

: ',•.

· Section 3 of

the

Act dpproved NJa.rch 3,1919, a.mends Section 11

of the Federal

Reserve

Act by the substi tution of a new s u ~ s e c t i o n (m)

which

r ~ d s d.S follows:

"(m) Upon the affirmative vote of not

less

than five of

i t s ruembers the Federal Reserve Boa.rd s ~ l l hd.ve

·power

to

pennit Federa-l Reserve

banks to discount

for any

member

bank notes, draf t s or bi l l s

of

exchange bea.ring the s i g ~ t u r e

or indorsement of <J.ny one borrower

n excess

of the .:mount

perndtted by

section

nine

and

sect ion

th ir teen of th is Act,

but

in no

ca.se to

exceed twenty

per centum

of

the member

bank

ls ca.pitd.l dll

d

surplus:

Provided, however, Thd.t a l l

such

notes,

dra.fts,

or

b i l l s

of

e c ~ g e discounted for ~ member

bank in excess of

the d.IDO\.:.-nt

permitt•ed under such sections

shal l

be secured y not less tl:lan

a.

l ike face dmount of bonds

or

notes

of

the

United

States

issued since

Ap:..•il

twer.tyfourth,

nineteen

hundred

ani

seventeen,

or

certifica.tes

of

indebtedness

of

the United

Stc:4.tes: Provided

further,

Tha.t the provisions of

th i s subsection (m) s ~ l l not be operative

af ter

December thi r ty

f i r s t nineteen hundred ~ d twenty.w

Under

the

provisions of this Section,

F e d e r ~ l Reserve

~ n k s

are

permitted

upon

the affirmative vote of not

less tb.Jn

five members of the

: F e d e r c : ~ l

Reserve

B o ~ r d

to rediscount

far

any

one member bank,

notes, d r4 t s

or bi l l s of exchange of any one borrower in

excess

of those

l imits

now i ~

posed by Sections 9 <J.nd 13

of

the

Federal

Reserve

Act,

provided

that

the

aggregate

in

no

ca.se

shal l

exceed twenty per cent and provided t ut a.rq

rediscounts

over

a.nd

above ten per cent

sha.llbe

secured

by

Government

obligat ions

of

the

kinds

specified.

The interpretd.tion of this clmendment is very clea.r .as

to re

discounts

for

na.tiond.l member bQI.nks

ani

the

only

question which might a-rise

is as

to

whether

or

not the power to rediscount a.n addit ional ten per cent

of pil.:per

secured by the

p ~ r o p e r Government

obligat ions

ap,Plies

to the

ca.se

of a. State membel bank which under the Stc;at e

l.:t.w

ha.s alre..3.dy loaned. under

the regular l ine of

credit

n

excess of

ten per

cent to one borrower.

Section

9, independent

of the amendment • provides in substance

tha.t

i a.

State bank

ha.s loaned in

excess

of ten per cent to d n::f one borrower,

the

F e d e r c : ~ l

Reserve

b a ~

ca.nnot

rediscount

for that

bank

any

of

the paper of

that

borrower, but

i

on

the

other ha.nd i t

has

not loa.ned in excess Oil

ten

percent

then

the State meniber b.,j.nk

sh.l.ll

be a.fforded

the

reguld.r rediscount

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-2-

 

.

privileges conferrad by Section

13

EQ

12

the

l imits

set forth in Section

lJ.

The amendlr,ent

of

March 3,1919, confers powers in excess of the z:mount

set forth in Sections 13 so that in

order.

to

give

ful l

force to th?.t

part

of the

language which refers to

Section 9 i t

must

be

interPreted to r n a ~

that even though the State member

bank

has loaned in excess of ten

per

cent to

one

borrower under

his

regular

l ine

of

credit ,

nevertheless

the

Federal

Deserve bank rra y rediscount paper

of

that borrower which

is

secured by the

Government

obligat ions

of the kind

specified,

provided that

the age:regate

of

al l

rediscounts does

not exceed

twenty

per

cant

of

the

meu;ber

bank's

ce:.pital

and surplus.

f

t

were intended to

authorize Stc:.te member bc.nks

to

rediscount

with

their Federal

Reserve banks,

paper secured by Government

o',:,ligations

onll n

the

case where the Stc:te

bank h.:.s

loaned

less

than

ten ·oer cent under

i t s

regular

l ine

of

credit , there

could h v e ~ no p u r ~ o s in referring to

Section 9 in

the

amendrrent.

The Board therefore rules under authority ~ n t e d in

this

amendment that

the Federal

~ e s e r v e

banks may

rediscount unt i l

Decenber 31,1920 for w t ional

and

state

member banks. paper secured by not less

t h ~

a l ike

f ~ c e

amount

of

bonds

or notes

of

the

United

States

issued since

April

24,1917,

or

cer t i f ica tes

of indebtedness

of

the United States, without regc..rd to the an;ount the

borrowing

bank rray have

already

loaned to i t s borrower under

his

regular l ine

of credit; provided, however, that the ag?regate of ~

rediscounts

must in

no case

exceed

twenty per

centum of the

capital and surplus

of the

n;err,ber bank,

I l l ~ s t r a t i o n : The resul t in a specific

case would

be as follows:

Stc:.te member bank A

has loaned

f i f teen

per cent

to X on

his

regular

l ine

of

credit

and

f i f teen

per

cent

to

X

on

the

securi ty

of

Government

obligat ions

of

the kindsspecified. What

and

how much m i ~ h t

the

reserve

bank rediscount of these

items? The regular l ine being in excess of ten per cent. ,

Section

9 applies

n d ~ of that paper

may

be rediscounted but the amendrr:ent of March

3,1919,

authorizes the rediscount

of

paper in 'excess" of what co..Ud

have

been

re

discounted

heretofore under Section

9

provided f i r s t t h ~ t the excess be

secur-nd y Government obligat ions of the kinds specified and -provided second,

that the

ag.p;-egate

in

no event

~ l l

exceed twenty ~ . ~ e n \ < ~ : ; . l

tne c :: se

su.pposed

therefore, the reserve bank

could take

al l f i f teen per cent of

the

paper seeured

hy the Gov3rnn:ent

obligat ions

but none

of the

paper tDken

in

X' s regular

l ine

of

credit .

f the

commercial l ine had been nine per cent . , for instance,

the

reserve

b ~

could

rediscount

al l

of the nine

per cent

and

in

addit ion

eleven per

cent

of the paper secured by Government oblig&tions, rraking a total

of

twenty

per

cent

of

the capital and s ~ l u s of the member bank. n