Insurance Corporation to define the term "interest" for both classes of banks. Reasons In its administration of the provisions of law regarding payment of interest on deposits by member banks, the Board of Governors has found that the difficulty of determining whether various practices of member banks involve an "indirect" payment of interest has made the law extremely difficult to apply as a practical matter. The problem arises chiefly in determining whether the giving of free services to customers (such as the use of armored trucks, free parking space, specially printed checks, etc.) constitutes an indirect payment of interest on demand deposits; but the problem also arises in determining whether "giveaways" designed to attract savings deposits should be considered payments of interest in determining whether the maximum permissible rate on savings deposits is being exceeded. This problem would be avoided if the law were changed to eliminate reference to indirect payments of interest and to include only cash. payments or credits for the benefit of depositors. Such a change would not, in the Board's opinion, serve to defeat the basic purpose of these provisions of the law. A special and particularly troublesome problem in this connection has arisen from the fact that the Board of Governors has taken the position that absorption of exchange charges by member banks involves a payment of interest, whereas the Federal Deposit Lnsurance Corporation has taken the position that the absorption of such charges by insured nonmember banks does not constitute a payment of interest. As a result, member banks have been placed at a serious competitive disadvantage in some sections of the country. Yet it seems obvious that the intent of Congress was to put member and nonmember insured banks on the same basis insofar as payment of interest on deposits is concerned. It is believed that this special problem should be squarely met and solved by an amendment to the law which would explicitly state whether or not absorption of exchange charges shall be deemed to be a payment of interest and which would make it clear that the same principle should apply to both member and nonmember banks. Since the absorption of exchange on a check deposited by a customer with his bank results in the giving of credit to the depositor in an amount greater than the amount collected by his bank, the Board believes that such absorption constitutes a direct crediting of interest. In any event, the matter should be clarified so that competing member and insured nonmember banks may operate on an equal basis. This might be done either by an explicit identical statement on the point in both the Federal Reserve Act and the Deposit Insurance Act or by authorizing 1 of the 2 agencies to define "interest" for both classes of banks. 78. INTEREST ON DEMAND DEPOSITS OF SAVINGS BANKS AND OF PUBLIC FUNDS Existing law The 12th paragraph of section 19 of the Federal Reserve Act (12 U. S. C. 371a), which relates to the payment of interest on demand deposits by member banks, provides as follows: “*** That until the expiration of two years after the date of enactment of the Banking Act of 1935 this paragraph shall not apply (1) to any deposit made by a savings bank as defined in section 12B of this Act, as amended, or by a mutual savings bank, or (2) to any deposit of public funds made by or on behalf of any State, county, school district, or other subdivision or municipality, or to any deposit of trust funds if the payment of interest with respect to such deposit of public funds or of trust funds is required by State law.**** Recommendation An amendment to eliminate this provision of law. Reasons This part of the statute is obsolete as it is provided in the statute that this exception which permits the payment of interest on demand deposits of savings banks and of public funds shall be effective until 2 years after the date of enactment of the Banking Act of 1935. The Banking Act of 1935 was enacted August 23, 1935, and the exception expired by limitation August 23, 1937. Therefore, the provision is of no current or future effect. 79. RESERVES AGAINST DEPOSITS OF PUBLIC MONEYS Existing law The 14th paragraph of section 19 of the Federal Reserve Act (12 U. S. C. 462a-1) provides "Notwithstanding the provisions of the First Liberty Bond Act, as amended, the Second Liberty Bond Act, as amended, and the Third Liberty Bond Act, as amended, member banks shall be required to maintain the same reserves against deposits of public moneys by the United States as they are required by this section to maintain against other deposits: Provided, That until six months after the cessation of hostilities in the present war as determined by proclamation of the President or concurrent resolution of the Congress no deposit payable to the United States by any member bank arising solely as the result of subscriptions made by or through such member bank for United States Government securities issued under authority of the Second Liberty Bond Act, as amended, shall be subject to the reserve requirements of this section." Section 7 of the First Liberty Bond Act of April 24, 1917 (31 U. S. C. 755a), and section 8 of the Second Liberty Bond Act of September 24, 1917 (31 U. S. C. 771), contain identical provisions stating that the provisions of section 5191 of the Revised Statutes, as amended by the Federal Reserve Act, with reference to the reserves required to be kept by national banks and other member banks of the Federal Reserve System "shall not apply to deposits of public moneys by the United States in designated depositaries." Recommendation An amendment repealing the provisions of the First and Second Liberty Bond Acts referred to above which state that reserves need not be maintained against deposits of public moneys, and also revising the 14th paragraph of section 9 of the Federal Reserve Act to state simply that member banks shall be required to maintain the same reserves against deposits of public moneys by the United States as they are required to maintain against other deposits. Reasons Prior to 1935, the provisions of the Liberty Bond Acts relieving member banks from reserve requirements with respect to deposits of public moneys were fully effective. However, the Banking Act of 1935 added a provision to section 19 of the Federal Reserve Act expressly requiring reserves to be maintained against deposits of public moneys notwithstanding the Liberty Bond Acts. That requirement was suspended during World War II by the addition of the proviso relieving member banks from reserve requirements as to public moneys until 6 months after cessation of hostilities; but that provision terminated on December 31, 1946, when cessation of hostilities was proclaimed by the President. Consequently it would be desirable to eliminate the inconsistency between the various provisions mentioned above, to eliminate also the obsolete proviso relieving member banks from reserve requirements as to public deposits during the war, and to provide simply that re- . serves shall be maintained against such deposits as against all other deposits. 80. OBSOLETE PROVISION AS TO LOANS TO EXECUTIVE OFFICERS OF Existing law Under section 22 (g) of the Federal Reserve Act (12 U. S. C. 375a), it is provided: “*** That loans made to any such officer prior to June 16, 1933, may be renewed or extended for periods expiring not more than five years from June 16, 1939, where the board of directors of the member bank shall have satisfied themselves that such extension or renewal is in the best interest of the bank, and that the officer indebted has made reasonable effort to reduce his obligation, these findings to be evidenced by resolution of the board of directors spread upon the minute book of the bank: * * *" Recommendation An amendment eliminating this provision of law. Reasons As the time within which a member bank may renew or extend loans made to its executive officers prior to June 16, 1933, was limited to June 16, 1944 (5 years from June 16, 1939), this provision of law is obsolete and should be eliminated. 81. LOANS TO EXECUTIVE OFFICERS DOLLAR EXEMPTION Existing law Section 22 (g) of the Federal Reserve Act (12 U. S. C. 375a) pro vides: "(g) No executive officer of any member bank shall borrow from or otherwise become indebted to any member bank of which he is an executive officer, and no member bank shall make any loan or extend credit in any other manner to any of its own executive officers: Provided, That loans made to any such officer prior to June 16, 1933, may be renewed or extended for periods expiring not more than five years from June 16, 1939, where the board of directors of the member bank shall have satisfied themselves that such extension or renewal is in the best interest of the bank, and that the officer indebted has made reasonable effort to reduce his obligation, these findings to be evidenced by resolution of the board of directors spread upon the minute book of the bank: Provided further, That with the prior approval of a majority of the entire board of directors, any member bank may extend credit to any executive officer thereof, and such officer may become indebted thereto, in an amount not exceeding $2,500. If any executive officer of any member bank borrow from or if he be or become indebted to any bank other than a member bank of which he is an executive officer, he shall make a written report to the board of directors of the member bank of which he is an executive officer, stating the date and amount of such loan or indebtedness, the security therefor, and the purpose for which the proceeds have been or are to be used. Borrowing by, or loaning to, a partnership in which one or more executive officers of a member bank are partners having either individually or together a majority interest in said partnership, shall be considered within the prohibition of this subsection. Nothing contained in this subsection shall prohibit any executive officer of a member bank from endorsing or guaranteeing for the protection of such bank any loan or other asset which shall have been previously acquired by such bank in good faith or from incurring any indebtedness to such bank for the purpose of protecting such bank against loss or giving financial assistance to it. The Board of Governors of the Federal Reserve System is authorized to define the term 'executive officer', to determine what shall be deemed to be a borrowing, indebtedness, loan, or extension of credit, for the purposes of this subsection, and to prescribe such rules and regulations as it may deem necessary to effectuate the provisions of this subsection in accordance with its purposes and to prevent evasions of such provisions. Any executive officer of a member bank accepting a loan or extension of credit which is in violation of the provisions of this subsection shall be subject to removal from office in the manner prescribed in section 30 of the Banking Act of 1933: Provided, That for each day that a loan or extension of credit made in violation of this subsection exists, it shall be deemed to be a continuation of such violation within the meaning of said section 30." Recommendation An amendment to section 22 (g) to increase the present $2,500 exemption from the prohibition on loans by member banks to executive officers to $5,000. Reasons When the prohibition against loans by member banks to their executive officers was incorporated in the law by the Banking Act of 1933, it was considered appropriate to exempt loans not exceeding $2,500. Since 1933, economic conditions have changed very considerably; and it would seem reasonable to increase the exemption to at least $5,000. It is believed that such an increase would not be inconsistent with the purposes of the basic prohibition. 82. INVESTMENT BY NATIONAL BANKS IN FOREIGN FINANCING CORPORATIONS Existing law The fourth paragraph of section 25 of the Federal Reserve Act (12 U.S. C. 601), provides: "Until January 1, 1921, any national banking association, without regard to the amount of its capital and surplus, may file application with the Board of Governors of the Federal Reserve System for permission, upon such conditions and under such regulations as may be prescribed by said board, to invest an amount not exceeding in the aggregate 5 per centum of its paid-in capital and surplus in the stock of one or more corporations chartered or incorporated under the laws of the United States or of any State thereof and, regardless of its location, principally engaged in such phases of international or foreign financial operations as may be necessary to facilitate the export of goods, wares, or merchandise from the United States or any of its dependencies or insular possessions to any foreign country: Provided, however, That in no event shall the total investments authorized by this section by any one national bank exceed 10 per centum of its capital and surplus." Recommendation An amendment to repeal the fourth paragraph of section 25 of the Federal Reserve Act. Reasons The authority conferred by this paragraph, which was added to the law in 1919, expired by its terms on January 1, 1921, and is therefore obsolete. 83. POWERS OF FOREIGN BRANCHES OF NATIONAL BANKS Recommendation An amendment adding a new provision to section 25 of the Federal Reserve Act (12 U. S. C. 601-604) which would authorize the Board, by regulation, to permit foreign branches of national banks to exercise such further powers as may be usual in connection with the business of banking in the place where the foreign branch is located, subject to suitable safeguards to assure that such foreign branches would not engage in such business as investment banking or manufacturing. Such new provision would be added to the last paragraph of section 25 (12 U. S. Č. 604). Reasons Foreign branches of national banks, which may be established for the furtherance of the foreign commerce of the United States with the approval of the Board, are subject abroad to most of the laws and regulations that apply to national banks in the United States. However, business methods and operating conditions in foreign countries often differ considerably from those in this country, and banks in foreign countries are often subject to few if any of the rules that apply to national banks in this country. Under the recommended addition to the law, foreign branches of national banks could operate more effectively in the foreign countries where they do business, as |