been especially prepared for the use of such banks; it being the same as Form 86 except for several appropriate changes in wording. It may be noted that a state member bank that increases its capital stock must apply for additional stock in the Federal reserve bank even though it has given notice of its intention to withdraw,31 for the notice of withdrawal is merely a prerequisite, not a part, of the actual withdrawal. Special Conditions of Membership

Prior to 1924 the Federal Reserve Board had made from time to time certain additional requirements of applicants, asking the bank to undertake certain changes in policy. In its revision of Regulation H in that year, however, it embodied the more important of these conditions, making conformity with them a universal requirement for admission to membership. While all banks alike must now meet these conditions, the change must be regarded on the whole as more apparent than real, with the exception of the requirement as to branch banking. The Board, it should be noted, also explicitly reserves the right to specify other conditions in individual cases.

These new requirements, nine in number, may best be stated in the Board's own words, as follows:

1. Except with the permission of the Federal Reserve Board, such bank or trust company shall not cause or permit any change to be made in the general character of its assets or in the scope of the functions exercised by it at the time of admission to membership, such as will tend to affect materially the standard maintained at the time of its admission to the Federal Reserve System and required as a condition of membership."

2. Such bank or trust company shall at all times conduct its business and exercise its powers with due regard to the safety of its customers.

3. Such bank or trust company shall not reduce its capital stock except with the permission of the Federal Reserve Board.

4. Such bank or trust company shall not, except after applying for and receiving the permission of the Federal Reserve Board, establish any branch, agency or additional office.

5. Such bank or trust company, except after applying for and receiving the permission of the Federal Reserve Board, shall not consolidate with or absorb or purchase the assets of any other bank or branch bank for the purpose of operating such bank or branch bank as a branch of the applying bank; nor directly or indirectly, through affiliated corporations or otherwise, acquire an interest in another bank in excess of 20 per cent of the capital stock of such other bank; nor directly or indirectly promote the establishment of any new bank for the purpose of acquiring such an interest in it; nor make any arrangement to acquire such an interest.

1924 Bulletin, p. 278.

"Every state bank admitted to membership subject to this general condition, or admitted after August 15, 1924, when Regulation H, Series of 1924, was put in effect, must obtain the Board's permission before it opens a trust department or engages de novo in trust business. 1924 Bulletin, p. 865.

6. Such bank or trust company shall reduce to, and maintain within, the limits prescribed by the laws of the state in which it is located, any loan which may be in excess of such limits.

7. Such bank or trust company shall reduce to an amount equal to 10 per cent of its capital and surplus all balances in excess thereof, if any, which are carried with banks or trust companies which are not members of the Federal Reserve System, and shall at all times maintain such balances within such limits.

8. Such bank or trust company may accept drafts and bills of exchange drawn upon it of any character permitted by the laws of the state of its incorporation; but the aggregate amount of all acceptances outstanding at any one time shall not exceed the limitations imposed by section 13 of the Federal Reserve Act, that is, the aggregate amount of acceptances outstanding at any one time which are drawn for the purpose of furnishing dollar exchange in countries specified by the Federal Reserve Board shall not exceed 50 per cent of its capital and surplus, and the aggregate amount of all other acceptances, whether domestic or foreign, outstanding at any one time shall not exceed 50 per cent of its capital and surplus, except that the Federal Reserve Board, upon the application of such bank or trust company, may increase this limit from 50 per cent to 100 per cent of its capital and surplus: Provided, however, that in no event shall the aggregate amount of domestic acceptances outstanding at any one time exceed 50 per cent of the capital and surplus of such bank or trust company.

9. The board of directors of said bank or trust company shall adopt a resolution authorizing the interchange of reports and information between the Federal Reserve Bank of the district in which such bank or trust company is located and the banking authorities of the state in which such bank is located.

Each institution hereafter admitted, and each heretofore admitted. subject to condition number 1 stated above or subject to any similar condition, must request permission of the Board through the Federal reserve agent prior to taking any action that may result in a change in the general character of its assets or in the scope of the functions exercised by it when admitted to membership such as will tend to affect materially the standard maintained at the time of its admission and required as a condition of membership. Among such actions are included the establishment of branches, agencies, or additional offices, and consolidations or mergers with or purchase of the assets of other banks or branch banks. The Board has laid down an elaborate set of principles governing the establishment of such branches in future, which are described fully in chapter XXV. This action was the outcome of the Board's experience with certain state bank members.

Among the other special conditions which at times were required were the following: 33

That prior to the payment of a dividend you shall carry to surplus account not less than one-tenth part of your net profits for the preceding dividend period until your surplus fund shall amount to 20 per cent of your capital stock.

33

Federal Reserve Bank of Richmond, Letter No. 14 to College Classes, p. 27.

That you shall agree to bond your active officers and employees handling cash or securities or having access to same.

Privileges and Restrictions of State Members

As has already been indicated, the limitations imposed upon state member banks have been somewhat changed with the passage of time. In 1917 especially it was necessary to make them both more liberal and more definite. The Federal Reserve Act and the Board's Regulation H provide that a state bank or trust company shall retain while a member its full charter and statutory rights as a state bank or trust company, subject to the provisions of the Act, the regulations of the Board, and the conditions prescribed by the Board and agreed to by the institution prior to its admission. Taking the specific restrictions of the Act, it must comply with the reserve and capital requirements and conform to the same provisions as national banks with respect to lending on or purchase of its own stock, to withdrawal or impairment of its capital stock, and to payment of unearned dividends. The bank officers and employees are subject to the national banking statutes dealing with penal offenses. The state banks are subject to examination and must file reports, as will be indicated later, while they must not discount at the Federal reserve bank paper of borrowers liable to them in a greater amount than a national bank could lawfully loan, and they must not overcertify checks.

In addition, the Board requires that each member state bank and trust company maintain such improvements and changes in its banking practice as may have been specifically required of it as a condition of admission and that it shall not lower the standard of banking then required of it. It enjoys all the privileges (such as power to create acceptances) and observes all the requirements of the Act, and of the Board's regulations made in conformity therewith, applicable to state-chartered member institutions. Finally, it must comply at all times with any and all conditions of membership prescribed by the Board at the time it was admitted.

Examinations and reports call for more extended discussion. State banks objected to the supervisory power of the Comptroller of the Currency provided in the original Act; hence the amendment of June 21, 1917, providing that they should be subject to examinations made by direction of the Board or of the Federal reserve bank by examiners selected or approved by the Board. In order to avoid duplication, examinations made by state authorities are accepted wherever they are satisfactory to the directors of the Federal reserve bank, and whenever desirable, examiners from the staff of the Board or of the Federal reserve banks will be designated to act with the state examining

force in order that uniformity in the standard of examination may be assured.

Not less than three reports of condition must be made each year to the district Federal reserve bank on the latter's call, the dates to be fixed by the Board. Member state banks make also semi-annual reports of earnings and dividends, and as dividends may be declared from time to time, they furnish the district Federal reserve bank with a special notification thereof.

Power to cancel membership after a hearing is granted the Federal Reserve Board in the event that it appears to the Board that the offending bank has failed to comply with the provisions of section 9 or the Board's regulations made pursuant thereto, as well as power to restore membership upon due compliance with the conditions imposed by section 9. Voluntary withdrawal, upon six months written notice to the Board, was permitted by the amendment of June 21, 1917, but no Federal reserve bank may, except under express authority of the Board, cancel within the same calendar year more than 25 per cent of its capital stock for the purpose of effecting voluntary withdrawals during that year. All applications for withdrawal are dealt with in the order in which they are filed with the Board.

Advertisement of Membership

There is nothing to prevent state member banks from advertising or making known the fact of membership; on the contrary it is desirable that they should do so. Announcement that an institution has become a member or holds a membership in the Reserve System and a statement of the advantages it actually enjoys as a result is properly regarded as a very desirable kind of advertising. The use of this fact as a basis for advertising, however, must be made under proper conditions. It is not held proper to advertise that a bank is under "Government protection" or "Federal control" or that "our membership in the Federal Reserve System means your guaranteed safety."

Another question concerns the character of supervision. Although the Board has always opposed the statement that a member is under national supervision, for several years it permitted a bank to state that it was under Government or Federal supervision.34 Since early in 1923, however, such statements have also been held improper because misleading to the layman.35 The Board had previously opposed the use of statements to the effect that membership in the System gives "double security" or "double protection." At present, therefore, the Board feels that the fact of membership, perhaps coupled with the statement 1920 Bulletin, p. 65; Digest, IX, 102, p. 7.

5 1923 Bulletin, p. 300; Digest, IX, 103, p. 7.

that the System's resources are available to the bank through the rediscount privilege, alone constitutes a satisfactory basis for advertising, the reader of the announcements or advertising being then left to draw his own conclusions as to the further significance of the facts.

A problem relating to the name given to a bank has also arisen from time to time, the question being asked whether a state bank may use the words "Federal" or "reserve" as part of its title. There is no legal prohibition of such use, but the Board has opposed it 36 and on one occasion recommended to Congress the introduction of a bill limiting the use of these words by state institutions.97

*1915 Bulletin, p. 361; 1917 Bulletin, p. 615; 1918 Bulletin, p. 521; Digest, IX, 100, p. 6.

*1916 Bulletin, p. 373; Digest, IX, 101, p. 6.