TRUST COMPANIES AND THE NEW BANKING LAW
WILL IT BE TO THEIR ADVANTAGE TO ENTER OR REMAIN
OUT OF THE FEDERAL RESERVE SYSTEM?

HON. CHARLES A. CONANT

American Technical Delegate to the International Conference on Bills of Exchange,
and Author of "The Principles of Money and Banking"

T

WO of the biggest tasks which will come before the Federal Reserve Board under the new banking law, after the machinery of the Federal reserve banks has once been set up, will concern the relations of trust companies to the new system and the trust functions which are granted in the law to National banks. While both of these subjects are referred to in the law, the completion of the details is left essentially to the judgment of the Federal Reserve Board. Until this judgment has been expressed in the form of regulations or otherwise, it may be difficult for a trust company to determine whether advantage lies in entering the new Federal reserve system or staying out of it.

The provision for the admission of trust companies is the same as for the admission of other State banking institutions. Apart from certain limitations laid down in the law in respect to reserve and capital requirements, which exclude State institutions of less than $25,000 capital, trust companies fall under two general provisions. One is that they must "submit to the examination and regulations prescribed by the Organization Committee or by the Federal Reserve Board." The other provision (in Sec. 9) is as follows:

"Any bank becoming a member of a Federal reserve bank under the provisions of this section shall, in addition to the regulations and restrictions hereinbefore provided, be required to conform to the provisions of law imposed on the National banks respecting the limitation of liability which may be incurred by any person, firm, or corporation to such banks, the prohibition against making purchase of or loans on stock of such banks, and the withdrawal or impairment of capital, or the payment of unearned dividends, and to such rules and regulations as the Federal Reserve Board may, in pursuance thereof, prescribe."

If trust companies as a body are inclined to hold aloof from membership in the new system, upon the ground that they would be better off under the laws of their respective States, they will find occasion to consider seriously another provision of the new law which has the tendency to increase the competing power of the National banks in the trust company field. This provision is among the powers which are granted to the Federal Reserve Board (Sec. 10) and is as follows:

"To grant by special permit to National banks applying therefor, when not in contravention of State or local law, the right to act as trustee,

executor, administrator, or registrar of stocks and bonds under such rules and regulations as the said board may prescribe."

This provision by its terms takes effect only with the consent of the Federal Reserve Board and will probably be considered by them in connection with the earlier provision, giving them authority to prescribe rules and regulations for State banks and trust companies which become members of the system.

There is an obvious implication in the section just quoted, proposing to gives trust company powers to the National banks, that such powers are not granted by existing law. This is, in effect, the attitude which the courts took in an early stage in the interpretation of the National banking law. It was declared in several decisions that the National banks were limited to the powers specifically granted by Congress in the National banking act and such additional powers as naturally flowed from those granted. Yet as long ago as 1908, in the discriminating article of Mr. Breckenridge Jones, President of the Mississippi Valley Trust Company, it was pointed out that about that time National banks were given in a standard manual as transfer agents of 21 companies having an aggregate capital stock of nearly $500,000,000, and that Poor's Manual showed that National banks were registrars of stock for over 75 corporations, among which were some of the largest in the United States.

It is notorious also that National banks have acted as agents and depositaries for the safekeeping and exchange of securities in consolidations and reorganizations, and have become subscribers to syndicate purchases and underwritings of stocks and bonds. The question might be raised whether the provisions of the new law, which tacitly assumes that trust company powers are not vested in the National banks by existing law, did not preclude the exercise of such powers until the "rules and regulations" are promulgated on the subject which the Federal Reserve Board is authorized to prescribe. The function of putting an end to the exercise of such powers would be rather that of the Comptroller of the Currency, however, in the exercise of his direct authority over the National banks, than the function of the Federal Reserve Board.

In deciding whether it is desirable to enter the Federal reserve system, a trust company will be compelled to compare the relative freedom of its operations and its opportunities for doing business under existing laws with those afforded by the new system. In spite of the mild pressure put upon the trust companies by the grant of trust functions to National banks under rules to be prescribed by the Federal Reserve Board, they are not subjected to any such serious pressure in this respect as are the National banks. The trust companies are not holders to any considerable extent of United States two per cent. bonds, which are liable to depreciate in the open market; they hold no government funds except those of the Philippine Islands or other dependencies, which they will lose if they continue their independent life; and they will not be under the necessity of seeking rediscounts to any such extent as the National banks, especially if their business is limited to the exercise of the distinctive functions of a trust company.

There is one important provision of the law which might be invoked against the extension of aid by a member of the Federal reserve system to a trust company in time of monetary pressure. This provision is as follows:

"No member bank shall act as the medium or agent of a non-member bank in applying for or receiving discounts from a Federal reserve bank under the provisions of this act except by permission of the Federal Reserve Board."

This provision is likely to receive severe scrutiny by the legal advisers of the trust companies and may be the subject of an opinion by the law officers of the Government. Interpreted strictly, however, as such statutes should be, it does not seem upon its face to preclude the doing of business between a non-member trust company and a National bank which is a member of the Federal reserve system, provided that the latter does not take paper received from the non-member institution to a Federal reserve bank to be rediscounted. In effect, the restriction would not be serious, if thus interpreted, because the rediscounting powers of the member bank would be broad enough to obtain such additional funds as it was likely to need from the Federal reserve bank, without employing paper derived from its correspondent trust company.

If the new Federal reserve system works as is expected, such situations as arose in 1907, when there was a special demand for currency for fear that it would cease to be obtainable, will not arise. A run upon a trust company because of distrust of its assets or management, might take place, but this would be a run based upon the conditions of the particular company and not primarily upon general monetary conditions. If distrust was widespread, however, and the Federal Reserve Board felt justified in taking strong measures to check runs upon member and non-member banks, they could find the power for direct rediscounts of trust company assets in the last clause of the paragraph above quoted; which authorizes such rediscounting, "by permission of the Federal Reserve Board."

Thus upon the side of compulsion, or on the side of exposure to grave risk, there is not much in the new law to induce trust companies to enter the Federal reserve system. On the side of relative business advantage, however, several additional factors would have to be considered. If it develops that membership in the Federal reserve system is influential in inspiring public confidence in the member banks, and the bar sinister falls upon institutions which are not members, this would undoubtedly prove a potent factor in bringing into the new system all but the very strongest trust companies. In several respects the new law makes it easier for a trust company to become a member of the system than did the earlier drafts of the law. In respect to legal reserves, the old requirements imposed upon National banks have been so far reduced as to impose little additional burden upon trust companies over those imposed in the States where they are most numerous and efficient. In a few cases, it might be necessary for them to withdraw deposits from National banks, in order to strengthen their cash or to transfer them to Federal reserve banks in order to make them available as legal

reserves.

A wide open door is afforded, moreover, for keeping reserves at a minimum by the provisions that time deposits shall be protected by a reserve of only five per cent., which may be split up into small fractions, partly kept in cash and partly in other institutions. There would be little difficulty with trust companies having large individual deposits, in securing an agreement on the part of depositors to treat at least a part of their account as payable

only on time, leaving another part payable on demand. Time deposits, according to the new law, are those payable after thirty days, so that no hardship would be imposed upon large depositors in converting a part of a comparatively inactive account into a time deposit. The new law, moreover, contains none of the restrictions of the New York law upon the payment of time deposits in anticipation of maturity, in case such payment is found convenient by the trust company.

The entry of State banks and trust companies into the new system, without disturbance to their existing reserve liabilities, is specially provided for by one of the clauses of Section 19 of the new law, relating to reserves. It is there provided as follows:

"If a State bank or trust company is required by the law of its State to keep its reserves either in its own vaults or with another State bank or trust company, such reserve deposits so kept in such State bank or trust company shall be construed, within the meaning of this section, as if they were reserve deposits in a National bank in a reserve or central reserve city for a period of three years after the Secretary of the Treasury shall have officially announced the establishment of a Federal reserve bank in the district in which such State bank or trust company is situate."

Another feature of the new law, the grant to any member bank of the power to make acceptances, and to the Federal reserve banks of the power to rediscount such acceptances, may afford inducements to certain trust companies to enter the new system, or at least remove an obstacle which would exist if these new powers were not granted. In this matter of acceptances as in many others, deliberation and the exercise of great conservatism at the beginning are likely to mark the course of the Federal Reserve Board. The power to accept bills of exchange is given broadly to banks which are members of the new system, except that "no bank shall accept such bills to an amount equal at any time in the aggregate to more than one-half its paid-up capital stock and surplus." Here again, power is given to the Federal Reserve Board to exercise control over the rediscounting of acceptances by the Federal reserve banks, by the provision that such acts "shall be subject to such restrictions, limitations and regulations as may be imposed by the Federal Reserve Board."

Obviously, in spite of the broad provisions of the new law in regard to State banking institutions which may enter the Federal reserve system, and the new powers conferred upon National banks in respect to trust functions, the trust companies will remain very much in the dark as to their exact status until the terms of the new law have been interpreted and defined by the Federal Reserve Board. Where they are not under some special compulsion to seek the shelter of the new system, they will apparently be justified in proceeding with more deliberation in determining upon their policy than will the national banks, whose life is largely wrapped up in the working of the new system. If certain trust companies enter the new system at once, the policy pursued toward them by the Federal reserve banks and by the Federal Reserve Board, and the regulations prescribed for their guidance, will do much to enlighten the companies which do not at first enter the system as to their rights, functions and liabilities under it.

The brief limitation in the clause conferring trust company functions on. National banks, that permission to exercise them can be granted only

"when not in contravention of State or local law," in itself will involve research and serious consideration by the legal advisers of the trust companies in the various States. It would be rash to express an opinion upon the effect of this limitation, and upon the reaction of local laws regarding inheritance, devise and trusteeships upon institutions sheltered under Federal law. The principle is well established that State law governs many of the acts of National banks in dealing with property rights, including the entire law of bills, which has only in recent years been brought into comparative harmony in the various States. The subject opens a wide vista of possible future action by the States, either to create obstacles to the competition of National banks with their local trust companies or to tear down such obstacles under the impulse to increase the solidarity of the banking system.

A CONTRAST: BANK FAILURES AND THE GRINDING OUT OF NEW CHARTERS