The Board of Governors has
reexamined the question whether a member bank’s undivided profits
may be considered as part of its “capital stock and surplus,” as that
or a similar term is used in provisions of the Federal Reserve Act
that limit member banks with respect to the following: purchases of
investment securities (12 USC 335), loans on stock or bond collateral
(12 USC 248(m)), deposits with nonmember banks (12 USC 463), bank
acceptances (12 USC 372, 373), investments in and by Edge and agreement
corporations (12 USC 601, 615, 618), and the amount of paper of one
borrower that may be discounted or accepted as collateral for an advance
by a Federal Reserve Bank (12 USC 330, 345, 347).
Upon such reexamination the Board concludes
that its negative view expressed in 1964 is unnecessarily restrictive
in the light of the congressional purpose in establishing limitations
on bank activities in terms of a bank’s capital structure. Accordingly,
the Board has decided that, for the purposes of the limitations set
forth above, undivided profits may be included as part of “capital
stock and surplus.”
As used herein, the term “undivided profits” includes
paid-in or earned profits (unearned income must be deducted); reserves
for loan losses or bad debts, less the amount of tax which would become
payable with respect to the tax-free portion of the reserve if such
portion were transferred from the reserve; valuation reserves for
securities; and reserves for contingencies. It does not include reserves
for dividends declared or reserves for taxes, interest and expenses.
1971 Fed. Res. Bull. 330; 12 CFR 250.162.
