VIII QUESTIONS AND ANSWERS RELATING TO MEMBERSHIP OF STATE INSTITUTIONS IN THE FEDERAL RESERVE SYSTEM (Compiled by the Federal Reserve Bank of New York.) (See text, pp. 440-448) REDISCOUNTING SAFETY FOR DEPOSITORS, STOCKHOLDERS, AND BORROWERS Q. 1. In what way is membership of advantage to a bank or trust company? A. Through membership in the Federal Reserve System, a bank or trust company is assured of greater safety for its depositors and stockholders than when operating as a nonmember bank, not only as to the repayment of deposits, but also as to its ability to continue to grant accommodation at all times. Q. 2. In what way does membership insure greater safety to the institution, its depositors and stockholders? A. Nearly every bank or trust company has among its assets a considerable amount of commercial paper. If it is a member of the Federal Reserve system, this commercial paper is practically as available as though it were actual cash, for the member bank can at any time take it to the Federal Reserve bank and rediscount or borrow upon it, and is thus in position to meet whatever demands for cash it may have. Government securities and notes secured by government securities, or given for the purpose of purchasing or carrying govern ment securities, may be used in the same way. The ability of the well-managed institution to meet its obligations is thus assured. CERTAINTY OF ACCOMMODATION Q. S. How does this affect the ability of a bank io grant accommodation to its customers? A. The ability of a bank to grant accommodation to its customers under our system of banking is dependent upon its ability to maintain a fixed ratio of reserves to its deposit liability. As additional accommodation is extended, deposits increase, and a larger reserve becomes necessary. If the bank cannot obtain this additional reserve, it must cease extending accommodation. By borrowing from the Federal Reserve bank and taking credit upon the books of that institution, the member's reserve is increased and its power to extend accommodation is thereby correspondingly extended to a maximum amount equal, in the case of a country bank, to about fourteen times the amount it borrows from the Federal Reserve bank, and in the case of a reserve city bank or a central reserve city bank, to about ten times and eight times, respectively. Q. 4. How much can a member bank borrow from the Federal Reserve bank? A. The law places no limitation upon the amount which a particular member bank may borrow from its Federal Reserve bank, and the only practical limit is that which would be dictated by the banking judgment of the management of the Federal Reserve bank, having in mind its own position and the needs of all the other member banks. Q. 5. Can a member bank borrow on anything besides commercial paper? A. Yes. Obligations of the United States government are available as collateral for loans made by the Federal Reserve bank to its members, and notes of customers, secured by United States government obligations, or given for the purpose of purchasing or carrying government securities, are eligible for rediscount. PRACTICALLY ALL BANKS HAVE PAPER ELIGIBLE FOR REDISCOUNT Q. 6. Banks and trust companies frequently state that they do not hold paper of a kind eligible for rediscount at the Federal Reserve bank. Is this true? A. The experience of banks and trust companies, ranging from very small banks in the smallest communities up to the largest institutions of this kind in the country, which are members of the system, shows conclusively that practically all such institutions have substantial amounts of paper which is eligible for rediscount at the Federal Reserve bank, and the institutions which have thus far joined have experienced no difficulty in obtaining from the Federal Reserve bank all needed accommodation. Q. 7. Is not the paper held by the smaller banks and trust companies, and especially those in small towns, too small to be used for rediscounting? A. No. It is probable that the small institutions have an even larger proportion of eligible paper than the larger ones, and no item is too small in size to be used for this purpose. Notes for amounts as small as $5 have been rediscounted, and items of $100, $500, and $1,000 and similar amounts constitute the bulk, in number, of Federal Reserve bank rediscounts. Q. 8. What paper is eligible for rediscount? A. Generally speaking, the ordinary notes, single or double name, which a bank receives from its business and agricultural borrowers. More specifically, eligible commercial paper includes notes, drafts, or bills of exchange having a maturity of not more than ninety days (or agricul |