Frequently Asked Questions about Regulation W

Please enable JavaScript if it is disabled in your browser or access the information through the links provided below.

Legal Interpretations FAQs

Frequently Asked Questions about Regulation W

Transactions Between Member Banks and Their Affiliates

Staff of the Board of Governors of the Federal Reserve System has developed the following frequently asked questions (FAQs) to assist entities in complying with the Board's Regulation W. Except as noted below, these FAQs are staff interpretations and have not been approved by the Board of Governors. Staff may supplement or revise these FAQs as necessary or appropriate in the future. Unless indicated otherwise, terms and definitions used in the FAQs have the same meaning as those in Regulation W. Any questions regarding these FAQs, or requests for modification, rescission, or exemption, should be submitted through the Board's Contact Us form.

In General

Q1: Has Regulation W been revised to reflect the amendments to sections 23A and 23B of the Federal Reserve Act (FRA) from the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)?

Q2: Where can I find Board interpretations and statements concerning Regulation W?

Subpart A—Introduction and Definitions

12 CFR 223.2 (What is an "affiliate" for purposes of sections 23A and 23B and this part?)

Q1: Is a company that controls a subsidiary of a member bank (but does not control the bank or otherwise meet the definition of "affiliate" in section 223.2 of Regulation W) an affiliate of the bank?

Q2: If a foreign government controls a member bank and another company, is the company an affiliate of the bank?

Q3: Would a merchant banking or insurance company investment portfolio company trigger the presumption of affiliation in section 223.2(a)(9)(i) of Regulation W if the holding company of the member bank controls 12 percent of the equity capital and voting stock of the portfolio company under the merchant banking or insurance company investment authority of section 4(k)(4)(H) or (I) of the Bank Holding Company Act (BHC Act), and 4 percent of the equity capital and voting stock of the portfolio company under section 4(c)(6) of the BHC Act?

Q4: Under what circumstances is a company excluded from the definition of "affiliate" because it engages in holding the premises of the member bank?

12 CFR 223.3 (What are the meanings of the other terms used in sections 23A and 23B and this part?)

Q1: Does a company control another company if the first company consolidates the other company on its financial statements?

Q2: May a member bank increase the capital stock and surplus used to calculate its Regulation W quantitative limits to reflect capital raised since its last Consolidated Report of Condition and Income (Call Report) as-of date?

Q3: Must a member bank decrease the capital stock and surplus used to calculate its Regulation W quantitative limits to reflect losses or other capital impairments incurred since its last Call Report as-of date?

Q4: In the event of a merger with another depository institution, how may a member bank measure its capital stock and surplus for purposes of calculating its Regulation W quantitative limits?

Q5: Is a sole proprietorship a company for purposes of Regulation W?

Q6: Is a trust established for a business purpose (for example, an employee stock ownership plan or pension plan) a company for purposes of Regulation W?

Q7: May a company qualify for the exception from the definition of "control" for shares owned or controlled in a fiduciary capacity if the company controls shares in a fiduciary capacity but has sole voting discretion over the shares?

Q8: Is an affiliate's purchase of stock issued by the member bank a covered transaction?

Q9: If a member bank indemnifies its parent holding company in a service contract for holding company losses caused by the negligence or willful misconduct of the bank, would this create a covered transaction?

Q10: If a holding company indemnifies its subsidiary member bank in a service contract for bank losses caused by the negligence or willful misconduct of the holding company, would this create a covered transaction?

Q11: If an affiliate purchases assets from a member bank, and the affiliate pays for the assets at a later date, would this generate an extension of credit by the bank to the affiliate?

Q12: What is a "guarantee or letter of credit issued by a member bank on behalf of an affiliate"?

Q13: Would a member bank's pledge of collateral to secure a borrowing made by an affiliate represent a guarantee by the bank on behalf of the affiliate?

Q14: Is a keepwell agreement in which a member bank agrees to maintain the capital levels or solvency of an affiliate a guarantee by the member bank on behalf of an affiliate?

Q15: Would a member bank that acquires from a nonaffiliate a guarantee or letter of credit issued on behalf of an affiliate or that confirms a letter of credit issued by a nonaffiliate on behalf of an affiliate be viewed as issuing a guarantee or letter of credit on behalf of an affiliate?

Q16: What forms of subordinated debt are considered equity capital of a company?

Q17: If a member bank purchases a loan or other asset from an affiliate but retains recourse to the affiliate on the asset, would that be considered an extension of credit by the bank to the affiliate?

Q18: If a member bank purchases from a nonaffiliate an extension of credit to an affiliate, has the member bank extended credit to the affiliate?

Q19: Is a lease of property by a member bank to an affiliate that qualifies as a full-payout lease and a net lease that would be permissible for a national bank under 12 U.S.C. § 24 (Seventh) and 12 CFR part 23 considered an extension of credit by the bank to the affiliate?

Q20: If a member bank extends credit to a nonaffiliate who uses the proceeds to purchase newly issued shares of an affiliate of the bank and pledges the shares as collateral for the extension of credit, would the transaction be viewed as an extension of credit by the bank to the affiliate?

Q21: May any subsidiary of a savings association be a financial subsidiary for purposes of Regulation W?

Q22: May an asset escape status as a low-quality asset under the "classified" prong of the definition of a low-quality asset through a restructuring?

Q23: If a member bank has sold an asset to an affiliate with recourse, may the member bank repurchase the asset from the affiliate if it has become a low-quality asset since the time of sale?

Q24: May an asset that has been renegotiated or restructured due to a deterioration in the financial condition of the borrower ever escape status as a low-quality asset?

Q25: If an affiliate transfers an asset to a member bank and receives as sole consideration for the transfer shares in the bank, would this be viewed as a purchase of assets by the bank from an affiliate?

Q26: If an affiliate transfers liabilities to a member bank but also transfers an equivalent amount of cash to the bank, does this generate a covered transaction?

Q27: If a member bank and an affiliate engage in an asset exchange, would this be a purchase of assets by the member bank from the affiliate?

Q28: How does the Board define the term "securities" for purposes of Regulation W?

Subpart B—General Provisions of Section 23A

12 CFR 223.11 (What is the maximum amount of covered transactions that a member bank may enter into with any single affiliate?)

Q1: If a member bank's holding company owns 100 percent of affiliate A, which owns 100 percent of affiliate B, does the bank get a separate 10 percent limit with each of affiliate A and affiliate B?

Q2: Does Regulation W require a member bank to unwind existing covered transactions if the bank exceeds its 10 or 20 percent quantitative limit due solely to a decline in the bank's capital or to an increase in value of a preexisting covered transaction?

12 CFR 223.14 (What are the collateral requirements for a credit transaction with an affiliate?)

Q1: May a member bank use a guarantee from a nonaffiliate to meet the collateral requirements of Regulation W?

Q2: Does Regulation W require a member bank that accepts deposit account collateral to establish a separate segregated, earmarked deposit account to secure each covered transaction with an affiliate?

Q3: May a member bank satisfy the collateral requirements of Regulation W by purchasing credit protection in the form of a credit default swap or other credit derivative referencing the credit transaction with the affiliate?

Q4: How does a member bank that has extended a revolving credit facility to an affiliate ensure compliance with the exemption in 12 CFR 223.14(f)(2) from the collateral requirements of Regulation W for unused portions of certain extensions of credit?

12 CFR 223.15 (May a member bank purchase a low-quality asset from an affiliate?)

Q1: How does Regulation W treat a transaction in which a member bank acquires by free contribution all the shares of an affiliate that has liabilities and low-quality assets, causing that affiliate to become an operating subsidiary of the bank after the acquisition?

Q2: Does a member bank purchase low-quality assets from an affiliate if the affiliate contributes the assets to the bank for free?

12 CFR 223.16 (What transactions by a member bank with any person are treated as transactions with an affiliate?)

Q1: What transactions are subject to the attribution rule? Is the attribution rule applied by the Board solely to prevent evasion of Regulation W?

Q2: Does the attribution rule apply only to transactions between a member bank and a party unaffiliated with the bank?

Q3: Under the attribution rule, what is the covered transaction amount if a member bank makes a $100 loan to a nonaffiliate and only $5 of the loan is transferred to, or used for the benefit of, an affiliate of the bank?

Q4: A member bank makes a loan to a nonaffiliate, and the nonaffiliate uses the proceeds of the loan to purchase an asset from an affiliate of the bank. Would the attribution rule treat this transaction as an extension of credit by the bank to an affiliate or a purchase of assets by the bank from an affiliate?

Q5: Sister bank A lends money to sister bank B, which then on-lends the money to an affiliate of both banks in a nonexempt covered transaction. Would the attribution rule apply to attribute the nonexempt covered transaction to sister bank A in this scenario?

Q6: Where a member bank purchases assets from affiliate A in an exempt transaction, and affiliate A then on-lends the proceeds to affiliate B, would the attribution rule apply so that the member bank would have a covered transaction with affiliate B?

Q7: Does the attribution rule apply only if a member bank knows or has reason to know that the proceeds of a transaction with a nonaffiliate may be used for the benefit of, or transferred to, an affiliate?

Q8: If a member bank makes an extension of credit to a nonaffiliate knowing or having reason to know that the nonaffiliate will transfer the proceeds to an affiliate of the member bank several days later, when should the member bank treat the extension of credit to the nonaffiliate as a covered transaction?

Q9: A bank holding company owns less than 25 percent of the equity capital of company A. The bank holding company’s subsidiary member bank lends money to company A, which is not considered an affiliate of the bank under Regulation W. Does the attribution rule apply to the member bank’s loan to company A solely because of the bank holding company’s ownership of shares in company A?

Q10: Would an extension of credit by a member bank to an employee of an affiliate be treated as being made to the affiliate under the attribution rule if the proceeds are used solely for the employee’s personal benefit and are not transferred to the affiliate?

Q11: Would the attribution rule apply to an extension of credit by a member bank solely because it is made to an insider of the bank’s affiliate?

Q12: Does the attribution rule apply when a member bank makes a loan to a nonaffiliate and the nonaffiliate uses the proceeds of the loan to purchase securities issued by an affiliate of the member bank?

Q13: If a lending affiliate of a member bank provides floor-plan financing to a retailer that is not an affiliate of the bank, and the member bank extends credit to a nonaffiliate who uses the proceeds to purchase goods from the unaffiliated retailer, would the attribution rule apply?

Q14: If a portion of an extension of credit by a member bank to a nonaffiliate is treated as having been made to an affiliate per the attribution rule, how does the covered transaction amount decline as the nonaffiliate pays down the principal amount of the extension of credit?

Q15: Does the attribution rule apply solely because a member bank issues a guarantee in support of securities issued by a nonaffiliate that are underwritten by an affiliate?

Q16: If a member bank extends credit to a nonaffiliate that uses the proceeds to purchase an asset from an affiliate of the bank (such that the extension of credit is considered to have been made to the affiliate), would a renewal of the extension of credit continue to be treated as having been made to the affiliate under the attribution rule?

Q17: If a member bank makes a five-year loan to a nonaffiliate, and the nonaffiliate uses the proceeds to make a one-year loan to an affiliate of the bank, would the attribution rule cease to apply at the maturity of the five-year loan or the one-year loan?

Subpart C—Valuation and Timing Principles under Section 23A

12 CFR 223.21-.22 (What valuation and timing principles apply to credit transactions and asset purchases?)

Q1: If a member bank purchases from an affiliate a participation in a revolving credit facility extended by the affiliate to a nonaffiliate, does the bank purchase an asset from an affiliate only at the time of the original participation purchase or also at each time the bank funds an additional draw under the revolving credit facility?

Q2: For purposes of valuing the acquisition or purchase of an asset by a member bank from an affiliate, should contingent liabilities be included as liabilities assumed in calculating the covered transaction amount?

Q3: Under what circumstances may a member bank reduce the covered transaction amount associated with its previous purchase of assets from an affiliate?

Q4: If a line of credit from a member bank to an affiliate contains a material adverse change clause or other provision that is intended to relieve the bank of its funding obligation under certain conditions, may the member bank reduce the amount of that line of credit that counts toward the bank’s quantitative limits under Regulation W?

Q5: A member bank provides a committed revolving credit facility or loan commitment to a nonaffiliate that later becomes an affiliate of the bank. The bank is not required to reduce the amount of its covered transactions with the new affiliate, as provided in 12 CFR 223.21(b)(2). Would the new affiliate’s drawing on the loan commitment or revolving credit facility pursuant to its terms cause 12 CFR 223.21(b)(2) to cease to apply and thereby require the bank to reduce the amount of its covered transactions with the affiliate?

Q6: When does Regulation W consider a member bank to have engaged in an asset purchase from an affiliate under 12 CFR 223.22?

Q7: An affiliate of a member bank makes a loan to a nonaffiliate. The member bank then purchases that loan from its affiliate. When does the member bank’s purchase of the loan cease to be a covered transaction?

Subpart D—Other Requirements under Section 23A

12 CFR 223.31 (How does section 23A apply to a member bank's acquisition of an affiliate that becomes an operating subsidiary of the member bank after the acquisition?)

Q1: In what situations may a member bank apply the step-transaction exemption in section 223.31(d) of Regulation W?

Q2: Natural persons control both a member bank and another company. The member bank acquires from those controlling shareholders all the shares of the other company. The other company has liabilities and becomes an operating subsidiary of the bank after the acquisition. How does Regulation W treat this transaction?

Q3: When a member bank acquires an affiliate that becomes an operating subsidiary of the bank after the acquisition, what are the affiliate’s liabilities for purposes of the valuation rule in 12 CFR 223.31(b)?

Q4: When a member bank acquires an affiliate that becomes an operating subsidiary of the bank after the acquisition, may the bank reduce the amount of liabilities of the affiliate for purposes of the valuation rule in 12 CFR 223.31(b) to reflect cash assets?

Q5: If a member bank acquires less than 100 percent of the shares of an affiliate under 12 CFR 223.31(b), must the bank include 100 percent of the liabilities of the affiliate for purposes of determining the covered transaction amount?

Subpart E—Exemptions from the Provisions of Section 23A 11

12 CFR 223.41 (What covered transactions are exempt from the quantitative limits and collateral requirements?)

Q1: Does the purchase by a member bank of the shares of a subsidiary of a sister-bank depository institution described in the exemptions in 12 CFR 223.41(a) or (b) qualify for the sister-bank exemptions in 12 CFR 223.41(a) or (b) if the subsidiary is not itself a depository institution?

Q2: Does the contribution by a bank holding company of all the shares of one of its subsidiary depository institutions to another subsidiary member bank of the holding company qualify for the sister-bank exemption in 12 CFR 223.41(b)?

Q3: A member bank dividends to its parent holding company all the shares of an operating subsidiary, which the parent holding company then contemporaneously contributes to another of its subsidiary depository institutions that is a sister bank of the member bank. Would this transaction qualify for the sister-bank exemption in 12 CFR 223.41(b)?

Q4: Would a transaction with an uninsured depository institution that otherwise would qualify as a sister bank be eligible for the sister-bank exemptions?

Q5: May a member bank accept shares issued by a sister bank as collateral for a loan to a nonaffiliate using the sister-bank exemption?

Q6: A member bank extends credit to a nonaffiliate who has an outstanding extension of credit from a sister bank of the member bank. If the nonaffiliate uses the proceeds from the new loan by the member bank to repay its outstanding extension of credit from the sister bank of the member bank, would this transaction qualify for the sister-bank exemption in 12 CFR 223.41(b)?

Q7: If a member bank is controlled by a series of holding companies, which of the holding companies must be well-capitalized and well-managed in order for the member bank to meet the requirement in 12 CFR 223.41(d)(7)?

12 CFR 223.42 (What covered transactions are exempt from the quantitative limits, collateral requirements, and low-quality asset prohibition?)

Q1: May interest-bearing deposits qualify for the correspondent banking exemption in 12 CFR 223.42(a)?

Q2: What qualifies as an "item" for purposes of the exemption in 12 CFR 223.42(b)?

Q3: Does a U.S. dollar-denominated credit transaction between a member bank and an affiliate that is fully secured by a non-U.S. dollar denominated deposit account at the member bank qualify for the cash collateral exemption in 12 CFR 223.42(c)?

Q4: Does a credit transaction between a member bank and an affiliate that is guaranteed by a U.S. government agency qualify for the U.S. government securities collateral exemption in 12 CFR 223.42(c)?

Q5: May a member bank collateralize a purchase of assets from an affiliate with cash or U.S. government securities in order to qualify for the exemption in 12 CFR 223.42(c)?

Subpart F—General Provisions of Section 23B

12 CFR 223.51–.56 (General provisions of section 23B)

Q1: What is prohibited by the advertising restriction in section 223.54 of Regulation W?

Q2: Does Regulation W regulate a member bank's provision of services to an affiliate?

In General

A1: Regulation W has not yet been revised to reflect the amendments to sections 23A and 23B of the FRA from the Dodd-Frank Act. Nevertheless, the amendments made by the Dodd-Frank Act to sections 23A and 23B of the FRA became effective on July 21, 2011. Among other changes, the Dodd-Frank Act revised the process by which an insured depository institution (IDI) could be granted an exemption from the requirements of section 23A, generally authorizing the primary federal banking agency for the IDI to grant such requests by order, although the Board also is required to make certain findings before an exemption may be granted. Accordingly, the Office of the Comptroller of the Currency (OCC) may, by order, exempt a transaction of a national bank or federal savings association from the requirements of section 23A if (i) the Board and the OCC jointly find that granting the exemption would be in the public interest and consistent with the purposes of section 23A and (ii) the Federal Deposit Insurance Corporation (FDIC) is notified of the finding and does not object, in writing, to the finding within 60 days based on a determination that the exemption presents an unacceptable risk to the Deposit Insurance Fund. The FDIC may, by order, exempt a transaction of a state nonmember bank and state savings association, and the Board may, by order, exempt a transaction of a state member bank, if, in all cases, (i) the FDIC and Board jointly find that granting the exemption would be in the public interest and consistent with the purposes of section 23A and (ii) the FDIC finds that the exemption does not present an unacceptable risk to the Deposit Insurance Fund. An IDI seeking an exemption from section 23A should contact its primary federal supervisor, the Board, and the FDIC.

Source: 12 U.S.C. § 371c; Pub. L. 111-203, §§ 608(d), 609(d).

Posted: 3/31/2021

Q2: Where can I find Board interpretations and statements concerning Regulation W?

A2: In addition to the preamble to Regulation W (67 Fed. Reg. 76560 (December 12, 2002)), certain Board statements on sections 23A and 23B of the FRA can be found in Federal Register notices related to Regulation KK (85 Fed. Reg. 39754, 39764 (July 1, 2020)) and the Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure (79 Fed. Reg. 35228 (June 19, 2014)). The Board also has published the approval letters for all Regulation W exemptions granted by the Board since 1996 on the Board's website. See here. The Federal Reserve Regulatory Service (FRRS) contains certain additional staff interpretations. A Board staff memo on the general application of sections 23A and 23B and Regulation W also is available on the Board's website. See here.

Source: Interpretations from 1996 to present; Federal Reserve Regulatory Service; Board Staff Memorandum on Coverage of Sections 23A and 23B of the FRA.

Posted: 3/31/2021

Subpart A—Introduction and Definitions

12 CFR 223.2 (What is an "affiliate" for purposes of sections 23A and 23B and this part?)

Q1: Is a company that controls a subsidiary of a member bank (but does not control the bank or otherwise meet the definition of "affiliate" in section 223.2 of Regulation W) an affiliate of the bank?

A1: No.

Posted: 3/31/2021

Q2: If a foreign government controls a member bank and another company, is the company an affiliate of the bank?

A2: Yes, due to common control by the foreign government.

Posted: 3/31/2021

A3: Yes, since a bank holding company may not own any shares of a company in reliance on section 4(c)(6) of the BHC Act if it owns or controls, in the aggregate under a combination of authorities, more than 5 percent of any class of voting securities of the company.

Source: 67 Fed. Reg. 76560, 76565 n. 39 (December 12, 2002).

Posted: 3/31/2021

Q4: Under what circumstances is a company excluded from the definition of "affiliate" because it engages in holding the premises of the member bank?

A4: Regulation W excludes from the definition of "affiliate" any company engaged solely in holding the premises of the relevant member bank. 12 CFR 223.2(b)(2). To qualify for this exclusion, the company must engage only in holding real property that is used exclusively (without any portion leased to external parties) by the member bank and any Regulation W sister bank of the member bank (as described in 12 CFR 225.24(b)). The company may not hold any other assets, including premises for a bank that is not a sister bank of the member bank, and may not engage in other activities.

Source: Letter from J. Virgil Mattingly, Deputy General Counsel to the Board, to Mark Aldrich, Esq. (June 20, 1986), available here.

Posted: 3/31/2021

12 CFR 223.3 (What are the meanings of the other terms used in sections 23A and 23B and this part?)

Q1: Does a company control another company if the first company consolidates the other company on its financial statements?

A1: Yes. A company should be presumed to have a controlling influence over a second company if the first company consolidates the second company on its financial statements prepared under U.S. Generally Accepted Accounting Principles (GAAP). 12 CFR 223.3(g)(1)(iii).

GAAP generally calls for consolidation under circumstances where the consolidating entity has a controlling financial interest in the consolidated entity. Consolidation is typically required under GAAP due to ownership by one company of a majority of the voting securities of another company, which would significantly exceed the 25 percent voting security threshold for control under the FRA. GAAP also requires consolidation of companies under the variable interest entity standard where (i) a company has significant economic exposure to a variable interest entity and has the power to direct the activities of the entity that most significantly impact the entity's economic performance, or (ii) a company controls a variable interest entity by contract. These circumstances also demonstrate a controlling interest by the consolidating entity over the consolidated entity.

This position is consistent with the Board's view of accounting consolidation and control in Regulation Y.

Source: Cf. 12 CFR 225.32(g).

Posted: 3/31/2021

A2: No. A member bank's capital stock and surplus is based on the bank's most recent consolidated Call Report. 12 CFR 223.3(d).

Posted: 3/31/2021

A3: No. A member bank's capital stock and surplus is based on the bank's most recent consolidated Call Report. 12 CFR 223.3(d).

Posted: 3/31/2021

Q4: In the event of a merger with another depository institution, how may a member bank measure its capital stock and surplus for purposes of calculating its Regulation W quantitative limits?

A4: A member bank that merges with another depository institution may use the aggregate capital stock and surplus of the two merging depository institutions for purposes of calculating its Regulation W quantitative limits until such time as the merged bank files its next Call Report.

Posted: 3/31/2021

Q5: Is a sole proprietorship a company for purposes of Regulation W?

A5: No.

Posted: 3/31/2021

Q6: Is a trust established for a business purpose (for example, an employee stock ownership plan or pension plan) a company for purposes of Regulation W?

A6: Yes.

Posted: 3/31/2021

A7: Yes. Although the fiduciary exemption in section 4(f)(2) of the BHC Act is unavailable to fiduciaries that have sole discretionary voting power over shares, the fiduciary exemption in Regulation W does not exclude fiduciaries with sole discretionary voting power.

Posted: 3/31/2021

Q8: Is an affiliate's purchase of stock issued by the member bank a covered transaction?

A8: No.

Posted: 3/31/2021

A9: No.

Posted: 3/31/2021

A10: No.

Posted: 3/31/2021

Q11: If an affiliate purchases assets from a member bank, and the affiliate pays for the assets at a later date, would this generate an extension of credit by the bank to the affiliate?

A11: Yes.

Posted: 3/31/2021

Q12: What is a "guarantee or letter of credit issued by a member bank on behalf of an affiliate"?

A12: A guarantee or letter of credit issued by a member bank on behalf of an affiliate is a guarantee or letter of credit by the bank where the affiliate is the account party (not the beneficiary). In other words, it is a transaction where a member bank promises to make a payment to a nonaffiliate if an affiliate of the bank defaults on an obligation.

Source: John T. Rose and Samuel H. Talley, The Banking Affiliates Act of 1982: Amendments to Section 23A, 68 Fed. Res. Bull. 693, 697 n. 8 (November 1982); S. Rep. No. 97-536, at 32 (1982).

Posted: 3/31/2021

Q13: Would a member bank's pledge of collateral to secure a borrowing made by an affiliate represent a guarantee by the bank on behalf of the affiliate?

A13: Yes, in the amount of the lesser of (i) the market value of the pledged collateral or (ii) the amount of the borrowing.

Source: Letter from J. Virgil Mattingly, General Counsel to the Board, to Richard Lasner, Esq. (August 6, 1993), available here.

Posted: 3/31/2021

Q14: Is a keepwell agreement in which a member bank agrees to maintain the capital levels or solvency of an affiliate a guarantee by the member bank on behalf of an affiliate?

A14: Yes.

Source: 67 Fed. Reg. 76560, 76569 (December 12, 2002).

Posted: 3/31/2021

A15: Yes.

Posted: 3/31/2021

Q16: What forms of subordinated debt are considered equity capital of a company?

A16: Subordinated debt that counts as regulatory capital of a company would be treated as equity capital of the company. In addition, subordinated debt that is mandatorily convertible or convertible at the option of the holder into equity capital of a company would be treated as equity capital of the company. Other subordinated debt may be considered equity capital of a company after consideration of all the facts and circumstances.

Posted: 3/31/2021

A17: Yes.

Source: FRRS 3-1188.

Posted: 3/31/2021

Q18: If a member bank purchases from a nonaffiliate an extension of credit to an affiliate, has the member bank extended credit to the affiliate?

A18: Yes.

Source: FRRS 3-1188.

Posted: 3/31/2021

A19: Yes.

Source: 67 Fed. Reg. 76560, 76570 (December 12, 2002).

Posted: 3/31/2021

A20: Yes, the transaction would be viewed as an extension of credit by the member bank to the affiliate (not just as an acceptance of securities issued by the affiliate). Accordingly, the member bank must comply with the quantitative limits and collateral requirements of Regulation W. Note that securities issued by an affiliate may not be used to meet the collateral requirements.

Source: FRRS 3-1188.1.

Posted: 3/31/2021

Q21: May any subsidiary of a savings association be a financial subsidiary for purposes of Regulation W?

A21: No.

Source: 67 Fed. Reg. 76560, 76565 (December 12, 2002).

Posted: 3/31/2021

Q22: May an asset escape status as a low-quality asset under the "classified" prong of the definition of a low-quality asset through a restructuring?

A22: No. The asset would remain a low-quality asset until re-examined and de-classified by examiners.

Posted: 3/31/2021

Q23: If a member bank has sold an asset to an affiliate with recourse, may the member bank repurchase the asset from the affiliate if it has become a low-quality asset since the time of sale?

A23: Yes, so long as the asset was not a low-quality asset at the time of sale by the member bank.

Posted: 3/31/2021

Q24: May an asset that has been renegotiated or restructured due to a deterioration in the financial condition of the borrower ever escape status as a low-quality asset?

A24: No. Once renegotiated or restructured due to a deterioration in the financial condition of the borrower, the asset is and always will be a low-quality asset, no matter how long the borrower has been current on the asset.

Posted: 3/31/2021

A25: No, this would be viewed as a capital contribution by the affiliate to the bank, which generally is not a covered transaction under Regulation W.

Posted: 3/31/2021

Q26: If an affiliate transfers liabilities to a member bank but also transfers an equivalent amount of cash to the bank, does this generate a covered transaction?

A26: No, so long as the transfers are simultaneous, the cash and liabilities are denominated in the same currency, and the liabilities are fixed in amount.

Posted: 3/31/2021

Q27: If a member bank and an affiliate engage in an asset exchange, would this be a purchase of assets by the member bank from the affiliate?

A27: Yes, unless the asset being received by the member bank is cash.

Posted: 3/31/2021

Q28: How does the Board define the term "securities" for purposes of Regulation W?

A28: The Board generally has looked to the federal securities laws for guidance in determining which financial instruments are securities for purposes of Regulation W.

Source: 67 Fed. Reg. 76560, 76572 (December 12, 2002).

Posted: 3/31/2021

Subpart B—General Provisions of Section 23A

12 CFR 223.11 (What is the maximum amount of covered transactions that a member bank may enter into with any single affiliate?)

Q1: If a member bank's holding company owns 100 percent of affiliate A, which owns 100 percent of affiliate B, does the bank get a separate 10 percent limit with each of affiliate A and affiliate B?

A1: Yes, although the attribution rule of Regulation W may apply where affiliate A uses affiliate B as a financing conduit.

Posted: 3/31/2021

A2: No. The quantitative limits of Regulation W only prohibit a member bank from engaging in a new covered transaction if the bank would be in excess of the 10 or 20 percent threshold after consummation of the new transaction. However, since credit transactions must meet the collateral requirements of Regulation W at all times, an increase in the value of a preexisting credit transaction may require an affiliate to post additional collateral to the member bank.

Source: 67 Fed. Reg. 76560, 76572 (December 12, 2002).

Posted: 3/31/2021

12 CFR 223.14 (What are the collateral requirements for a credit transaction with an affiliate?)

Q1: May a member bank use a guarantee from a nonaffiliate to meet the collateral requirements of Regulation W?

A1: No, even if that guarantee is from a U.S. government agency. A transaction whose only credit risk mitigant is a guarantee from a U.S. government agency also cannot qualify for the exemption in section 223.42(c) of Regulation W.

Posted: 3/31/2021

Q2: Does Regulation W require a member bank that accepts deposit account collateral to establish a separate segregated, earmarked deposit account to secure each covered transaction with an affiliate?

A2: No. Use of an omnibus segregated, earmarked deposit account that covers multiple affiliates and multiple covered transactions may be appropriate in some circumstances. In all cases, the bank must maintain security interests in the collateral that meet the perfection and priority requirements of 12 CFR 223.14.

Source: 67 Fed. Reg. 76560, 76573 (December 12, 2002).

Posted: 3/31/2021

A3: No.

Source: 67 Fed. Reg. 76560, 76573 n. 91 (December 12, 2002).

Posted: 3/31/2021

A4: A bank that uses this exemption must ensure, at the time of each new draw on the credit facility, that the amount of collateral pledged to support the facility meets the required thresholds in 12 CFR 223.14(b) with respect to the total outstanding drawn amount after the new draw. In other words, the affiliate is required to have posted collateral to the bank at the time of the new draw in an amount sufficient to cover all of the total outstanding drawn amounts (including the new draw) consistent with the collateral requirements of Regulation W.

Posted: 3/31/2021

12 CFR 223.15 (May a member bank purchase a low-quality asset from an affiliate?)

A1: The transaction would be an asset purchase by the member bank from an affiliate under 12 CFR 223.31 and must be valued in accordance with that section. However, the Board would not view the transaction as a purchase of low-quality assets from an affiliate so long as (i) the total capital contributed to the member bank in the transaction (the value of the transferred company's assets minus the transferred company's liabilities plus any cash separately contributed to the bank) is greater than or equal to the value of the low-quality assets being transferred, and (ii) the total capital contributed to the bank in the transaction (net of the low-quality assets transferred) would leave the transferred affiliate adequately capitalized.

Source: Letter from Robert deV. Frierson, Deputy Secretary of the Board, to Winthrop N. Brown, Esq. (December 22, 2004), available here; Letter from Robert deV. Frierson, Deputy Secretary of the Board, to Carl V. Howard, Esq. (August 28, 2001), available here.

Posted: 3/31/2021

Q2: Does a member bank purchase low-quality assets from an affiliate if the affiliate contributes the assets to the bank for free?

A2: No, unless the assets contributed are undrawn committed credit facilities or are associated with other liabilities that would be assumed by the bank upon acceptance of the contribution.

Posted: 3/31/2021

12 CFR 223.16 (What transactions by a member bank with any person are treated as transactions with an affiliate?)

Q1: What transactions are subject to the attribution rule? Is the attribution rule applied by the Board solely to prevent evasion of Regulation W?

A1: The attribution rule of Regulation W states that any transaction between a member bank and a person is deemed to be a transaction between the member bank and an affiliate to the extent that the proceeds of the transaction are used for the benefit of, or transferred to, the affiliate. The purposes of the attribution rule include preventing a member bank from evading the restrictions of Regulation W by using intermediaries and limiting the exposure that a member bank has to customers of its affiliates. In addition, unlike Regulation O, Regulation W does not include an exemption from the attribution rule for transactions in which the proceeds are used to make bona fide, ordinary course purchases of goods and services from an affiliate. Regulation W does, however, contain several specific exemptions from the attribution rule. 12 CFR 223.16(b)-(c). In addition, Board staff generally would not expect to recommend the Board take enforcement action against a member bank where the bank did not know or have reason to know at the time of the transaction that the proceeds of the transaction would be used for the benefit of, or transferred to, an affiliate; provided that, at the time of the transaction, the bank maintained reasonable policies and procedures to assure compliance with Regulation W.

Source: 67 Fed. Reg. 76560, 76576 (December 12, 2002).

Posted: 3/31/2021

Q2: Does the attribution rule apply only to transactions between a member bank and a party unaffiliated with the bank?

A2: No. The attribution rule may apply to transactions between a member bank and any party (affiliated or unaffiliated with the bank). Therefore, a member bank may not engage in covered transactions with an affiliate that would exceed the bank's quantitative limit applicable to that affiliate by using another affiliate as an intermediary. For example, if a member bank extends credit to affiliate A for on-lending to affiliate B, the Board generally would apply the attribution rule and view the transaction as an extension of credit by the bank to affiliate B.

Source: FRRS 3-1186.

Posted: 3/31/2021

A3: The attribution rule applies to transactions to the extent that the proceeds of the transaction are used for the benefit of, or transferred to, an affiliate. Accordingly, the covered transaction amount in this scenario would be $5.

Posted: 3/31/2021

A4: Under the attribution rule, the transaction would be treated as an extension of credit by the member bank to the affiliate. 12 CFR 223.16(a).

Source: Letter from Michael Bradfield, General Counsel to the Board, to Richard S. Brennan (March 21, 1988).

Posted: 12/30/2021

A5: Generally, no. Sister bank B would have a nonexempt covered transaction with the affiliate. Sister bank A’s loan to sister bank B would qualify for the sister-bank exemption, and the attribution rule would not attribute the nonexempt covered transaction between sister bank B and the affiliate to sister bank A, unless the arrangement is structured to enable sister bank A to evade the requirements of section 23A and Regulation W.

Posted: 12/30/2021

A6: Generally, no. The member bank would not be viewed as having a covered transaction with affiliate B under the attribution rule, unless the arrangement is structured to evade the requirements of section 23A and Regulation W.

Posted: 12/30/2021

A7: The attribution rule applies by its terms whenever the proceeds of a transaction by a member bank with any party are used for the benefit of, or transferred to, an affiliate of the member bank. 12 CFR 223.16. However, Board staff generally would not expect to recommend that the Board take enforcement action against a member bank where the bank did not know or have reason to know at the time of the transaction that the proceeds of the transaction may be used for the benefit of, or transferred to, an affiliate, provided that the bank maintains reasonable Regulation W compliance procedures and processes that monitor the use of proceeds for credit transactions with parties with which an affiliate of the bank has significant business relationships.

Posted: 12/30/2021

A8: The member bank should treat the extension of credit as a covered transaction at the earlier of (i) when the proceeds are transferred to the affiliate, or (ii) when the bank knows or has reason to know that the proceeds are expected to flow to the affiliate, which may be at the time the extension of credit is made.

Posted: 12/30/2021

A9: No. Even though the bank’s parent holding company owns some shares in company A, the attribution rule generally would not apply to this fact pattern because company A is not itself an affiliate of the member bank under Regulation W.

Posted: 12/30/2021

A10: No.

Posted: 12/30/2021

Q11: Would the attribution rule apply to an extension of credit by a member bank solely because it is made to an insider of the bank’s affiliate?

A11: No, although other facts or circumstances could cause the attribution rule to apply. In any event, the extension of credit would be subject to other requirements, including section 22(h) of the Federal Reserve Act (12 U.S.C. § 375b) and the Board’s Regulation O (12 CFR part 215).

Posted: 12/30/2021

A12: If the nonaffiliate purchases the affiliate’s securities in the primary market, the attribution rule would apply. If the nonaffiliate purchases the affiliate’s securities from a nonaffiliate in the secondary market, the attribution rule generally would not apply, unless the purchase of the affiliate’s securities was structured to evade the requirements of section 23A and Regulation W.

Posted: 12/30/2021

A13: Yes. The attribution rule would apply up to the amount of the floor-plan financing provided by the lending affiliate of the member bank to the unaffiliated retailer.

Posted: 12/30/2021

A14: The member bank may decrease the covered transaction amount proportionately with repayments by the nonaffiliate. For example, assume a member bank lends $100 to a nonaffiliate that uses $20 of the loan proceeds to purchase an asset from an affiliate of the bank. The initial covered transaction amount is $20. If the nonaffiliate makes repayments that reduce the principal amount of the bank’s extension of credit by $10, the bank may reduce the covered transaction amount by $2 (consistent with the original attribution of 20 percent of the original extension of credit to the affiliate).

Posted: 12/30/2021

Q15: Does the attribution rule apply solely because a member bank issues a guarantee in support of securities issued by a nonaffiliate that are underwritten by an affiliate?

A15: No. However, the market-terms requirement of Regulation W would apply to the transaction. 12 CFR 223.51.

Source: 67 Fed. Reg. 76560, 76569 (December 12, 2002) (citing 62 Fed. Reg. 45295, 45299 (August 27, 1997)).

Posted: 12/30/2021

A16: Yes.

Posted: 12/30/2021

A17: The attribution rule would cease to apply when the one-year loan by the nonaffiliate to the member bank’s affiliate matures, assuming that the debt is fully repaid and the proceeds of the one-year loan repayment are not again transferred to, or used for the benefit of, an affiliate of the bank.

Posted: 12/30/2021

Subpart C—Valuation and Timing Principles under Section 23A

12 CFR 223.21-.22 (What valuation and timing principles apply to credit transactions and asset purchases?)

A1: If the member bank's original purchase of the participation commits it to fund additional draws and does not provide the bank with the right to make an independent credit decision before each draw under the facility, the bank is viewed as purchasing an asset from an affiliate only at the time of the original participation purchase. Accordingly, a member bank may continue to fund additional draws on the revolving credit facility even if the facility becomes a low-quality asset.

Posted: 3/31/2021

A2: Yes. Regulation W requires a member bank to include liabilities assumed by a member bank when calculating the covered transaction amount for certain asset purchases. 12 CFR 223.21(a)(2), 223.22(a), and 223.31. For purposes of these sections, liabilities include not only the balance sheet liabilities assumed by the member bank in connection with the transaction, but generally also include contingent liabilities. However, in cases where a member bank acquires an affiliate that has contingent liabilities in the form of undrawn lines of credit (that is, lines of credit where the affiliate is the borrower), the undrawn portions of those lines of credit need not be included in calculating the covered transaction amount.

Posted: 3/31/2021

Q3: Under what circumstances may a member bank reduce the covered transaction amount associated with its previous purchase of assets from an affiliate?

A3: Regulation W indicates that the purchase by a member bank of an asset from an affiliate remains a covered transaction for as long as the bank holds the asset. 12 CFR 223.22(b)(1). Therefore, if the member bank sells the asset to a third party (without recourse to the bank or any similar arrangement) and no longer holds the asset on its balance sheet, the bank would no longer be required to include the purchase of the asset as a covered transaction.

If a member bank sells to a third party a participation in a loan it previously acquired from an affiliate, the bank may reduce the covered transaction amount associated with the purchase of the loan from an affiliate by the amount of the sold participation if: (i) the participation does not involve any recourse to the bank or any ability for the buyer to put the loan back to the bank; (ii) the bank has no obligations to the borrower with respect to funding the participated amount; (iii) the sale of the participation removes the loan (to the extent of the participation) from the bank's balance sheet; and (iv) the participation would not be considered a loan or extension of credit for purposes of the national bank lending limits under 12 CFR 32.2(q)(2)(vi)(A). Note that any sale of a participation must meet the market terms requirement of section 23B of the FRA.

Regulation W also provides that a member bank may reduce the value of a covered transaction involving the purchase of an asset from an affiliate to reflect amortization or depreciation of the asset, to the extent that such reductions are consistent with GAAP, while the asset remains on the bank's balance sheet. 12 CFR 223.22(a)(1).

Posted: 3/31/2021

A4: No. See 12 CFR 223.21(a).

Source: 67 Fed. Reg. 76560, 76578 (December 12, 2002).

Posted: 12/30/2021

A5: No.

Posted: 12/30/2021

Q6: When does Regulation W consider a member bank to have engaged in an asset purchase from an affiliate under 12 CFR 223.22?

A6: A member bank has engaged in an asset purchase from an affiliate at the time the bank commits or becomes legally obligated to purchase the asset from the affiliate.

Posted: 12/30/2021

A7: The purchase of the loan generally remains a covered transaction until either (i) it is sold or (ii) it is reduced to reflect amortization down to zero, consistent with GAAP. 12 CFR 223.22(a)(1) and (b)(1). If the bank renews the loan at maturity, the renewal generally would be deemed a new loan to a nonaffiliate, which is not a covered transaction. However, if the bank refinances or restructures the loan prior to its maturity, the restructured or refinanced loan would continue to be treated as a covered transaction until either (i) it is sold or (ii) it is reduced to reflect amortization down to zero, consistent with GAAP.

Posted: 12/30/2021

Subpart D—Other Requirements under Section 23A

12 CFR 223.31 (How does section 23A apply to a member bank's acquisition of an affiliate that becomes an operating subsidiary of the member bank after the acquisition?)

Q1: In what situations may a member bank apply the step-transaction exemption in section 223.31(d) of Regulation W?

A1: Generally, a member bank has purchased assets from an affiliate if the bank acquires all the shares of an affiliate. 12 CFR 223.31(a). Regulation W provides an exemption for step transactions in which a member bank acquires all the shares of the affiliate shortly after the company becomes an affiliate of the bank that also meets a few other conditions. 12 CFR 223.31(d). In establishing this regulatory exemption, the Board cited as an example a situation in which an existing bank holding company acquires all the stock of an unaffiliated company and, immediately after consummation of the acquisition, transfers the shares of the acquired company to the holding company's subsidiary bank. 12 CFR 223.31(e). The Board provided an exemption for these transactions because, if the acquisition had been structured differently—specifically, if the bank had acquired the target company directly and the bank holding company had not owned the target company for a moment in time—there would have been no covered transaction. Notably, the Board intended this exemption to be available only when a holding company of an existing member bank acquires an unaffiliated company and promptly thereafter contributes the company to the subsidiary bank. The exemption is not intended to be used by a company to acquire a member bank and then promptly transfer the company's nonbank operations under the bank free from the limitations of Regulation W.

To the extent a member bank fails to meet the terms of the exemption in 12 CFR 223.31(d), the bank may nevertheless be able to satisfy the conditions of another exemption, such as the exemption for internal-corporate-reorganization transactions in 12 CFR 223.41(d).

Source: 67 Fed. Reg. 76560, 76585 (December 12, 2002).

Posted: 3/31/2021

A2: Due to common control, the other company is an affiliate of the member bank prior to the acquisition for purposes of Regulation W. Therefore, the bank’s acquisition of the other company’s shares is viewed as a purchase of assets by the bank from an affiliate under 12 CFR 223.31(a) that must be valued under the principles of 12 CFR 223.31(b).

Posted: 12/30/2021

A3: All balance-sheet liabilities included for GAAP purposes and contingent liabilities of the affiliate that are transferred to a member bank are liabilities for purposes of the valuation rule. See Q2 of these FAQ in the section concerning 12 CFR 223.21-.22 for additional discussion of contingent liabilities.

Posted: 12/30/2021

A4: Yes. A member bank may reduce the amount of liabilities for purposes of the valuation rule by both (i) the amount of cash assets of the affiliate at the time of transfer and (ii) the amount of any separate cash contributions to the bank that are simultaneous with the transfer of the affiliate to the bank, provided that any such cash is free, unencumbered (including for regulatory purposes), and available for immediate use by the bank to pay off any liabilities, if desired.

Posted: 12/30/2021

A5: Yes.

Source: 67 Fed. Reg. 76560, 76584 n. 133 (December 12, 2002).

Posted: 12/30/2021

Subpart E—Exemptions from the Provisions of Section 23A

12 CFR 223.41 (What covered transactions are exempt from the quantitative limits and collateral requirements?)

A1: Yes.

Posted: 12/30/2021

A2: Yes. The contribution by a bank holding company of all the shares of one of its subsidiary depository institutions to another subsidiary member bank qualifies for the sister-bank exemption, provided that the bank holding company controls 80 percent or more of the voting securities of each of the two subsidiary depository institutions. See 12 CFR 223.41(b).

Posted: 12/30/2021

A3: Yes, since the transaction would have qualified for the exemption if the depository institution had directly acquired the member bank’s operating subsidiary. See 12 CFR 223.41(b).

Posted: 12/30/2021

Q4: Would a transaction with an uninsured depository institution that otherwise would qualify as a sister bank be eligible for the sister-bank exemptions?

A4: No. Regulation W generally defines "depository institution" to mean an insured depository institution as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. § 1813). 12 CFR 223.3(k).

Source: 67 Fed. Reg. 76560, 76589 (December 12, 2002).

Posted: 12/30/2021

Q5: May a member bank accept shares issued by a sister bank as collateral for a loan to a nonaffiliate using the sister-bank exemption?

A5: Yes.

Posted: 12/30/2021

A6: Yes.

Posted: 12/30/2021

A7: Only the member bank’s top-tier holding company (which may be a foreign bank, to the extent the foreign bank controls a U.S. bank holding company) must be well-capitalized and well-managed for the member bank to meet the requirement in 12 CFR 223.41(d)(7). See also 12 CFR 223.41(d)(3) and (4) (referencing obligations of the top-tier holding company).

Posted: 12/30/2021

12 CFR 223.42 (What covered transactions are exempt from the quantitative limits, collateral requirements, and low-quality asset prohibition?)

Q1: May interest-bearing deposits qualify for the correspondent banking exemption in 12 CFR 223.42(a)?

A1: Yes, consistent with the 1982 revisions to section 23A.

Source: See, e.g., John T. Rose and Samuel H. Talley, "Bank Transactions with Affiliates: The New Section 23A," 100 Banking L.J. 423, 433 (1983) (discussing the expansion of the statutory exemption following the 1982 revisions).

Posted: 12/30/2021

Q2: What qualifies as an "item" for purposes of the exemption in 12 CFR 223.42(b)?

A2: For purposes of this exemption, "item" generally is interpreted narrowly and in a manner consistent with that term’s definition in the Board’s Regulation J (namely, checks or certain instruments or promises or orders to pay money). See 12 CFR 210.2(i).

Posted: 12/30/2021

A3: No. Where a credit transaction is denominated in U.S. dollars but is secured by a non-U.S. dollar deposit account at the member bank, the transaction is not eligible for the exemption in 12 CFR 223.42(c).

Posted: 12/30/2021

Q4: Does a credit transaction between a member bank and an affiliate that is guaranteed by a U.S. government agency qualify for the U.S. government securities collateral exemption in 12 CFR 223.42(c)?

A4: No. A guarantee issued by any party, including a U.S. government agency, is not eligible to be used as collateral to meet the collateral requirements of Regulation W. See 12 CFR 223.14(c)(5).

Posted: 12/30/2021

Q5: May a member bank collateralize a purchase of assets from an affiliate with cash or U.S. government securities in order to qualify for the exemption in 12 CFR 223.42(c)?

A5: No. A member bank’s purchase of an asset from an affiliate is valued at the total amount of consideration given by the bank in exchange for the asset, including any liabilities assumed by the member bank, and is not subject to any collateral requirements. 12 CFR 223.14; see also 12 CFR 223.3(i). Therefore, an affiliate’s pledge of cash or U.S. government securities cannot be used to reduce the covered transaction amount. Moreover, the exemption in 12 CFR 223.42(c) is available by its terms only for credit transactions, not for asset purchases. However, a member bank would not be deemed to have purchased an asset from an affiliate where the bank acquires the asset from the affiliate and simultaneously receives a cash contribution in an amount equal to the consideration paid by the bank for the asset (including liabilities assumed by the bank). 12 CFR 223.22(a).

Source: See 67 Fed. Reg. 76560, 76575 n. 95, 76585 (December 12, 2002).

Posted: 12/30/2021

Subpart F—General Provisions of Section 23B

12 CFR 223.51–.56 (General provisions of section 23B)

Q1: What is prohibited by the advertising restriction in section 223.54 of Regulation W?

A1: Regulation W prohibits a member bank and its affiliates from publishing any advertisement stating or suggesting that the member bank will in any way be responsible for the obligations of its affiliates. The restriction not only prohibits a member bank and its affiliates from entering into such public advertising arrangements, but also prohibits them from entering into any agreement stating or suggesting that the member bank will in any way be responsible for the obligations of its affiliates, subject to limited exceptions. 12 CFR 223.54. However, consistent with section 23A of the FRA and 12 CFR 223.3(h)(5), a member bank may issue a guarantee, acceptance, or letter of credit on behalf of an affiliate, confirm a letter of credit issued by an affiliate, or enter into a cross-affiliate netting arrangement, provided that the transaction complies with the quantitative limits and collateral requirements of, and is otherwise permissible under, Regulation W. In addition, a member bank may refer to such guarantee, acceptance, letter of credit, or cross-affiliate netting arrangement if otherwise required by law.

Source: 67 Fed. Reg. 76560, 76598 (December 12, 2002).

Posted: 3/31/2021

Q2: Does Regulation W regulate a member bank's provision of services to an affiliate?

A2: Regulation W requires that the furnishing of a service by a member bank to an affiliate under contract, lease, or otherwise be on terms and under circumstances that are substantially the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions with or involving nonaffiliates. 12 CFR 223.51-.52. This requirement is commonly known as the market-terms requirement of Regulation W. The market-terms requirement of Regulation W generally would require that a member bank receive prompt payment for services provided to its affiliate. Consistent with section 23B, a member bank must apply the same invoicing and payment collection practices when furnishing services to affiliates as it would when furnishing services to nonaffiliates (or practices that are more favorable to the bank). If a bank does not provide similar services to nonaffiliates, payment generally would be considered prompt where the member bank receives payment within 60 days of providing the service (for example, bank invoices affiliate for services within 30 days and affiliate pays bank within 30 days of invoice).

When a member bank does not receive prompt payment for services provided to an affiliate, the amount owed to the bank would be considered an extension of credit subject to the quantitative limits and collateral requirements of Regulation W until payment is made.

Source: 67 Fed. Reg. 76560, 76570 (December 12, 2002).

Posted: 3/31/2021

Last Update: December 30, 2021