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?

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?

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?

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

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)?

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

 

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?

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

 

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?

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

 

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?

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

 

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?

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

 

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?

A9: No.

Posted: 3/31/2021

 

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?

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

 

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?

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

 

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?

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

 

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?

A19: Yes.

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

Posted: 3/31/2021

 

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?

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

 

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?

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

 

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?

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

 

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?

A3: No.

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

Posted: 3/31/2021

 

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?

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?)

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?

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

 

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?

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

 

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?

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

 

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?

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

 

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

 

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

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Last Update: March 31, 2021