Compliance Guide to Small Entities
Regulation F: Limitations on Interbank Liabilities
12 CFR 206
This description should not be interpreted as a comprehensive statement of the regulation. Rather, it is intended to give a broad overview of the regulation's requirements. The full regulation is available on the Government Printing Office web site.
Regulation F establishes a general limit for overnight credit exposure to an individual correspondent stated in terms of the exposed bank's capital. The regulation requires banks, savings associations, and branches of foreign banks with deposits insured by the Federal Deposit Insurance Corporation (FDIC) to develop and implement internal prudential policies and procedures for evaluating and controlling exposure to the depository institutions with which they do business.
A general description of the regulation, by section, follows.
Section 206.1 Authority, purpose, and scope
States that the purpose of the regulation is to limit the risks that the failure of a depository institution would pose to insured depository institutions and applies to all depository institutions insured by the Federal Deposit Insurance Corporation.
Section 206.2 Definitions
Defines key terms used in the regulation.
Section 206.3 Prudential standards
States that a bank must establish policies and procedures that take into account credit and liquidity risks, including operational risks, in selecting correspondents and in terminating those relationships. At least annually, these policies and procedures should be reviewed and approved by the bank's board of directors.
Section 206.4 Credit exposure
Stipulates that a bank ordinarily should limit its credit exposure to an individual correspondent to an amount not more than 25 percent of the exposed bank's total capital, unless the bank can demonstrate that its correspondent is at least "adequately capitalized." Certain transactions that carry a low risk of loss, such as transactions that are fully secured by government securities or other readily marketable collateral, are excluded from the calculation of a bank's credit exposure.
Section 206.5 Capital levels of correspondents
Defines "adequately capitalized" correspondents. Although the regulation does not specify a limit on credit exposure to adequately capitalized correspondents, a bank is required to establish and follow its own internal policies and procedures with regard to exposure to all correspondents, regardless of capital level.
Section 206.6 Waiver
States that if the primary federal supervisor of the bank advises the Federal Reserve Board that the bank is not reasonably able to obtain necessary services without incurring an exposure to a correspondent in excess of the regulatory limit, the Board may issue a waiver.
Section 206.7 Transition provisions
Provides for a transition period for compliance with the regulation; the transition period ended in 1995.