Regulation W

What types of entities are generally excluded from the definition of affiliate?

1.) Operating subsidiaries of the bank 2.) Companies engaged solely in holding bank premises or obligations of the U.S. government and its agencies.

Regulation W defines an affiliate as?

A.) Any COMPANY THAT CONTROLS A MEMBER BANK and that company's subsidiaries. B.) A BANK SUBSIDIARY of the member bank C.) A company controlled by a trust for the benefit of shareholders or which a majority of its directors or trustees constitute a majority of the persons holding any such office with the member bank D.) An investment fund which a member bank or affiliate is an investment adviser E.) A company which the board has determined by regulation/order that the relationship may be detrimental to the member bank or its subsidiary.

Under Regulation W, a bank's covered credit transactions with an affiliate must be secured with collateral having a market value equal to:

At least 100 percent, up to 130 percent, depending on the collateral's risk factor.

Regulation W, Section 23B requires:

CERTAIN TRANSACTIONS, INCLUDING ALL COVERED TRANSACTIONS, be on market terms and conditions, that is; at "Arm's-Length." This is to reduce a bank's exposure to loss from affiliate relationships and to PREVENT A BANK FROM BEING FINANCIAL DISADVANTAGED through its transactions with affiliated organizations.

Does Regulation W apply to all financial organizations?

NO. Only federally insured depository institutions (not BHC's and other NDI's). For example, a transaction between a BHC and a mortgage company that is an affiliate of a bank would not be affected by Reg W.

What is the Attribution Rule?

The Attribution Rule states: a member bank must treat any of its transactions with any person as a transaction with an affiliate TO THE EXTENT that the proceeds of the transaction are used for the benefit of, or transferred to, that affiliate. In other words, does the transaction benefit the affiliate, even with the third party as a buffer?

What is the purpose of Regulation W?

To prevent the misuse of a bank's resources through transactions with its affiliates that are not at arm's-length. AND To limit the ability of a bank to transfer its federal subsidy (derived from its FDIC insurance) to its affiliates.

Per Section 225.42(b) of Regulation Y, under what circumstances does a person/entity need only notify the Federal Reserve 90 days after the acquisition of bank/BHC stock?

When shares are INHERITED or in the instance of a BONA FIDE GIFT.

What are the two most common types of situations in which control exists?

1.) A company OR shareholder that directly or indirectly (shareholder acting through one or more other persons) owns, controls, or votes AT LEAST 25 PERCENT of any class of voting securities of a (or another) company. 2.) A company or shareholder that CONTROLS THE ELECTION OF THE MAJORITY of directors, trustees or general partners of another company.

In addition to covered transactions, the arm's length requirement also applies to:

1.) Any sale of assets by the bank to an affiliate. 2.) Any payment of money or furnishing of services by the bank to an affiliate. 3.) Any transaction in which an affiliate acts as agent or broker for the bank. 4.) Any transaction by the bank with a third party if an affiliate has a financial interest in the third party. 5.) Any bank transaction with a third party if any of the proceeds of the transaction benefit an affiliate.

What are the two primary prohibitions against the purchase of assets under Regulation W and Section 23B?

1.) Banks are generally prohibited from PURCHASING AS FIDUCIARY any securities or other ASSETS FROM any AFFILIATE. 2.) Banks or bank affiliates are generally prohibited from publishing an ADVERTISEMENT or entering into an agreement that SUGGESTS OR GUARANTEES that a BANK is in any way RESPONSIBLE FOR an AFFILIATES' OBLIGATIONS.

What are the two primary risks for institutions failing to comply with Regulation W?

1.) CREDIT RISK (extending credit to an affiliate) 2.) LEGAL RISK (Using bank resources, untimely payments, etc)

A credit transaction with an affiliate must be secured by collateral having a market value equal to at least 120% of the transaction amount if the collateral is in the form of:

1.) DEBT INSTRUMENTS (including loans and other receivables) 2.) PLCMOS (Privately issued collateralized mortgage obligations) 3.) MORTGAGE NOTES insured by the FHA

Name the various types of covered transactions:

1.) Extensions of credit to the affiliate 2.) A purchase of, or an investment in, a security issued by the affiliate. 3.) A purchase of an asset from an affiliate 4.) The acceptance of a security issued by an affiliate as collateral for a loan. 5.) Issuance of a guarantee, acceptance, or letter of credit on behalf of an affiliate.

An extension of credit by a bank can be in the form of:

1.) Granting a LINE OF CREDIT OR A LOAN, such as a business loan, a mortgage loan, or a consumer loan 2.) IMPROPER TAX PAYMENTS from the subsidiary bank to its holding company 3.) CHECKING ACCOUNT OVERDRAFTS by either a holding company or affiliate

What types of collateral are CONSIDERED UNACCEPTABLE for credit transactions under Regulation W?

1.) Low-quality assets 2.) Securities (stock, bonds, etc.) issued by an affiliate 3.) Equity securities issued by the bank and debt securities, if considered part of the bank's regulatory capital 4.) Intangible assets 5.) Guarantees, letters of credit and other similar instruments

A credit transaction with an affiliate must be secured by collateral with a market value equal to at least 100% of the amount of the transaction IF THE COLLATERAL IS COMPOSED OF:

1.) Obligations of the United States or its agencies ( Treasury notes, GNMA, FHLB, etc) 2.) Obligations fully guaranteed by the U.S. government or its agencies 3.) Notes, drafts, bills of exchange, or banker's acceptances that are eligible for re-discount or purchase by a Federal Reserve Bank 4.) Deposit accounts segregated, earmarked, and held at the member bank that are for the sole purpose of securing the credit and are identified as such. (The account owner is not allowed to withdraw funds while the account serves as collateral.)

A credit transaction with an affiliate must be secured by collateral with a market value equal to at least 130% of the transaction amount IF THE COLLATERAL IS COMPOSED OF:

1.) STOCK. 2.) LEASES. 3.) OTHER REAL OR PERSONAL PROPERTY (such as land and improvements and buildings).

Regulation W, Section 23A prohibits a bank from initiating a covered transaction with an affiliate IF, AFTER THE TRANSACTION:

1.) The aggregate amount of the bank's covered transactions with THAT PARTICULAR affiliate would exceed 10 percent of the bank's capital stock and surplus. OR 2.) The aggregate amount of the bank's covered transactions with ALL AFFILIATES would exceed 20 percent of the bank's capital stock and surplus.

What types of transactions are EXEMPT from quantitative limits and collateral requirements under Regulation W?

1.) Transactions between TWO OR MORE INSURED DEPOSITORY INSTITUTIONS that are at least 80% OWNED BY THE SAME HOLDING COMPANY are exempt. 2.) A bank's PURCHASE OF A LOAN ON A NON-RECOURSE BASIS from an affiliated insured depository institution is exempt. 3.) ASSET PURCHASES THAT ARE PART OF A ONE-TIME INTERNAL REORGANIZATION are exempt if certain conditions are met.

A credit transaction with an affiliate must be secured by collateral having a market value equal to at least 110% of the transaction amount if the collateral is composed of:

OBLIGATIONS OF ANY STATE OR POLITICAL SUBDIVISION (including instruments like municipal revenue bonds or industrial revenue bonds).