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Winter 2003-04 FRB approves new regulation on loans to affiliates

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Number 50
Winter 2003

FRB approves new regulation on loans to affiliates

Regulation W has been promulgated by the Board of Governors of the Federal Reserve System to implement sections 23A and 23B of the Federal Reserve Act. These deal with transactions between banks and their affiliates. The regulation also applies to banks whose deposits are insured by the Federal Deposit Insurance Corporation.

"Affiliates"

Considered by Regulation W to be "affiliates" of a bank are:

the bank's parent company,

companies under the common "control" (the power to vote 25% or more of any class of voting securities) of the bank's parent company,

subsidiaries of the bank,

subsidiaries of companies under the common control of the bank's parent company,

companies with interlocking directorates,

companies that are sponsored and advised under contract by the bank or an affiliate of the bank,

certain investment companies,

companies held under merchant banking or insurance company investment authority, if the holding company owns or controls 15% or more of their equity capital, unless, subject to certain exceptions.

The following are not considered to be "affiliates" under Regulation W:

a company engaged solely in holding the premises of the bank,

a company engaged solely in conducting a safe deposit business,

a company engaged solely in holding obligations of the United States,

a company whose control results from foreclosure of a lien or collection of a debt.

"Covered transactions"

Regulation W deals not only with inter-company loans, but extends to a number of other so-called "covered transactions," such as:

any extension of credit,

purchase of securities,

acceptance of securities as collateral,

purchase of assets,

issuance of guaranties, acceptances and letters of credit.

Rules

Pursuant to Regulation W:

A bank may not engage in a covered transaction with an affiliate (other than a financial subsidiary of the bank) if the aggregate amount of the bank's transactions with such affiliate would exceed 10% of the capital stock and surplus of the bank.

A bank may not engage in a covered transaction with any affiliate if the aggregate amount of the bank's covered transactions with all affiliates would exceed 20% of the capital stock and surplus of the bank.

A bank must ensure that each of its credit transactions with an affiliate is secured by collateral security worth at least-

100% of the amount of the transaction, if the collateral consists of obligations of the United States or its agencies, or secured thereby, or of cash collateral;

110% of the amount of the transaction, if the collateral consists of obligations of a State or a political subdivision thereof;

120% of the amount of the transaction, if the collateral consists of other debt instruments (e.g., accounts receivable); and

130% of the amount of the transaction, if the collateral consists of other kinds of real or personal property.

The value of senior liens must be deducted when computing the above percentages.

Any collateral that is retired must be replaced.

Securities issued by any affiliate, the bank's own stock or other equity securities, intangible assets and guaranties, letters of credit and similar instruments are not eligible collateral.

Exception

None of the above applies if the level of affiliate control is 80% or more.

‡‡ Note:

Regulation W will become effective on April 1, 2003. n


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