Regulation O restricts credit from member banks to executive officers, directors, principal shareholders, and their related interests.
Regulation O is the Federal Reserve rule at 12 CFR Part 215 governing extensions of credit by member banks to insiders. Insiders include directors, executive officers, principal shareholders, and specified related interests, with rules designed to prevent preferential lending and excessive concentration of bank credit among people able to influence the institution.
Regulation O defines an insider as an executive officer, director, or principal shareholder of a member bank, and includes insiders of specified affiliates for several restrictions. The rule also attributes credit to “related interests,” such as certain companies or political committees controlled by the person.
Titles alone are not always decisive. An executive officer is generally a person who participates or has authority to participate in major policymaking functions, subject to the detailed definition and exclusions. Principal-shareholder status depends on voting control under the rule.
| Test | Main requirement |
|---|---|
| Terms and underwriting | Substantially the same terms and no less stringent procedures than comparable noninsider transactions, with limited employee-benefit exceptions |
| Credit quality | No more than normal repayment risk and no other unfavorable features |
| Prior approval | Majority approval of the entire board above the rule’s threshold, with the interested party abstaining |
| Individual limit | Combined credit to the insider and related interests cannot exceed the applicable bank lending limit |
| Aggregate limit | Total credit to insiders generally cannot exceed unimpaired capital and unimpaired surplus, subject to defined exceptions |
| Records | Bank records must identify insiders and support aggregation and compliance testing |
Prior approval generally applies when combined credit to the insider and related interests exceeds the higher of USD 25,000 or 5% of unimpaired capital and unimpaired surplus. However, the approval threshold can never exceed USD 500,000: combined credit above USD 500,000 requires prior approval regardless of the percentage calculation. These amounts must be read with the current rule, aggregation provisions, and approved-line treatment.
Assume a member bank has USD 20 million of unimpaired capital and unimpaired surplus. A director and a controlled related interest already owe the bank USD 100,000 and request a new USD 1.2 million loan.
Because USD 1.3 million exceeds the USD 500,000 ceiling, the extension generally requires advance approval by a majority of the entire board. The interested director must abstain from participating directly or indirectly. Approval does not cure another problem: the loan must still meet the nonpreferential-terms, credit-quality, individual-limit, and aggregate-limit requirements.
Credit to a member bank’s executive officer is more restricted. The rule permits specified categories, including financing education of the officer’s children, qualifying residence financing, and credit secured by specified collateral. Other-purpose credit is subject to a separate amount cap.
The extension must also be promptly reported to the board, preceded by a detailed current financial statement, comply with the general terms requirement, and include a written demand condition tied to specified borrowing from other banks.
A member bank generally may not pay an overdraft for an executive officer or director unless payment occurs under a written, preauthorized, interest-bearing credit plan with a repayment method or a written preauthorized transfer from another account. A limited exception exists for qualifying inadvertent overdrafts of USD 1,000 or less that are corrected within five business days and charged the same fee as comparable customers.
This page provides general banking and regulatory education, not legal, lending, accounting, or compliance advice. Apply the current rule definitions and bank records to an actual extension of credit.