Regulation W

Regulation W is the Federal Reserve rule at 12 CFR Part 223 that implements sections 23A and 23B of the Federal Reserve Act. It limits and conditions transactions between a member bank and its affiliates so the bank is not used to transfer value to, or absorb excessive risk from, related companies.

Key Takeaways

• Regulation W begins with defined “member bank,” “affiliate,” and “covered transaction” concepts.
• Section 23A generally limits covered transactions to 10% of the bank’s capital stock and surplus for one affiliate and 20% for all affiliates combined.
• Credit transactions with affiliates can require collateral worth 100%, 110%, 120%, or 130% of the exposure, depending on the collateral type.
• Securities issued by an affiliate and low-quality assets are not eligible collateral for this purpose.
• Section 23B generally requires covered dealings to be on terms at least as favorable to the bank as comparable nonaffiliate transactions.
• Exemptions are transaction-specific; an exemption from one requirement does not necessarily remove every Regulation W condition.

Affiliates and Covered Transactions

Affiliates can include a company that controls the bank, a company under common control, certain investment funds advised by the bank or an affiliate, and specified financial subsidiaries. Subsidiaries of the bank are often treated differently, but definitions and exceptions must be checked.

Covered transactions include:

• loans or extensions of credit to an affiliate;
• purchases of or investments in securities issued by an affiliate;
• purchases of assets from an affiliate;
• acceptance of affiliate-issued securities as collateral;
• guarantees, acceptances, or letters of credit issued on behalf of an affiliate; and
• specified derivatives, securities-financing transactions, and other exposures to affiliate risk.

The attribution rule can treat a transaction with a third party as an affiliate transaction to the extent proceeds are used for the benefit of, or transferred to, an affiliate.

Quantitative Limits

Section 23A generally applies two limits to covered transactions:

Both tests apply after using Regulation W’s valuation, timing, and aggregation rules. The limits do not mean every affiliate transaction below 10% is permissible; collateral, market terms, low-quality-asset, safety-and-soundness, and other restrictions can still apply.

Collateral Requirements

Credit transactions with affiliates generally require collateral with market value of at least:

Coverage must be maintained while the transaction remains outstanding. Affiliate-issued securities and low-quality assets are among the ineligible collateral categories.

Worked Example: Single-Affiliate Limit and Collateral

Assume a member bank has USD 500 million of capital stock and surplus. It already has USD 20 million of covered transactions with Affiliate A and proposes a new USD 40 million loan to that affiliate.

• Single-affiliate limit: USD 500 million x 10% = USD 50 million.
• Combined exposure to Affiliate A: USD 20 million + USD 40 million = USD 60 million.

Absent an applicable exemption or other rule treatment, USD 60 million exceeds the USD 50 million single-affiliate limit. Board approval or favorable pricing would not by itself cure that excess.

If the proposed loan were otherwise permitted and secured only by eligible corporate debt, 120% collateral coverage would generally require USD 40 million x 120% = USD 48 million of qualifying market value at the time of the transaction, with required coverage maintained afterward.

Market-Terms Requirement

Section 23B generally requires covered transactions and specified other dealings to occur on terms and circumstances, including credit standards, that are substantially the same as or at least as favorable to the bank as comparable transactions with nonaffiliates. If no comparable transaction exists, the terms must be those the bank would in good faith offer to a nonaffiliate.

The requirement can apply to services, asset sales, agency arrangements, and other transactions beyond loans. “Arm’s length” is useful shorthand, but the bank needs evidence supporting valuation, pricing, credit standards, and other terms.

Common Mistakes and Limitations

• Applying a universal 100% collateral requirement instead of the 100%-to-130% schedule.
• Testing only the 10% single-affiliate limit and ignoring the 20% combined limit.
• Assuming a company is not an affiliate because it is outside the bank’s direct ownership chain.
• Ignoring a third-party transaction whose proceeds benefit an affiliate.
• Treating an exemption from quantitative limits as an exemption from market terms or safety and soundness.
• Using book value when the rule requires another valuation method.
• Accepting affiliate securities or low-quality assets as required collateral.
• Describing a transaction as arm’s length without comparable evidence or a good-faith nonaffiliate analysis.

Authoritative Sources

• Federal Reserve Regulation W: current rule
• Federal Reserve Regulation W background and summary
• Federal Reserve section 223.14: collateral requirements
• Federal Reserve section 223.51: market-terms requirement
• Federal Reserve Regulation W FAQs

Related Terms

• Federal Reserve Act: Statute containing sections 23A and 23B.
• Affiliate: Related-company concept whose precise Regulation W definition controls this rule.
• Regulation O: Insider-lending rule focused on people and related interests.
• Regulation U: Margin-stock credit rule focused on purpose and collateral.

FAQs

This page provides general banking and regulatory education, not legal, accounting, valuation, or compliance advice. Apply the current rule, exemptions, valuations, and institutional facts to an actual transaction.