Regulation W in Banking: Limits on Bank–Affiliate Transactions

Regulation W implements Sections 23A and 23B of the Federal Reserve Act to limit risks from transactions between a bank and its affiliates. It sets quantitative caps, collateral standards, and market‑terms requirements to prevent banks from using federally backstopped funds to subsidize affiliated entities. The rule applies to Federal Reserve member banks, insured state non‑member banks, and insured savings associations.

What Regulation W covers

Covered transactions include a broad range of dealings between a bank and its affiliates, for example:
* Extensions of credit to an affiliate (loans, advances)
* Purchases of assets from an affiliate (loan portfolios, securities)
* Investment in securities issued by an affiliate
* Acceptance of securities issued by an affiliate as collateral
* Guarantees, letters of credit, and similar credit enhancements for an affiliate
* Derivative transactions and intraday extensions of credit

Key limits and collateral requirements

• Single affiliate cap: no covered transaction with any one affiliate may exceed 10% of the bank’s capital.
• Aggregate affiliate cap: total covered transactions with all affiliates may not exceed 20% of the bank’s capital.
• Collateral: covered transactions generally must be secured by eligible collateral with coverage typically ranging from 100% to 130% of the exposure, depending on the type of collateral and transaction.
• Low‑quality assets: banks are prohibited from purchasing certain low‑quality affiliate assets (for example, assets with principal or interest over 30 days past due).

All transactions must be on market terms and documented to demonstrate arms‑length pricing and risk allocation.

Affiliates, exemptions, and post‑2008 changes

Dodd‑Frank expanded the concept of “affiliate” and tightened oversight of exemptions that regulators may grant. Exemptions from Regulation W can be permitted by the Federal Reserve, but certain exemptions also require the Federal Deposit Insurance Corporation (FDIC) to review and raise objections within a defined period (for example, the FDIC has a statutory window to determine whether an exemption would pose unacceptable risk to the deposit insurance fund).

Regulatory changes since 2008 also increased transparency expectations and clarified what constitutes a covered transaction.

Compliance, reporting, and enforcement

• Reporting: the Federal Reserve collects affiliate exposure data via the FR Y‑8 report, filed quarterly by covered institutions.
• Compliance challenges: implementation can be complex for banks with diversified holding companies, rapid growth in capital markets activities, or recent acquisitions.
• Enforcement: violations can result in substantial civil money penalties. Penalty determinations consider factors such as intent, reckless disregard for safety and soundness, and whether the violation produced a financial gain.

Practical example

If Bank A intends to buy a loan portfolio from its subsidiary, the bank must ensure:
* The transaction with that single affiliate does not exceed 10% of Bank A’s capital.
* The loans are not prohibited low‑quality assets.
* The price and terms reflect market conditions.
* Adequate collateral, if required, is obtained and documented.

Key takeaways

• Regulation W protects banks and federal deposit insurance funds by restricting risky or subsidized transactions with affiliates.
• Transactions with any one affiliate are capped at 10% of capital; all affiliates combined are capped at 20%.
• Covered transactions must generally be secured, on market terms, and reported to regulators.
• Dodd‑Frank expanded affiliate definitions and tightened exemption procedures, increasing transparency and oversight.
• Noncompliance can lead to significant penalties and supervisory action.

Regulation W is a core supervisory tool to ensure that banks conduct affiliate transactions prudently and do not transfer the benefits of federal safety nets to affiliated entities in ways that endanger the bank or deposit insurance funds.