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What is 'Regulation W'

Regulation W is a Federal Reserve regulation that established terms for transactions between banks and their affiliates. The U.S. Congress enacted Regulation W as part of the Federal Reserve Act. The regulation applies to depository institutions and their affiliates by setting quantitative limits on covered transactions and requiring collateral for certain transactions.

BREAKING DOWN 'Regulation W'

In particular, credit extended to an affiliate must be secured, transactions with any one affiliate must total no more than 10% of an institution's capital, and transactions with all affiliates must total no more than 20% of an institution's capital.

Regulation W set forth quantitative thresholds and other requirements for various transactions between a depository financial institution and its affiliates. The regulation is applied to banks that are members of the U.S. Federal Reserve System, insured state nonmember banks and insured savings associations.

Affiliates and Covered Transactions

Regulation W defines a bank's affiliate fairly broadly and includes any company that a bank directly or indirectly controls or that is sponsored and advised by a bank. Additionally, Regulation W covers a wide spectrum of transactions, including extension of credit to an affiliate, investment in securities issued by an affiliate, asset purchases from an affiliate, issuance of a guarantee on behalf of an affiliate, and acceptance of securities issued by an affiliate as collateral for credit.

Regulation W Requirements

Regulation W does not allow a covered transaction between a bank and its affiliate if the total amount of such transaction exceeds 10% of the bank's capital stock and surplus, or if the aggregate amount of covered transactions with all affiliates would be greater than 20% of the bank's capital stock and surplus. Additionally, banks are prohibited from purchasing low-quality assets from their affiliates, such as bonds with principal and interest payments past due for more than 30 days. If a bank provides its affiliate either credit, guarantees or letters of credit, such transactions must have a collateral, which is a statutorily defined assets that backs up covered transactions. Collateral must have coverage that ranges between 100% and 130% of the total transaction amount.

Consequences for Violating Regulation W

Financial institutions found in violation of Regulation W can be levied substantial civil penalties. The amount of the fine is determined by several factors, including if the violation was caused with intent, if it was undertaken with reckless disregard for the institution's financial safety and soundness, or if it results in any type of gain to the perpetrator.

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