DEFINITION of Regulation F
Regulation F is a regulation set forth by the Federal Reserve. The regulation specifies that banks must institute internal rules that control the amount of risk that they can take in their business proceedings with other institutions. It also limits the amount of credit exposure between banks to 25% of capital, in most cases.
BREAKING DOWN Regulation F
The intent of Regulation F is to limit the potential risk that the failure of a depository institution might bring to insured institutions covered by FDIC.
Regulation F covers the collection of checks as well as various other services that larger banks offer to smaller ones. Banks might enter such agreements in order to operate more efficiently or because the smaller banks do not have their own resources to adequately offer such services themselves. The regulation also covers certain types of transactions in the financial markets. Interest rate swaps and repurchase agreements fall under this regulation. Regulation F also lets banks that are highly capitalized have higher levels of credit exposure.
What Regulation F Sets Limits On
The regulation establishes general limits in terms of the bank’s capital regarding overnight credit exposure to other banking institutions. Regulation F requires institutions such as savings associations, banks and branches of foreign banks that have deposits insured by FDIC to create internal policies to evaluate and control their exposure to the depository institutions they do business with. Banks must also create policies to account for operational, liquidity and credit risks when choosing other institutions to do business with.
Banks can break the 25% capital credit exposure limit if the bank can show the institution it does business with is adequately capitalized. Transactions can be excluded from the calculated credit exposure limit if those transactions carry a low risk of loss. This includes transactions fully secured by readily marketable collateral or government securities.
Banks may apply for a waiver to ignore restrictions set by Regulation F. This can occur if the primary federal supervisor of the bank informs the Federal Reserve Board that the bank would not have access to necessary services if it did not open itself to exposure beyond the regulatory limits. For example, if a small bank needs the check collection services of a larger bank but its exposure exceeds the limit, the small bank might seek a waiver if it has no other options available to provide check collection.
Banks that are not insured depositary institutions are typically not subject to the rules of Regulation F.