What Is Regulation O?

Regulation O is a Federal Reserve regulation that places limits and stipulations on the credit extensions a member bank can offer to its executive officers, principal shareholders, and directors. The regulation is designed to prevent bank directors, trustees, executive officers, or principal shareholders ("insiders") from benefiting from favorable credit extensions.

Key Takeaways:

  • Regulation O controls the credit extensions that member banks can offer to its "insiders."
  • Regulation O requires that banks report any extensions provided to insiders in their quarterly reports. 
  • Regulation O defines bank insiders as directors or trustees of a bank, executive officers, or principal shareholders.
  • The restrictions in place are devised to prevent bank insiders from receiving advantageous or generous credit extensions,

Regulation O Explained

Regulation O regulates the credit extensions that member banks can offer to individuals who are considered to be "insiders" with respect to the bank. While bank insiders are not barred from taking out loans from a bank with which they are professionally associated, federal law carefully regulates how that bank treats the insider as a customer. In addition to setting restrictions on credit extensions for bank insiders, Regulation O requires that banks report any extensions provided to insiders in their quarterly reports

Regulation O also gives a clear definition of bank insiders, dividing them into multiple tiers of association, subject to different credit extension regulations. Insiders can be directors or trustees of a bank, executive officers (for example, the president or treasurer) or principal shareholders (individuals who own or otherwise control more than 10% of the publicly-traded shares of the institution).

Generally speaking, the restrictions in place are devised to ensure that bank insiders are not given more advantageous or generous credit extensions than the bank would provide for a non-insider. The bank cannot give credit extensions that it would not provide to a non-insider customer, nor can it extend credit beyond legal or self-imposed lending limits. One exception to this rule comes with compensation packages provided by banks to all employees, including non-insiders. For example, if a bank has a policy of waiving certain mortgage application fees for non-insider employees (such as tellers), the same fees could be waived for the bank president, who would be an insider.

Implementation and Expansion

Regulation O lays out the reporting requirements included in two previous financial laws: the Financial Institutions Regulatory and Interest Rate Control Act of 1978 (the first iteration of Regulation O was fully rolled out by 1980) and the Depository Institutions Act of 1982

Banks and other lending institutions are often able to find exceptions or workarounds to Regulation O, in effect, providing preferential treatment to insiders without violating any of the regulations. One of the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act provided an extended definition of "credit extension" to expand the scope of Regulation O.

Special Considerations For Regulation O

Recent growth in investments in mutual funds, exchange-traded funds (ETFs), and other index-based investment products has caused a number of companies to pay greater attention to Regulation O. Large asset management companies are becoming principal shareholders through "fund complexes," organizations that invest in funds. A complex that acquires 10% of a class of voting securities of a banking organization is considered a “principal shareholder.”