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. 

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 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 which 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 (like tellers), the same fees could be waived for the bank president, who would be an insider.

Implementation and Expansion

Regulation O has put into effect the requirements for reporting as laid out 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) as well as 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" in order to expand the scope of Regulation O.