Banking Industry Regulation W: Restrictions on Financial Affiliate Transactions
In the United States, banks are governed by Regulation W, a set of rules introduced by the Federal Reserve System (FRS) to limit transactions between banks and their affiliates. This regulation, adopted in 2000, is designed to mitigate risk and manage financial safety.
Regulation W applies to a wide range of banking institutions, including members of the Fed, insured state non-member banks, and insured savings associations. It covers nine major issues, such as derivative transactions, intraday credit, and financial subsidiaries.
One of the key provisions of Regulation W is the prohibition of banks from purchasing low-quality assets from their affiliates, such as bonds with principal and interest payments more than 30 days past due. Any extension of credit under Regulation W must be secured by collateral with coverage between 100% and 130% of the total transaction amount.
Quantitative limits are also imposed, restricting transactions with a single affiliate to 10% of the bank's capital and all affiliates combined to 20%. These limits aim to prevent any single affiliate from having an undue influence on the bank's operations.
The Fed monitors banks' exposures to their affiliates through the FR Y-8 report, which has to be submitted quarterly. Financial institutions found in violation of Regulation W can be hit with substantial civil penalties, the amount of which is determined by several factors.
The Dodd-Frank Act, enacted in 2010, expanded Regulation W's scope by increasing transparency and oversight in transactions and expanding the definition of affiliates. It also curbed the Fed's ability to grant exemptions on its sole authority. Certain exemptions now require approval from the Federal Deposit Insurance Corporation (FDIC).
Regulation W is implemented to ensure a stable and secure financial system. By limiting transactions between banks and their affiliates, it helps to prevent excessive risk-taking and maintain the integrity of the banking sector.
The FDIC now has 60 days to determine whether an exemption is justified or whether it might pose an unacceptable risk to its deposit insurance fund and raise any objections. This added layer of oversight further strengthens the regulatory framework and protects consumers and the economy.
In summary, Regulation W plays a crucial role in maintaining the stability and safety of the US banking system. It sets clear guidelines for transactions between banks and their affiliates, ensures adequate collateral, imposes quantitative caps, and provides for regular monitoring and enforcement.
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