Supervision of Transactions with Affiliates
As part of the supervisory process, the Federal Reserve also evaluates
transactions between a bank and its affiliates to determine the effect of the
transactions on the bank’s condition and to ascertain whether the transactions
are consistent with sections 23A and 23B of the Federal Reserve Act, as
implemented by the Federal Reserve Board’s Regulation W. Since the GLB Act
increased the range of affiliations permitted to banking organizations,
sections 23A and 23B play an increasingly important role in limiting the risk to
depository institutions from these broader affiliations. Among other things,
section 23A prohibits a bank from purchasing an affiliate’s low quality assets.
In addition, it limits a bank’s loans and other extensions of credit to any
single affiliate to 10 percent of the bank’s capital and surplus, and it limits
loans and other extensions of credit to all affiliates in the aggregate to 20
percent of the bank’s capital and surplus. Section 23B requires that all
transactions between a bank and its affiliates be on terms that are
substantially the same, or at least as favorable, as those prevailing at the
time for comparable transactions with nonaffiliated companies. The Federal
Reserve Board is the only banking agency that has the authority to exempt any
bank from these requirements. During the course of an examination, examiners
review a banking organization’s intercompany transactions for compliance with
these statutes and Regulation W.