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.

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