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Regulation W - United States

It came into force in 1933. Regulation W deals with financial relationships between member banks and affiliates. It is a part of the Federal Reserve Act. Though it has been in existence since 1933, due to the regulatory reforms coming out of the recent financial crisis (2007), banks are being forced to revisit their Regulation W compliance closely. The following gives a brief overview of the regulation and its impact.

What does Regulation W affect?

Regulation W establishes limitations on transactions between member banks and their affiliates. The regulation applies to all federally insured depository institutions, from national to state banks, and from trust companies to insured savings associations.

What does Affiliate mean?

Affiliate includes, but is not limited to, the following. Note: The subsidiary of an affiliate is also considered an affiliate. Also, it is not important for the affiliate to be a legal person. It can be an individual person, trust, partnership or any other form of organisation.

Thus, the following entities could also come under the scope of the term affiliate.

What are the main sections under the Regulation W?

There are two main sections under this regulation, namely Section 23A and Section 23B.
The following is covered under Section 23A The following is covered under Section 23B

What does Attribution under the regulation mean?

The following is the extract on attribution under the regulation.

“A member bank must treat any of its transactions with any person as a transaction with an Affiliate to the extent that the proceeds of the transaction are used for the benefit of, or transferred to, an Affiliate”.

This means that the rule treats transactions between banks and third parties as extensions of credit from banks to affiliates to the extent that the third party utilizes the proceeds to benefit an affiliate. For example, if the bank provides a loan to a third party and the third party extends credit to one of the bank’s affiliate then the transaction is viewed as if the bank has provided direct credit to the affiliate. The transactions between the third party and the affiliate need not be just a loan, it can be investment, guarantee, etc.

Covered transactions under the regulation

A covered transaction under the regulation includes.

Exemptions under Regulation W

Transactions in liquid assets, municipal securities and intraday extensions of credit are not covered under this regulation.

Penalties for non-compliance to the regulation

The Federal Reserve has the capacity to levy penalties upto $1 million per day for non-compliance of the regulation.





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First updated on 03.05.2018