Regulation W

Regulation W is a Federal Reserve regulation that limits certain transactions between depository institutions and their affiliates. In particular, it sets quantitative limits on covered transactions and requires collateral for certain transactions. The regulation is applied to banks that are members of the U.S. Federal Reserve System, insured state non-member banks and insured savings associations.

Regulation W was published in 2003, to consolidate rulemaking under Sections 23A and 23B of the Federal Reserve Act. Compliance with Regulation W was incredibly complex, even before post-financial crisis regulatory reforms. The Dodd-Frank Wall Street Reform and Consumer Protection Act – which has been criticized for being overly burdensome — has further tightened Regulation W’s requirements.

Because Regulation W exemptions were widely used to provide emergency liquidity to affiliates during the financial crisis, the Fed’s ability to grant exemptions without a buy-in from the FDIC has been curbed. Regulation W has expanded the concept of who is an “affiliate” and what constitutes a “covered transaction” (which are securities only covered by Federal regulations). Banking regulators now expect greater transparency from banks in complying with Regulation W.

Regulation W defines a bank's affiliate fairly broadly and includes any company that a bank directly or indirectly controls or that is sponsored and advised by a bank. Additionally, Regulation W covers a wide spectrum of transactions, including extension of credit to an affiliate, investment in securities issued by an affiliate, asset purchases from an affiliate, issuance of a guarantee on behalf of an affiliate and acceptance of securities issued by an affiliate as collateral for credit.

Under Regulation W, transactions with any one affiliate must total no more than 10% of an institution's capital, and transactions with all affiliates must total no more than 20% of an institution's capital. Banks are prohibited from purchasing low-quality assets from their affiliates, such as bonds with principal and interest payments that are more than 30 days past due. And any extension of credit must be secured by collateral. Collateral must have coverage that ranges between 100% and 130% of the total transaction amount.

Financial institutions found in violation of Regulation W can be levied substantial civil penalties. The amount of the fine is determined by several factors, including if the violation was caused with intent, if it was undertaken with reckless disregard for the institution's financial safety and soundness, or if it results in any type of gain to the perpetrator.