Regulation W Compliance: An Overview

Definition and Scope

Regulation W is a Federal Reserve System (FRS) regulation that restricts certain transactions between depository institutions, such as banks, and their affiliates. It consolidates interpretations and rulemaking under Sections 23A and 23B of the Federal Reserve Act. Regulation W applies to banks that are members of the Fed, insured state non-member banks, and insured savings associations.

Key Facts

  1. Definition and Scope:
    • Regulation W limits transactions between banks and their affiliates.
    • It consolidates interpretations and rulemaking under Sections 23A and 23B of the Federal Reserve Act.
    • It applies to banks that are members of the Fed, insured state non-member banks, and insured savings associations.
  2. Covered Transactions:
    • Covered transactions under Regulation W include the extension of credit to an affiliate, investment in securities issued by an affiliate, asset purchases from an affiliate, acceptance of securities issued by an affiliate as collateral for credit, and issuance of guarantees or letters of credit on behalf of an affiliate.
    • Transactions with any single affiliate must not exceed 10% of a financial institution’s capital, and transactions with all affiliates combined must not exceed 20% of an institution’s capital.
  3. Compliance Challenges:
    • Compliance with Regulation W can be complex, especially for banks dealing with rapid growth in capital market activities or integration of previous acquisitions.
    • The regulatory reforms after the 2008 financial crisis, including the Dodd-Frank Act, further tightened Regulation W’s requirements.
    • Banking regulators expect greater transparency from banks in complying with Regulation W.
  4. Exemptions and Penalties:
    • Regulation W allows the Federal Reserve Bank to grant exemptions, but certain exemptions also require approval from the Federal Deposit Insurance Corporation (FDIC).
    • Financial institutions found in violation of Regulation W can face substantial civil penalties, determined based on factors like intent, recklessness, and gain from the violation.

Covered Transactions

Covered transactions under Regulation W include:

  • Extension of credit to an affiliate
  • Investment in securities issued by an affiliate
  • Asset purchases from an affiliate
  • Acceptance of securities issued by an affiliate as collateral for credit
  • Issuance of guarantees or letters of credit on behalf of an affiliate

Transactions with any single affiliate must not exceed 10% of a financial institution’s capital, and transactions with all affiliates combined must not exceed 20% of an institution’s capital.

Compliance Challenges

Compliance with Regulation W can be complex, especially for banks dealing with rapid growth in capital market activities or integration of previous acquisitions. The regulatory reforms after the 2008 financial crisis, including the Dodd-Frank Act, further tightened Regulation W’s requirements. Banking regulators expect greater transparency from banks in complying with Regulation W.

Exemptions and Penalties

Regulation W allows the Federal Reserve Bank to grant exemptions, but certain exemptions also require approval from the Federal Deposit Insurance Corporation (FDIC). Financial institutions found in violation of Regulation W can face substantial civil penalties, determined based on factors like intent, recklessness, and gain from the violation.

Sources

FAQs

 

What is Reg W compliance?

Reg W compliance refers to adherence to Regulation W, a Federal Reserve regulation that limits certain transactions between banks and their affiliates.

 

What types of transactions are covered by Reg W?

Covered transactions include the extension of credit to an affiliate, investment in securities issued by an affiliate, asset purchases from an affiliate, acceptance of securities issued by an affiliate as collateral for credit, and issuance of guarantees or letters of credit on behalf of an affiliate.

 

What are the limits on transactions under Reg W?

Transactions with any single affiliate must not exceed 10% of a financial institution’s capital, and transactions with all affiliates combined must not exceed 20% of an institution’s capital.

 

What are the challenges of complying with Reg W?

Compliance can be complex, especially for banks with rapid growth in capital market activities or integration of previous acquisitions. Regulatory reforms after the 2008 financial crisis have also tightened Reg W requirements.

 

Are there any exemptions to Reg W?

Yes, the Federal Reserve Bank can grant exemptions, but certain exemptions also require approval from the Federal Deposit Insurance Corporation (FDIC).

 

What are the penalties for violating Reg W?

Financial institutions found in violation of Reg W can face substantial civil penalties, determined based on factors like intent, recklessness, and gain from the violation.

 

How can banks improve their Reg W compliance?

Banks can improve compliance by implementing centralized, end-to-end compliance programs that focus on governance, risk assessment, monitoring and testing, reporting and communication, training, and technology enablement.

 

What are the benefits of Reg W compliance?

Reg W compliance helps to protect banks and federal deposit insurance funds from undue financial risk. It also promotes transparency and reduces the potential for conflicts of interest between banks and their affiliates.