What it means
A diversified financial group can contain a bank alongside other businesses, and Regulation W imposes boundaries on those transactions rather than treating group ownership as sufficient protection. Covered transactions include specified loans, asset purchases, securities investments and guarantees involving affiliates.
Affiliate status also has a regulatory definition, so identify both the relationship and the transaction before deciding which requirements apply. Section 23A generally limits covered transactions with one affiliate to 10% of the bank's capital stock and surplus, subject to special financial-subsidiary provisions, and covered transactions with all affiliates together generally face a 20% limit.
These are exposure limits under the applicable rules, not a separate fresh allowance for each new transaction. A small new loan can still be problematic when earlier exposures consume the available capacity, and the treatment cannot be determined from the loan amount alone without checking the relevant provisions.
Section 23B requires certain affiliate transactions to occur on terms substantially the same as, or at least as favourable to the bank as, comparable transactions with unaffiliated parties. The Federal Reserve's summary explains that this scope includes covered transactions and specified other dealings.
Passing a quantitative test does not remove the terms requirement. Certain credit transactions require eligible collateral at prescribed percentages depending on collateral type.
Under section 223.14, other debt instruments require at least 120% coverage, while stock, leases and other real or personal property require at least 130%, and some assets and instruments are ineligible collateral altogether. Collateral must also meet enforceability and priority requirements, since a prior lien can reduce the value available to support the bank's credit.
For managers working on group funding or asset transfers, involve bank compliance before committing to the arrangement. Keep the affiliate map, covered exposures, transaction terms and collateral evidence aligned.
General intercompany-loan accounting or a related-party note does not establish compliance with this banking-specific framework.
In practice
Real-world examples.
Example
A fictional bank considers a new loan to an affiliate and reviews only the requested amount. Compliance adds existing covered transactions with that affiliate to the assessment. The relevant capacity is not reset merely because the new loan is documented in a separate contract.
Example
A fictional group asks its bank subsidiary to buy a troubled affiliate asset at a generous price. The team checks transaction quality and applicable market-terms requirements, not just the percentage limit. Being inside a corporate group does not make the transfer acceptable by itself.
Example
A fictional affiliate offers property as collateral but another lender already holds a senior claim. The bank reviews the priority-adjusted value and required coverage. An attractive appraisal cannot remove the effect of the prior security interest or prove that the collateral requirement is satisfied.
Formula
Calculation
Illustrative required collateral value = included credit amount x applicable collateral percentage.
Assume a fictional $200,000 credit transaction must be secured entirely by eligible other debt instruments under the 120% category. Required value is $200,000 x 1.20 = $240,000, before considering priority adjustments or other relevant conditions. At 130%, the same credit would require $260,000 of eligible collateral in that category.
For the quantitative limits, assume a fictional bank has $50,000,000 of capital stock and surplus. The single-affiliate limit is 10% x $50,000,000 = $5,000,000 and the all-affiliate limit is 20% x $50,000,000 = $10,000,000. If $4,200,000 of covered transactions with one affiliate already exist, remaining single-affiliate capacity is $5,000,000 - $4,200,000 = $800,000, so a new $1,000,000 loan to that affiliate would exceed it. These calculations illustrate the stated categories, not a universal rate for every transaction or proof that an otherwise prohibited transaction becomes permissible.Case study
Seen in the real world.
In this fictional case, Summit Financial's bank considers financing equipment held by a related business. A group manager says the transaction is harmless because all entities share a parent. Bank compliance instead identifies affiliate status, transaction classification and existing covered exposure. The team compares terms with suitable unaffiliated transactions and checks the proposed collateral's eligibility, value and priority. It records which quantitative and qualitative requirements apply before deciding whether the arrangement can proceed.
A group-level funding plan is not used as a substitute for the bank's own assessment. Summit also separates the regulatory review from consolidation accounting. Eliminating an intercompany balance in group accounts does not eliminate the bank's legal exposure. The process protects that distinction without claiming that every affiliate transaction is banned or that satisfying one collateral calculation resolves the full framework.
Watch out
Common mistakes.
- Testing each new transaction in isolation and ignoring existing covered exposure to the affiliate and the wider affiliate group.
- Assuming the same parent company removes market-terms, collateral or transaction-quality requirements.
- Using gross appraised collateral value without checking eligibility, enforceability and senior claims.
Questions
People also ask.
Is every affiliate transaction prohibited?
No. The framework imposes applicable limits and conditions, with specified exemptions. Assess the actual relationship and transaction.
Is Regulation W the same as Regulation O?
No. Regulation W concerns bank-affiliate transactions; Regulation O concerns credit to specified bank insiders and related interests.
Does consolidation accounting remove these restrictions?
No. Eliminating balances in group accounts does not erase the bank-level transaction or its applicable legal requirements.
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