March 2021 

COVERAGE OF SECTIONS 23A 

AND 23B OF THE FEDERAL RESERVE ACT

Any questions regarding the information contained in this memorandum

should be submitted to the Board’s Contact Us form. 

Introduction:

This memorandum will describe the provisions of sections 23A and 

23B of the Federal Reserve Act (“Act”), which regulate loans, purchases of 

assets, and certain other transactions between an insured depository 

institution and its affiliates.1

A. Section 23A

Section 23A of the Act, originally enacted as part of the Banking Act 

of 1933, is designed to prevent the misuse of a bank’s resources through 

“non-arm’s-length” transactions with its affiliates and to limit the ability of a 

bank to transfer its federal subsidy to its affiliates.2

 Section 23A prohibits a 

bank from engaging in so-called “covered transactions” with an affiliate 

unless the bank limits the aggregate amount of such transactions to that 

particular affiliate to 10 percent of the bank’s capital stock and surplus. 

Section 23A limits the aggregate amount of all covered transactions between 

1

 12 U.S.C. 371c & 371c-1; 12 CFR part 223. Sections 608 and 609 of the 

Dodd-Frank Wall Street Reform and Consumer Protection Act 

(“Dodd-Frank Act”) amended sections 23A and 23B. These amendments 

took effect on July 21, 2012. Staff currently is revising Regulation W to 

reflect these changes.

2

 12 U.S.C. 371c. As originally enacted, the Banking Act of 1933 covered 

only member banks. In 1966, Congress amended section 18(j) of the 

Federal Deposit Insurance Act, 12 U.S.C. 1828(j), to extend the coverage of 

section 23A to include insured nonmember banks. As a result of FIRREA, 

section 23A also applies to savings associations as if they were member 

banks. 12 U.S.C. 1468. See subsection D for a discussion of savings 

associations and the application of sections 23A and 23B.
2 

a bank and all its affiliates to 20 percent of the bank’s capital stock and 

surplus.

In 1999, the Gramm-Leach-Bliley Act (“GLB Act”) amended 

section 23A to extend the statute’s coverage to covered transactions between 

banks and their financial subsidiaries by including financial subsidiaries in 

the definition of affiliate.3

 In addition, the GLB Act provides that the 

purchase of, or investment in, securities issued by a financial subsidiary of a 

bank by an affiliate of the bank counts towards the bank’s quantitative 

limits.

In October 2002, the Board formally adopted Regulation W to 

implement sections 23A and 23B of the Federal Reserve Act.4

 

Regulation W provides a comprehensive reference tool for complying with 

the statute. The regulation restates the statutory provisions, includes many 

of the Board’s interpretations of the statute, and addresses issues that arose 

as a result of the GLB Act. Regulation W also provides general guidance on 

the timing and valuation of covered transactions.

1. Covered Transaction

The following transactions are covered transactions for purposes of 

section 23A:

(1) a loan or extension of credit by a bank to an affiliate; including 

assets subject to an agreement to repurchase;5

3

 Pub. L. No. 106-102 § 121, 113 Stat. 1338, 1378 (codified at 12 U.S.C. 

371c(e)).

4

 67 Fed. Reg. 76,560 (Dec. 12, 2002) (codified at 12 CFR part 223).

5

 An extension of credit includes the sale of fed funds to an affiliate and the 

purchase of an obligation of an affiliate, including commercial paper or 

other debt securities. An extension of credit includes any similar transaction 

as a result of which an affiliate becomes obligated to pay money or its 

equivalent to the bank. 12 CFR 223.3(o).
3 

(2) a purchase by a bank of, or an investment by a bank in, securities 

issued by an affiliate;

(3) a purchase by a bank of assets from an affiliate;

6

 

(4) the acceptance by a bank of securities or other debt obligations 

issued by an affiliate as collateral for a loan or extension of credit 

by the bank to any person or company; 

(5) the issuance by a bank of a guarantee, acceptance, or letter of 

credit, including an endorsement or standby letter of credit, on 

behalf of an affiliate; 

(6) the credit exposure resulting from a securities lending and 

borrowing transaction with an affiliate; or

(7) the credit exposure resulting from derivative transactions with an 

affiliate.

If the transaction between the bank and an affiliate does not fall into 

one of these categories, the transaction is not a covered transaction for 

purposes of section 23A and is not subject to its limitations. For example, 

dividends or fees paid by the bank to a parent holding company generally are 

not covered transactions under section 23A.

2. Transactions with Third Parties Subject to Section 23A

Under section 23A, any transaction by a bank with a third party is 

deemed a transaction with an affiliate to the extent that the proceeds of that 

transaction are used for the benefit of, or transferred to, the affiliate. This 

provision broadens the coverage of section 23A.7

 For example, if an 

individual controls both a bank and a car dealership and a customer of the 

6

 A purchase of assets includes a novation or any transaction, including the 

donation of a subsidiary or an asset, resulting in the assumption or liabilities

by the insured depository institution. 

7

 12 U.S.C. 371c(a)(2).
4 

car dealership obtains a loan from the bank for the purpose of purchasing a 

car from the dealership, the transaction is deemed to be a covered transaction 

subject to section 23A because the proceeds of the loan are transferred to, 

and directly benefit, the affiliate.8

 Regulation W clarifies that a customer’s 

use of a bank-issued general purpose credit card to purchase goods and 

services from an affiliate of the bank is an extension of credit to the affiliate, 

but provides an exemption for institutions where less than 25 percent of the 

total value of the purchases with the card are purchases from affiliates of the 

bank or where all the affiliates are permissible for a financial holding 

company.

9

 Regulation W also exempts certain agency and riskless principal 

transactions, where the proceeds are transferred to an affiliate.10

3. Specific Additional Prohibitions

In addition to limiting the amount of covered transactions to 10 and 

20 percent of an institution’s capital stock and surplus, section 23A requires 

that banks conduct transactions with their affiliates on terms that are 

consistent with safe and sound banking practices.

Section 23A also prohibits certain affiliate transactions altogether. 

Most importantly, a bank may not purchase a low-quality asset (generally a 

classified or past-due asset) from an affiliate or accept a low-quality asset as 

collateral for a loan to any affiliate. A bank may not accept the securities 

issued by an affiliate for a loan to any affiliate. 

8

 This provision contrasts with Regulation O’s tangible economic benefit 

rule, which provides that if the proceeds of the loan are used in a bona fide 

transaction to acquire goods, property, or services from an insider and the 

transaction is conducted on an arm’s length basis, then the loan is not subject 

to Regulation O. 12 CFR 215.3(f).

9

 12 CFR 223.16(c)(4).

10 12 CFR 223.16.
5 

4. Definition of Affiliate

In general, section 23A defines companies that control or are under 

common control with the bank as “affiliates” of the bank.11 For example, 

the term “affiliate” includes bank, financial, and savings and loan holding 

companies and their subsidiaries. Banks, savings associations, and 

nonbanking companies that are under common individual control with the 

bank also are affiliates for purposes of section 23A.12 In addition, the 

GLB Act expanded the definition of affiliate to include financial subsidiaries 

of banks. Regulation W defines “financial subsidiary” to mean any 

subsidiary of a member bank that

(1) engages, directly or indirectly, in any activity that national 

banks are not permitted to engage in directly or that is 

conducted under terms and conditions that differ from those 

that govern the conduct of such activity by national banks; 

and

(2) is not a subsidiary that a national bank is specifically 

authorized to own or control by the express terms of a Federal 

statute (other than 12 U.S.C. 24a), and not by implication or 

interpretation.13 

11 12 U.S.C. 371c(b)(1)(A).

12 For example, banks that are part of a chain banking organization are 

“affiliates” under section 23A, and thus are subject to its restrictions. 

12 U.S.C. 371c(b)(1)(C).

13 12 CFR 223.3(p) & 223.32. An Edge Corporation is an example of a 

subsidiary that a national bank is specifically authorized to own by a federal 

statute.
6 

Regulation W exempted many financial subsidiaries covered by the 

GLB Act, such as certain insurance agencies, grandfathered subsidiaries of 

state banks, and subsidiaries of state banks that engage in activities 

permitted for the bank directly under federal and state law.14

The GLB Act also created a rebuttable presumption that a company or 

shareholder controls a company if the company or shareholder directly or 

indirectly owns or controls 15 percent or more of the equity capital of the 

other company pursuant section 4(k)(4)(H) or (I) of the Bank Holding 

Company Act. 15 These companies, which generally are referred to as 

portfolio companies, are affiliates under the statute.

Certain companies are deemed not to be affiliates for purposes of 

section 23A. Most importantly, nonbank subsidiaries of banks that are not 

financial subsidiaries are not affiliates for purposes of section 23A, unless 

the Board makes a determination to treat such subsidiaries as affiliates.16

5. Collateral Requirements

Section 23A establishes collateral requirements for certain 

transactions between a bank and an affiliate. Under the statute, each loan or 

extension of credit by a bank to an affiliate, each guarantee, acceptance, or 

letter of credit issued by a bank on behalf of an affiliate or the credit 

14 12 CFR 223.2(p).

15 12 U.S.C. 371c(b)(11).

16 12 U.S.C. 371c(b)(2)(A). The Board may make such a determination if it 

finds that transactions between the bank and the subsidiary may be affected 

by the affiliate’s relationship to the detriment of the bank.
7 

exposure resulting from securities lending or borrowing transactions, or 

derivative transaction must be secured at all times by collateral having a 

certain market value.17

Banks may accept cash, securities, receivables, leases, or other real or 

personal property as collateral for covered transactions. Section 23A and 

Regulation W prohibit a bank from accepting low-quality assets as collateral 

for a covered transaction, as well as intangible assets, guarantees, letters of 

credit, and equity securities of the lending bank.18 In addition, securities 

issued by an affiliate of the lending bank may not be used as collateral for a 

loan to that affiliate or any other affiliate.

If the loan is secured by obligations of the United States or its 

agencies, notes or drafts that are eligible for rediscount by a Federal Reserve 

Bank, or a segregated earmarked deposit account, the loan must be 

collateralized at 100 percent of the loan amount.

19 Loans secured by the 

obligations of a state or political subdivision of a state, debt instruments 

(including receivables), stock, leases, or other real or personal property must 

be collateralized at between 110 and 130 percent of the loan amount.

20

6. Exemptions from Section 23A

Section 23A has a number of exemptions for certain transactions 

between banks and their affiliates. The most important exemption is for 

transactions that are between banks where the same company owns 

17 Section 23A does not require a bank to secure a purchase of assets from 

an affiliate.

18 12 CFR 223.14(c).

19 A representative list of acceptable government obligations is found in 

Regulation A, 12 CFR 201.108.

20 The bank must perfect the security interest in the collateral. 12 CFR

223.14(d).
8 

80 percent of each bank’s shares.

21 The “sister bank” exemption allows 

banks controlled by the same company to improve their efficiency through 

intercorporate transfers.22 Section 23A also exempts from its provisions a 

bank making deposits in an affiliated bank or affiliated foreign bank in the 

ordinary course of correspondent business.

Section 23A also exempts transactions where the bank gives 

immediate credit to an affiliate for uncollected items received in the ordinary 

course of business. In addition, section 23A exempts transactions that are

fully secured by certain obligations of the United States government or its 

agencies or an earmarked deposit account. There also is an exemption for a 

bank’s purchase of assets from an affiliate where the assets have a readily 

identifiable market price and the asset is purchased at that price. The Board 

expanded this exemption in Regulation W to include purchases of securities 

that have a ready market and a price that is routinely quoted on an 

unaffiliated electronic service.23

In Regulation W, the Board expanded the types of transactions that 

are exempt from the quantitative and collateral requirements of section 23A 

to include the purchase of certain municipal securities, asset purchases by 

newly formed banks and intraday extensions of credit where the bank 

establishes and maintains policies and procedures to manage the intraday 

21 “Sister bank” transactions are still subject to the prohibition against the 

purchase of low-quality assets and to the requirement that covered 

transactions be conducted on terms and conditions that are consistent with 

safe and sound banking practices.

22 “Company” in this context, is not limited to a bank holding company. 

Thus, two credit card banks that are 80 percent owned by a retail institution 

may take advantage of the sister bank exemption.

23 12 CFR 223.42(f).
9 

credit risk.24 The Board can exempt transactions or relationships by 

regulation,

25 so long as the FDIC does not object. After enactment of the 

Dodd-Frank Act, the Board, OCC and the FDIC can grant an exemption by 

order for the institutions for which they are the primary supervisor with the 

nonobjection of the FDIC and the concurrence of the Board.26

7. Derivative Transactions & Securities Borrowing and Lending 

Transactions

The Dodd-Frank Act provides that a transaction with an affiliate that 

involves the borrowing or lending of securities is a covered transaction, to 

the extent that the transaction causes a member bank or a subsidiary to have 

credit exposure to the affiliate. The statute also provides that a derivative 

transaction, as defined in paragraph (3) of section 5200(b) of the Revised 

Statutes of the United States (12 U.S.C. 84(b)), with an affiliate is a covered 

transaction, to the extent that the transaction causes a member bank or a 

subsidiary to have credit exposure to the affiliate.

27

This credit exposure must be secured at all times pursuant to the 

collateral requirements of Regulation W.28 These provisions of the DoddFrank Act currently are in effect, and all insured depository institutions 

should be treating these credit exposures as covered transactions, using the 

same methodology to measure credit exposure that the institution uses with 

24 12 CFR 223.42.

25 The Board’s 23A exemption determinations can be found on the Board’s 

public website, 

https://www.federalreserve.gov/supervisionreg/legalinterpretations/federalre

serveact_archive.htm. 

26 12 U.S.C. 371c(f).

27 12 U.S.C. 371c(b)(7)(F) and (G).

28 12 U.S.C. 371c(c)(1); 12 CFR 223.14.
10

similarly situated third parties.

29 The transactions also are subject to section 

23B.30 Staff will provide additional guidance on the valuation of these 

transactions in the revised Regulation W.

B. Section 23B of the Federal Reserve Act

Section 23B provides that most transactions between a bank and its 

affiliates must be on terms and under circumstances, including credit 

standards, that are substantially the same or at least as favorable to the bank 

as those prevailing at the time for comparable transactions with or involving 

nonaffiliated companies.31 In the alternative, in an absence of comparable 

transactions, the transactions must be conducted on terms and under 

circumstances, including credit standards that in good faith would be offered 

to or applied to nonaffiliated companies. A bank also generally is prohibited 

from purchasing as a fiduciary securities or assets from an affiliate except 

under certain specified circumstances.

Finally, a bank and its affiliate may not advertise or enter into an 

agreement suggesting that the bank is in any way responsible for the 

obligations of the affiliate. Regulation W provides that a guarantee, 

acceptance, letter of credit, or cross-affiliate netting arrangement is 

permissible under section 23B if it meets the quantitative and collateral 

29 For example, if a bank includes a calculation for potential future exposure

(“PFE”) when calculating credit exposure with its nonaffiliates, it must 

include a PFE calculation when determining its credit exposure with an 

affiliate. 

30 Regulation W provides that credit derivatives between a bank and a 

nonaffiliate in which the bank provides credit protection to the nonaffiliate 

with respect to an obligation of an affiliate of the bank is a guarantee under 

the regulation. 12 CFR 223.33(c).

31 The Competitive Equality Banking Act of 1987 added section 23B to the 

Act. Pub. L. No. 100-86, § 102 (1987) (codified at 12 U.S.C. 371c-1).
11

requirements of section 23A.32 As with section 23A, the Board has the 

authority to prescribe regulations to administer and carry out the Act. The 

Dodd-Frank Act provides the Board with the authority to exempt individual

transactions from the requirements of section 23B with the nonobjection of 

the FDIC.

Section 23B applies to any covered transaction with an affiliate, as 

that term is defined in section 23A, but excludes banks from the term 

“affiliate.” Thus, transactions between “sister banks” and banks that are part 

of a chain banking organization are exempt from section 23B.33 In addition, 

section 23B applies to a number of transactions not covered by section 23A. 

Section 23B applies to a bank’s sale of securities or other assets to an 

affiliate, including assets subject to an agreement of repurchase; the payment 

of money or the furnishing of services to an affiliate under contract, lease, or 

otherwise; any transactions in which an affiliate acts as an agent or a broker 

or receives a fee for its services; and any transaction or series of transactions 

with a third party, if an affiliate has a financial interest in the third party or is 

a participant in such transaction or series of transactions.

C. U.S. Branches and Agencies of Foreign Banks

Regulation W provides that a transaction between a U.S. branch or 

agency of a foreign bank and certain affiliates is subject to sections 23A and 

23B.34 The affiliates that are covered by the regulation are affiliates 

engaged in the United States in insurance underwriting, securities 

32 12 CFR 223.54.

33 Although section 23B does not apply technically to transactions between 

affiliated banks, section 23A requires all transactions to be conducted on 

terms consistent with safe and sound banking practices. Staff has taken the 

position that safety and soundness requires market terms.

34 12 CFR 223.61.
12

underwriting and dealing, merchant banking, and insurance company 

investment activities.

D. Savings Associations

The Homeowners’ Loan Act (“HOLA”) subjects savings associations 

to sections 23A and 23B as if they were member banks.35 In addition to 

sections 23A and 23B, HOLA also imposes several additional restrictions on 

transactions between savings associations and affiliates that do not apply to 

banks. These restrictions are as follows:

(1) a savings association may not make a loan or extension of credit 

to any affiliate unless the affiliate is engaged only in activities that 

the Board, by regulations, determined to be permissible for bank 

holding companies under section 4(c) of the BHC Act,

36 and

(2) a savings association may not purchase or invest in securities 

issued by any affiliate other than respect to shares of a 

subsidiary.37

FIRREA authorized the Director of the Office of Thrift Supervision 

(“OTS”) to impose additional restrictions on transactions between any 

savings associations and any affiliate as the Director deemed necessary to 

35 Sections 301 of the Financial Institutions Reform, Recovery, and 

Enforcement Act of 1989 (“FIRREA”) Pub. L. 101-73, 103 Stat 183, 342 

(1989) amended HOLA and imposed the restrictions of sections 23A and 

23B on savings associations. Representatives of savings associations often

will refer to “TWA rules” (Transactions With Affiliates) when discussing 

sections 23A and 23B. Prior to FIRREA, savings associations were subject 

to some 23A provisions as well as a variety of other affiliate transactions 

rules. For a complete history, see Julie L. Williams, Savings Associations: 

Mergers, Acquisitions and Conversions § 13 (2011).

36 12 U.S.C. 1468(a)(1)(A) and 1467a(c)(2)(F)(ii). 

37 12 U.S.C. 1468(a)(1)(B).
13

protect the safety and soundness of the institution.38 In 2003, the OTS 

amended their regulations specifically to incorporate Regulation W as part 

of their regulations, with certain modifications.39 The OTS regulation 

contained a chart with the regulatory differences between Regulation W and 

the rules savings associations must follow. One of the most important 

differences noted in the chart is the treatment of a company that 

Regulation W defines as a financial subsidiary. As noted above, financial 

subsidiaries generally are treated as affiliates of the bank.40 When the Board 

adopted Regulation W, it determined that because of the ambiguities of the 

GLB Act and the additional restrictions that HOLA imposed on savings 

associations, the Board chose not to address the status of subsidiaries of 

savings associations as financial subsidiaries.41

As noted above, HOLA also imposed two additional section 23A-like

restrictions on savings associations. OTS took the position that these 

additional restrictions are HOLA restrictions and NOT section 23A 

restrictions on savings associations, which allowed OTS to impose its own 

interpretation of the restrictions. The first restriction states that a savings 

association may extend credit to an affiliate only if the affiliate engages 

38 The Dodd-Frank Act eliminated OTS and transferred the supervision of 

savings associations to the OCC. On September 13, 2011, the Board issued 

a final interim rule that codified the OTS rules relating to section 23A as part 

of Regulation W. 76 Fed. Reg. 56,531 (Sept. 13, 2011) (codified at 12 CFR 

223.72).

39 12 CFR 563.41 (2011). 

40 See n.14 and accompanying text.

41 67 Fed. Reg. 76,560, 76,565 (Dec. 12, 2002). For example, HOLA 

requires savings associations to deduct from capital all investments in and 

extensions of credit to any subsidiary engaged in activities that are not 

permissible for national banks. 12 U.S.C. 1464(t)(5).
14

solely in the section 4 activities.42 The OTS regulation interpreted this 

provision not to prohibit transactions where the section 23A Attribution Rule 

on loans to a third party would generally apply. Thus, a loan or extension of 

credit to a third party is not prohibited merely because proceeds of the 

transaction are used for the benefit of, or transferred to, an affiliate that 

engages in a non-section 4 activity. Instead, the loan is permissible, but 

must meet the quantitative and collateral restrictions of section 23A.43 For 

example, if Company A makes a loan to a customer so the customer can buy 

a tractor from Affiliate A, the loan is subject to section 23A and 

Regulation W, but is not prohibited by HOLA, even though the sale of 

tractors is not an activity permissible for a bank holding company under 

section 4(c). 

The other major exception imposed by HOLA is that a savings 

association may not purchase or invest in securities issued by any affiliate 

other than with respect to the shares of a subsidiary. Thus, for example, a 

savings association cannot own 15 percent of a company if an affiliate owns 

more than 25 percent of the same company.

Certain exemptions under Regulation W may not be available to 

certain saving associations. For example, the exemption for general purpose 

credit cards that is available to all banks in a bank holding company is not 

available to a savings association if the savings association has affiliates that 

are impermissible for a financial holding company.44 Thus, a savings 

association that has a department store or other retail affiliate cannot rely on 

42 12 CFR 223.72(c)(1).

43 Id. 

44 12 CFR 223.16(c)(4)(i). Special purpose credit cards issued by any 

insured depository institution that are used at affiliates always are subject to 

section 23A.
15

the exemption for general purpose credit cards and must consider general 

purpose credit card transactions by customers with the affiliate retailer as 

covered transactions under section 23A. Similarly, any exemption that 

requires a bank and its affiliates to be well capitalized is available to a 

savings association only if the holding company has and maintains at least 

the capital levels required for a bank holding company to be well 

capitalized.45

45 12 CFR 223.3(kk) and 223.41(d)(7). Prior to the passage of the 

Dodd-Frank Act, savings and loan holding companies were not required to 

meet the same capital standards as bank holding companies.