# Regulation W in Banking: Limits on Bank-Affiliate Transactions

## What Is Regulation W?

Regulation W, implemented by the [Federal Reserve System (FRS)](https://www.investopedia.com/terms/f/federalreservesystem.asp), restricts transactions between banks and [affiliates](https://www.investopedia.com/terms/a/affiliate.asp) to mitigate risk and manage financial safety. It enforces quantitative limits and [collateral](https://www.investopedia.com/terms/c/collateral.asp) requirements, ensuring banks do not misuse the federal safety net. Post-2008, more stringent rules were introduced under the Dodd-Frank Act, expanding Regulation W's scope. Discover how these measures affect bank operations and compliance strategies.

The regulation applies to banks that are members of the Fed, insured state non-member banks, and [insured savings associations](https://www.investopedia.com/terms/s/savings-association-insurance-fund.asp). Regulation W was introduced to consolidate several decades of interpretations and rulemaking under Sections 23A and 23B of the [Federal Reserve Act](https://www.investopedia.com/terms/f/1913-federal-reserve-act.asp).

### Key Takeaways

*   Regulation W limits transactions between banks and their affiliates to mitigate risks to the bank and the federal insurance system.  
    
*   Quantitative limits are imposed, restricting transactions with a single affiliate to 10% of the bank’s capital and all affiliates combined to 20%.  
    
*   Covered transactions include credit extensions, asset purchases, and securities dealings with affiliates, requiring strict adherence to collateral requirements.  
    
*   The Dodd-Frank Act enhanced Regulation W by expanding the definition of affiliates and increasing transparency and oversight in transactions.  
    
*   Violations of Regulation W can result in significant penalties, illustrating the importance of compliance for financial institutions.

![Regulation W: A Federal Reserve System rule limiting certain transactions between banks and their affiliates.](https://www.investopedia.com/thmb/4A2-sbhDG9GR6Lf6zyAHLoI2RVs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Regulation-w_final-0866f1e54ead43f9881221f6204bb856.png)

*— Investopedia / Michela Buttignol*

## Regulation W Explained: Key Provisions and Impacts

Regulation W implements sections 23A and 23B of the Federal Reserve Act. It was published on Dec. 12, 2002, and went into effect on April 1, 2003.

Sections 23A and 23B of Regulation W limit risks from transactions between a bank and its affiliates. They also limit how a depository institution can transfer subsidies to affiliates from its access to the federal safety net, which includes benefits like lower-cost insured deposits and the discount window. These objectives are met by setting quantitative and qualitative limits on a bank's ability to extend credit to affiliates or engage in certain transactions with them.

The Fed noted in January 2003 that Regulation W included 70 years of guidance on statutory requirements, which are brief but complex to apply. Regulation W covers nine major issues, such as derivative transactions, intraday credit, and financial subsidiaries.

## Navigating Compliance With Regulation W

Because most large U.S. banks exist within a diversified holding company structure, the possibility that bank funds may finance somewhat risky purposes exists. Regulation W seeks to limit this risk and is conceptually straightforward, although implementation is not easy. Compliance with Regulation W is a particular challenge for some banks that are dealing with issues such as rapid growth in [capital market](https://www.investopedia.com/terms/c/capitalmarkets.asp) activities or integration of previous acquisitions.

Complying with Regulation W was complex, even before the regulatory reforms that were instituted in the wake of the 2008 financial crisis. The [Dodd-Frank Wall Street Reform and Consumer Protection Act](https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp)—which has been criticized by some as being overly burdensome—further tightened Regulation W’s requirements.

Because exemptions to Regulation W rules widely provided emergency liquidity to affiliates during the financial crisis, the Fed's ability to grant exemptions on its sole authority was curbed under the new rules. For example, the [Federal Deposit Insurance Corporation (FDIC)](https://www.investopedia.com/terms/f/fdic.asp) now has 60 days to determine whether an exemption is justified or whether it might pose an unacceptable risk to its deposit insurance fund and raise any objections.

Modifications to Regulation W have also expanded the concept of what an “affiliate” is and what constitutes a “covered transaction” under the law. [Banking regulators](https://www.investopedia.com/articles/economics/09/financial-regulatory-body.asp) now expect greater transparency from banks in complying with Regulation W.

> **Important**
>
> Regulation W aims to protect banks and federal deposit insurance funds from undue financial risk.

## Determining Applicability: When Does Regulation W Apply?

Given that Regulation W applies to covered transactions between a bank and its affiliate, two basic questions need to be answered in determining whether a transaction is subject to this regulation:

*   Is the transaction between a bank and an affiliate of the bank?
*   Is the transaction a "covered transaction"?

Regulation W defines a bank's affiliates quite broadly including any company that the bank directly or indirectly controls or that is sponsored and advised by a bank, as well as subsidiaries of the bank.

Covered transactions under Regulation W cover a wide spectrum of transactions, including:

*   The extension of credit to an affiliate
*   Investment in securities issued by an affiliate
*   Asset purchases from an affiliate
*   The acceptance of securities issued by an affiliate as collateral for credit
*   The issuance of a guarantee or letter of credit on behalf of an affiliate

## Important Considerations Under Regulation W

Under Regulation W, transactions with any affiliate must total no more than 10% of a financial institution's capital, and transactions with all affiliates combined must total no more than 20% of an institution's capital.

Banks are also 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](https://www.investopedia.com/terms/p/past-due.asp). Meanwhile, any extension of credit must be secured by collateral with coverage that ranges between 100% and 130% of the total transaction amount.

As an example, consider a transaction where the hypothetical bank BigBanc intends to purchase a loan portfolio from its subsidiary SmallBanc. In order to comply with Regulation W, BigBanc must ensure that the transaction with SmallBanc does not exceed more than 10% of its capital and that the loan portfolio is not considered a low-quality asset. The transaction must also take place under market terms and conditions.

The Fed monitors banks' exposures to their affiliates through the FR Y-8 report that collects information on transactions between an insured depository institution and its affiliates. The report has to be submitted by banks quarterly, on the last calendar day of each quarter.

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

## How Does Regulation W Work?

Regulation W establishes the rulemaking authority granted to the Federal Reserve pursuant to sections 23A and 23B of the Federal Reserve Act. It regulates covered transactions, which include the extension of credit to an affiliate, asset purchases from an affiliate, acceptance of securities issued by an affiliate as collateral for credit, and other specifically defined transactions.  

## What Is the Limit of a Transaction With a Single Affiliate?

No transaction with a single affiliate can exceed 10% of an institution's capital.

## What Is the Limit of Transactions With All Affiliates?

All affiliate transactions may not exceed 20% of the institution's held capital.

## Are There Exemptions From Regulation W Requirements?

Yes, Regulation W allows the Federal Reserve Bank to permit exemptions, but certain exemptions also require approval from the Federal Deposit Insurance Corporation (FDIC).

## The Bottom Line

Regulation W plays a crucial role in maintaining the financial stability of banks by limiting transactions between them and their affiliates. This regulation, governed by Sections 23A and 23B of the Federal Reserve Act, sets strict limits on such transactions to mitigate risk. It defines what constitutes a bank affiliate and specifies the types of covered transactions, including loans and asset purchases.

Furthermore, Regulation W imposes quantitative caps on these transactions and requires collateral to secure them. By understanding and adhering to these rules, banks can protect themselves and federal deposit insurance funds from undue financial risk."  

> **Article Sources**
>
> 1.  Code of Federal Regulations. "[Part 223-Transactions Between Member Banks and Their Affiliates (Regulation W)](https://www.ecfr.gov/current/title-12/chapter-II/subchapter-A/part-223)."
>     
> 2.  Board of Governors of the Federal Reserve System. "[Adoption of Regulation W Implementing Sections 23A and 23B of the Federal Reserve Act](https://www.federalreserve.gov/boarddocs/srletters/2003/sr0302.htm)."
>     
> 3.  Board of Governors of the Federal Reserve System. "[Legal Interpretations-Frequently Asked Questions About Regulation W](https://www.federalreserve.gov/supervisionreg/legalinterpretations/reg-w-frequently-asked-questions.htm)."
>     
> 4.  Federal Registrar. "[Transactions Between Member Banks and Their Affiliates](https://www.federalregister.gov/documents/2002/12/12/02-30634/transactions-between-member-banks-and-their-affiliates)."
>     
> 5.  Board of Governors of the Federal Reserve System. "[Report Forms-FR Y-8](https://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDbCi7ts+EoybA==)."
>     
> 6.  Board of Governors of the Federal Reserve System. "[Federal Reserve Act: Section 29. Civil Money Penalty](https://www.federalreserve.gov/aboutthefed/section29.htm)."