23 A&B Flashcards
Sections 23A and 23B of the Federal Reserve Act are made applicable to State Non-Member banks through section ??(?) of the FDI Act
18(j)
What is an affiliate of a bank (23A):
Any company that controls the bank, and any othercompany controlled by the company that controls the bank
A bank subsidiary of the bank
Any company:
• Which is controlled directly or indirectly by or for the benefit of shareholder who beneficially or otherwise control, directly or indirectly, the bank or any company that controls the bank
• In which a majority of its directors or trustees constitute a majority of the persons holding any such office with the bank or any company that controls the bank
• Any company that is sponsored and advised on a contractual basis by the bank or any subsidiary or affiliate
• Any company that the FRB deems to be an affiliate
What is not considered an affiliate(23A)?
Non-bank subsidiaries of the bank
Companies engaged solely in holding bank premises
Companies engaged solely in conducting safe deposit operations
Companies engaged solely in holding obligations of the US or its agencies, or obligations fully guaranteed by the US or its agencies
Companies where control results from the exercise of rights arising out of a bona fide debt previously contracted (certain time limits apply)
Definition of Control
Owns, controls, or has power to vote 25 percent or more of any class of voting securities of the company
Controls in any manner the election of a majority of directors or shareholders of the company
FRB determines that the entity exercises a controlling influence over management or policies of the company
Rebuttable Presumption of Control
Entity owns or controls 15% or more of equity capital of the other company, unless the entity provides acceptable information to the FRB to rebut this presumption
definition of “Company”
a corporation, partnership, business trust, association, or similar organization, and includes banks
IMPORTANT: A sole proprietorship is NOT considered a company
Definition of a Low-Quality Asset
Was classified as Substandard, Doubtful, Loss, or Special Mention in the most recent ROE
Is in nonaccrual status
Is more than 30 days past due
Has undergone a TDR
Restrictions imposed by 23A:
o The aggregate amount of covered transactions between a bank and any single affiliate may not exceed 10% of the capital stock and surplus of the bank
o The aggregate amount of covered transactions between a bank and all affiliates may not exceed 20% of the capital stock and surplus of the bank
o A bank may not purchase a low-quality asset from an affiliate unless, pursuant to an independent credit evaluation, the bank commited to purchasing the asset prior to the time it was acquired by the affiliate
o All transactions between a bank and its affiliates (including those transactions otherwise exempted from the three restrictions imposed above) must be on terms and conditions that are consistent with safe and sound banking practices
o Loans to or guarantees on behalf of affiliates must be secured at all times by collateral with certain values according to the collateral type
What is a “covered transaction” with an affiliate under 23A?
o Loan or extension of credit to the affiliate, including purchase of assets subject to repurchase
o Purchase of or investment in securities issued by the affiliate
o Purchase of assets from the affiliate
o Acceptance of securities or other debt obligations issued by the affiliate as collateral security for a loan or line of credit
o Issuing a guarantee, acceptance, LOC/SBLOC on behalf of an affiliate
o Transactions with affiliate involving borrowing or lending of securities, or derivative transactions, which cause the bank or a subsidiary to have credit exposure to the affiliate
Are covered transactions ever exempt from 23A requirements?
o ALL transactions are always subject to the requirement that terms and conditions of the transaction are consistent with safe and sound banking practices
Certain transactions that are exempt from the other requirements of 23A
Transactions between banks where one controls 80% or more of the voting securities of the other, or where one common company controls 80% or more of the voting securities of both banks, EXCEPT the prohibition against purchasing low quality assets still applies
Making deposits in an affiliated bank in the ordinary course of correspondent business
Giving immediate credit to an affiliate for uncollected items received in the ordinary course of business
Making a loan to, issuing a guarantee, acceptance, or letter of credit on behalf of, an affiliate that is fully secured by obligations the US or its agencies, obligations fully guaranteed by the US or its agencies, or a segregated, earmarked deposit account with the bank
Purchasing assets having a readily identifiable and publicly available market quotation and purchased at that quotation
Purchasing loans on a nonrecourse basis from affiliated banks, subject to the low-quality asset restriction
Repurchasing a loan sold to an affiliate per the terms of a repurchase or recourse agreement
23A -Loans to/guarantees on behalf of affiliates must be collateralized at all times by collateral having a market value equal to:
o 100% of the loan if composed of obligations of US or its agencies, obligations fully guaranteed by US or its agencies, a segregated earmarked deposit account with the bank, or notes/drafts that are eligible for rediscount or purchase by a Federal Reserve Bank
o 110% of the loan if composed of obligations of any State or political subdivision of any State
o 120% of the loan if composed of other dent instruments, including receivables
o 130% of the loan if composed of stock, leases, or real or personal property
o Low-quality assets are not acceptable as collateral
o Securities or other debt obligations issued by an affiliate of the bank are not acceptable as collateral for loans to/guarantees on behalf of that affiliate or any other affiliate
23B - Definition excludes what?
Definition of “affiliate” for 23B EXCLUDES banks
“Covered Transactions” for 23B
“Covered Transactions” for 23B include all transactions considered covered under 23A plus:
Sale of securities or other assets to affiliate
Payment of money or furnishment of services to an affiliate under contract, lease, or otherwise
Any transaction in which the affiliate acts as an agent or broker or received a fee for its services
Any transaction with a 3rd party if an affiliate has a financial interest in that 3rd party or is a participant in the transaction
Covered transactions under 23B can only be engaged in if:
Terms and conditions, including credit standards are substantially the same or at least as favorable to the bank or subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies, OR
In the absence of comparable transactions, on terms and conditions which in good faith would be offered to nonaffiliated companies
Transactions prohibited by 23B
Purchasing as fiduciary any securities or other assets from any affiliate, unless permitted by the instrument creating the fiduciary relationship, by court order, or bylaw of the jurisdiction governing the relationship
Knowingly purchasing or otherwise acquiring, during the existence of any underwriting or selling syndicate, any security if the principal underwriter of that security is an affiliate, with limited exceptions
23B Advertising Restriction
A bank, its subsidiaries, or its affiliates, cannot publish any advertisement or enter into any agreement stating or suggesting that the bank is responsible in any way for the obligations of its affiliates
