Restrictions on Bank Affiliate Transactions: Federal Reserve Act §§ 23A and 23B and Regulation W

By: Eric S. Yoon, K&L Gates LLP

This article covers Sections 23A and 23B of the Federal Reserve Act (FRA), which establish certain quantitative limits and other prudential requirements for loans, purchases of assets, and certain other transactions between a member bank and its affiliates. Regulation W, promulgated by the Board of Governors of the Federal Reserve System (Federal Reserve), implements Sections 23A and 23B of the FRA.

Overview of Sections 23A and 23B of the Federal Reserve Act

The term member bank, as used in Sections 23A and 23B, includes national banks, state-chartered banks, trust companies, and institutions that are members of the Federal Reserve. Member banks also include state-chartered banks that are not members of the Federal Reserve as the Federal Deposit Insurance Act¹ applies Sections 23A and 23B to insured state nonmember banks in the same manner and to the same extent as if they were Federal Reserve member banks.

The principal regulatory policy behind these restrictive provisions is to reduce the risk exposure of member banks, which take deposits that are insured, up to a $250,000 limit, by the Federal Deposit Insurance Corporation (FDIC) to the balance sheet and activities of their non-FDIC-insured affiliates. The regulatory objective, in other words, is to shield the taxpayer-funded deposit insurance fund from potential losses that may result from activities of insured depository institutions that may enter into transactions with their affiliates without due regard to conflicts of interest-related concerns.

Overview of Section 23A

Section 23A prohibits a bank from entering into a “covered transaction” with an affiliate if, after the transaction, (1) the aggregate amount of the bank’s covered transactions with that particular affiliate would exceed 10% of the bank’s capital stock and surplus, or (2) the aggregate amount of the bank’s covered transactions with all of its affiliates would exceed 20% of the bank’s capital stock and surplus.

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Eric S. Yoon is a partner at K&L Gates LLP, splitting time evenly between its New York and Seoul offices. Eric focuses his practice in banking and financial services regulation, cross-border M&A, and financings. He has represented major multinational corporations, global financial institutions, and foreign sovereign entities in the regulatory and transactional aspects of their geographic and product-line expansions as well as strategic divestitures.

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1. 12 U.S.C.S. § 1828(j).