[Code of Federal Regulations]
[Title 12, Volume 3]
[Revised as of January 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 12CFR223.14]

[Page 62-63]
 
                       TITLE 12--BANKS AND BANKING
 
                   CHAPTER II--FEDERAL RESERVE SYSTEM
 
PART 223--TRANSACTIONS BETWEEN MEMBER BANKS AND THEIR AFFILIATES (REGULATION W)--Table of Contents
 
              Subpart B--General Provisions of Section 23A
 
Sec. 223.14  What are the collateral requirements for a credit transaction with an affiliate?

    (a) Collateral required for extensions of credit and certain other 
covered transactions. A member bank must ensure that each of its credit 
transactions with an affiliate is secured by the amount of collateral 
required by paragraph (b) of this section at the time of the 
transaction.
    (b) Amount of collateral required. (1) The rule. A credit 
transaction described in paragraph (a) of this section must be secured 
by collateral having a market value equal to at least:
    (i) 100 percent of the amount of the transaction, if the collateral 
is:
    (A) Obligations of the United States or its agencies;
    (B) Obligations fully guaranteed by the United States or its 
agencies as to principal and interest;
    (C) Notes, drafts, bills of exchange, or bankers' acceptances that 
are eligible for rediscount or purchase by a Federal Reserve Bank; or
    (D) A segregated, earmarked deposit account with the member bank 
that is for the sole purpose of securing credit transactions between the 
member bank and its affiliates and is identified as such;
    (ii) 110 percent of the amount of the transaction, if the collateral 
is obligations of any State or political subdivision of any State;
    (iii) 120 percent of the amount of the transaction, if the 
collateral is other debt instruments, including loans and other 
receivables; or
    (iv) 130 percent of the amount of the transaction, if the collateral 
is stock, leases, or other real or personal property.
    (2) Example. A member bank makes a $1,000 loan to an affiliate. The 
affiliate posts as collateral for the loan $500 in U.S. Treasury 
securities, $480 in corporate debt securities, and $130 in real estate. 
The loan satisfies the collateral requirements of this section because 
$500 of the loan is 100 percent secured by obligations of the United 
States, $400 of the loan is 120 percent secured by debt instruments, and 
$100 of the loan is 130 percent secured by real estate.
    (c) Ineligible collateral. The following items are not eligible 
collateral for purposes of this section:
    (1) Low-quality assets;
    (2) Securities issued by any affiliate;
    (3) Equity securities issued by the member bank, and debt securities 
issued by the member bank that represent regulatory capital of the 
member bank;
    (4) Intangible assets (including servicing assets), unless 
specifically approved by the Board; and
    (5) Guarantees, letters of credit, and other similar instruments.
    (d) Perfection and priority requirements for collateral. (1) 
Perfection. A member bank must maintain a security interest in 
collateral required by this section that is perfected and enforceable 
under applicable law, including in the event

[[Page 63]]

of default resulting from bankruptcy, insolvency, liquidation, or 
similar circumstances.
    (2) Priority. A member bank either must obtain a first priority 
security interest in collateral required by this section or must deduct 
from the value of collateral obtained by the member bank the lesser of:
    (i) The amount of any security interest in the collateral that is 
senior to that of the member bank; or
    (ii) The amount of any credit secured by the collateral that is 
senior to that of the member bank.
    (3) Example. A member bank makes a $2,000 loan to an affiliate. The 
affiliate grants the member bank a second priority security interest in 
a piece of real estate valued at $3,000. Another institution that 
previously lent $1,000 to the affiliate has a first priority security 
interest in the entire parcel of real estate. This transaction is not in 
compliance with the collateral requirements of this section. Due to the 
existence of the prior third-party lien on the real estate, the 
effective value of the real estate collateral for the member bank for 
purposes of this section is only $2,000--$600 less than the amount of 
real estate collateral required by this section for the transaction 
($2,000 x 130 percent = $2,600).
    (e) Replacement requirement for retired or amortized collateral. A 
member bank must ensure that any required collateral that subsequently 
is retired or amortized is replaced with additional eligible collateral 
as needed to keep the percentage of the collateral value relative to the 
amount of the outstanding credit transaction equal to the minimum 
percentage required at the inception of the transaction.
    (f) Inapplicability of the collateral requirements to certain 
transactions. The collateral requirements of this section do not apply 
to the following transactions.
    (1) Acceptances. An acceptance that already is fully secured either 
by attached documents or by other property that is involved in the 
transaction and has an ascertainable market value.
    (2) The unused portion of certain extensions of credit. The unused 
portion of an extension of credit to an affiliate as long as the member 
bank does not have any legal obligation to advance additional funds 
under the extension of credit until the affiliate provides the amount of 
collateral required by paragraph (b) of this section with respect to the 
entire used portion (including the amount of the requested advance) of 
the extension of credit.
    (3) Purchases of affiliate debt securities in the secondary market. 
The purchase of a debt security issued by an affiliate as long as the 
member bank purchases the debt security from a nonaffiliate in a bona 
fide secondary market transaction.