[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: 12CFR223.21]

[Page 65-67]
 
                       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 C--Valuation and Timing Principles Under Section 23A
 
Sec. 223.21  What valuation and timing principles apply to credit transactions?


    (a) Valuation. (1) Initial valuation. Except as provided in 
paragraph (a)(2) or (3) of this section, a credit transaction with an 
affiliate initially must be valued at the greater of:
    (i) The principal amount of the transaction;

[[Page 66]]

    (ii) The amount owed by the affiliate to the member bank under the 
transaction; or
    (iii) The sum of:
    (A) The amount provided to, or on behalf of, the affiliate in the 
transaction; and
    (B) Any additional amount that the member bank could be required to 
provide to, or on behalf of, the affiliate under the terms of the 
transaction.
    (2) Initial valuation of certain acquisitions of a credit 
transaction. If a member bank acquires from a nonaffiliate a credit 
transaction with an affiliate, the covered transaction initially must be 
valued at the sum of:
    (i) The total amount of consideration given (including liabilities 
assumed) by the member bank in exchange for the credit transaction; and
    (ii) Any additional amount that the member bank could be required to 
provide to, or on behalf of, the affiliate under the terms of the 
transaction.
    (3) Debt securities. The valuation principles of paragraphs (a)(1) 
and (2) of this section do not apply to a member bank's purchase of or 
investment in a debt security issued by an affiliate, which is governed 
by Sec. 223.23.
    (4) Examples. The following are examples of how to value a member 
bank's credit transactions with an affiliate.
    (i) Term loan. A member bank makes a loan to an affiliate that has a 
principal amount of $100. The affiliate pays $2 in up-front fees to the 
member bank, and the affiliate receives net loan proceeds of $98. The 
member bank must initially value the covered transaction at $100.
    (ii) Revolving credit. A member bank establishes a $300 revolving 
credit facility for an affiliate. The affiliate has drawn down $100 
under the facility. The member bank must value the covered transaction 
at $300 throughout the life of the facility.
    (iii) Guarantee. A member bank has issued a guarantee to a 
nonaffiliate on behalf of an affiliate under which the member bank would 
be obligated to pay the nonaffiliate $500 if the affiliate defaults on 
an issuance of debt securities. The member bank must value the guarantee 
at $500 throughout the life of the guarantee.
    (iv) Acquisition of a loan to an affiliate. A member bank purchases 
from a nonaffiliate a fixed-rate loan to an affiliate. The loan has an 
outstanding principal amount of $100 but, due to movements in the 
general level of interest rates since the time of the loan's 
origination, the member bank is able to purchase the loan for $90. The 
member bank initially must value the credit transaction at $90 (and must 
ensure that the credit transaction complies with the collateral 
requirements of Sec. 223.14 at the time of its acquisition of the loan).
    (b) Timing. (1) In general. A member bank engages in a credit 
transaction with an affiliate at the time during the day that:
    (i) The member bank becomes legally obligated to make an extension 
of credit to, issue a guarantee, acceptance, or letter of credit on 
behalf of, or confirm a letter of credit issued by, an affiliate;
    (ii) The member bank enters into a cross-affiliate netting 
arrangement; or
    (iii) The member bank acquires an extension of credit to, or 
guarantee, acceptance, or letter of credit issued on behalf of, an 
affiliate.
    (2) Credit transactions by a member bank with a nonaffiliate that 
becomes an affiliate of the member bank.
    (i) In general. A credit transaction with a nonaffiliate becomes a 
covered transaction at the time that the nonaffiliate becomes an 
affiliate of the member bank. The member bank must treat the amount of 
any such credit transaction as part of the aggregate amount of the 
member bank's covered transactions for purposes of determining 
compliance with the quantitative limits of Secs. 223.11 and 223.12 in 
connection with any future covered transactions. Except as described in 
paragraph (b)(2)(ii) of this section, the member bank is not required to 
reduce the amount of its covered transactions with any affiliate because 
the nonaffiliate has become an affiliate. If the nonaffiliate becomes an 
affiliate less than one year after the member bank enters into the 
credit transaction with the nonaffiliate, the member bank also must 
ensure that the credit transaction complies with the collateral 
requirements of Sec. 223.14 promptly after the nonaffiliate becomes an 
affiliate.

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    (ii) Credit transactions by a member bank with a nonaffiliate in 
contemplation of the nonaffiliate becoming an affiliate of the member 
bank. Notwithstanding the provisions of paragraph (b)(2)(i) of this 
section, if a member bank engages in a credit transaction with a 
nonaffiliate in contemplation of the nonaffiliate becoming an affiliate 
of the member bank, the member bank must ensure that:
    (A) The aggregate amount of the member bank's covered transactions 
(including any such credit transaction with the nonaffiliate) would not 
exceed the quantitative limits of Sec. 223.11 or 223.12 at the time the 
nonaffiliate becomes an affiliate; and
    (B) The credit transaction complies with the collateral requirements 
of Sec. 223.14 at the time the nonaffiliate becomes an affiliate.
    (iii) Example. A member bank with capital stock and surplus of 
$1,000 and no outstanding covered transactions makes a $120 unsecured 
loan to a nonaffiliate. The member bank does not make the loan in 
contemplation of the nonaffiliate becoming an affiliate. Nine months 
later, the member bank's holding company purchases all the stock of the 
nonaffiliate, thereby making the nonaffiliate an affiliate of the member 
bank. The member bank is not in violation of the quantitative limits of 
Sec. 223.11 or 223.12 at the time of the stock acquisition. The member 
bank is, however, prohibited from engaging in any additional covered 
transactions with the new affiliate at least until such time as the 
value of the loan transaction falls below 10 percent of the member 
bank's capital stock and surplus. In addition, the member bank must 
bring the loan into compliance with the collateral requirements of 
Sec. 223.14 promptly after the stock acquisition.