[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: 12CFR223.22]

[Page 67-68]
 
                       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. 223.22  What valuation and timing principles apply to asset purchases?

    (a) Valuation. (1) In general. Except as provided in paragraph 
(a)(2) of this section, a purchase of an asset by a member bank from an 
affiliate must be valued initially at the total amount of consideration 
given (including liabilities assumed) by the member bank in exchange for 
the asset. The value of the covered transaction after the purchase may 
be reduced to reflect amortization or depreciation of the asset, to the 
extent that such reductions are consistent with GAAP.
    (2) Exceptions. (i) Purchase of an extension of credit to an 
affiliate. A purchase from an affiliate of an extension of credit to an 
affiliate must be valued in accordance with Sec. 223.21, unless the note 
or obligation evidencing the extension of credit is a security issued by 
an affiliate (in which case the transaction must be valued in accordance 
with Sec. 223.23).
    (ii) Purchase of a security issued by an affiliate. A purchase from 
an affiliate of a security issued by an affiliate must be valued in 
accordance with Sec. 223.23.
    (iii) Transfer of a subsidiary. A transfer to a member bank of 
securities issued by an affiliate that is treated as a purchase of 
assets from an affiliate under Sec. 223.31 must be valued in accordance 
with paragraph (b) of Sec. 223.31.
    (iv) Purchase of a line of credit. A purchase from an affiliate of a 
line of credit, revolving credit facility, or other similar credit 
arrangement for a nonaffiliate must be valued initially at the total 
amount of consideration given by the member bank in exchange for the 
asset plus any additional amount that the member bank could be required 
to provide to the borrower under the terms of the credit arrangement.
    (b) Timing. (1) In general. A purchase of an asset from an affiliate 
remains a covered transaction for a member bank for as long as the 
member bank holds the asset.
    (2) Asset purchases by a member bank from a nonaffiliate in 
contemplation of the nonaffiliate becoming an affiliate of the member 
bank. If a member bank purchases an asset from a nonaffiliate in 
contemplation of the nonaffiliate becoming an affiliate of the member 
bank, the asset purchase becomes a covered transaction at the time that 
the nonaffiliate becomes an affiliate of the member bank. In addition, 
the member bank must ensure that the aggregate amount of the member 
bank's covered transactions (including any such 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.

[[Page 68]]

    (c) Examples. The following are examples of how to value a member 
bank's purchase of an asset from an affiliate.
    (1) Cash purchase of assets. A member bank purchases a pool of loans 
from an affiliate for $10 million. The member bank initially must value 
the covered transaction at $10 million. Going forward, if the borrowers 
repay $6 million of the principal amount of the loans, the member bank 
may value the covered transaction at $4 million.
    (2) Purchase of assets through an assumption of liabilities. An 
affiliate of a member bank contributes real property with a fair market 
value of $200,000 to the member bank. The member bank pays the affiliate 
no cash for the property, but assumes a $50,000 mortgage on the 
property. The member bank has engaged in a covered transaction with the 
affiliate and initially must value the transaction at $50,000. Going 
forward, if the member bank retains the real property but pays off the 
mortgage, the member bank must continue to value the covered transaction 
at $50,000. If the member bank, however, sells the real property, the 
transaction ceases to be a covered transaction at the time of the sale 
(regardless of the status of the mortgage).