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6.12 Section 23A and 23B Coverage Expanded

<< Title VI Overview

6.12 Section 23A and 23B Coverage Expanded

The following links provide expanded analysis within this section:


6.12. Section 23A and 23B Coverage Expanded.  The Act reflects Congressional concern regarding the risks to a bank from affiliate transactions that arise in the event of a failure of the affiliate.  Congress was particularly concerned that existing law did not adequately address the potential impact of derivative transactions with affiliates.

The Act amends Section 23A of the Federal Reserve Act, which governs banks' loans to, purchases of assets from, and other transactions with affiliates, to include all investment funds for which a member bank or an affiliate of the bank serves as investment adviser, as an affiliate of the member bank. [§608]  It also defines a purchase of assets subject to a repurchase agreement as an extension of credit, which subjects it to the collateral requirements of Section 23A.  Under existing law, these transactions are covered transactions, but are not subject to collateral requirements.  Additional transactions also are added to the definition of "covered transaction," as discussed below.  The exemption for transactions with financial subsidiaries is eliminated.

6.12.1.   New Types of Covered Transactions.  Several types of transactions are added to the list of "covered transactions" under Section 23A, including: (i) the acceptance of debt obligations other than securities of  an affiliate as collateral for a loan or extension of credit to a third party (acceptance of affiliate securities already is a covered transaction); (ii) a transaction with an affiliate involving the borrowing or lending of securities to the extent that the transaction causes the bank to have  credit exposure to the affiliate; and (iii) a derivative transaction with an affiliate, to the extent that the bank will have credit exposure to the affiliate.

6.12.2.  The Fed May Issue Regulations Defining "Credit Exposure" and   Regarding the Treatment of Netting Arrangements.  The term "credit exposure" is not defined in the Act.  The Fed therefore may issue regulations or interpretations using existing rulemaking authority to define "credit exposure." Credit exposures on inter-affiliate derivative and securities lending or borrowing transactions are, to the extent they are collateralized by U.S. government securities and other high quality assets, exempt from Section 23A's quantitative and qualitative limitations.  The Fed may also issue regulations or interpretations   regarding how to treat netting arrangements in determining the amount of a covered transaction and whether it is fully secured. 

6.12.3.    New Procedures for Exemptions from 23A and B.  The Act amends the Fed's authority to issue exemptions from Sections 23A and 23B, by conditioning that authority on the Fed's notification to the FDIC of its finding that the exemption is in the public interest and the absence of a written response from the FDIC within 60 days of notification that the FDIC finds the exemption poses an unacceptable risk to the Deposit Insurance Fund.  The Act also authorizes the OCC by order to exempt a transaction of a national bank from the requirements of Section 23A if the OCC and the FDIC jointly find the exemption is in the public interest and consistent with the purposes of Section 23A, and the FDIC finds that the exemption does not present an unacceptable risk to the Deposit Insurance Fund.  The FDIC may exempt a transaction of a State nonmember bank if the FDIC and the Fed jointly find the exemption is in the public interest and consistent with the purposes of Section 23A, and the FDIC finds that the exemption does not present an unacceptable risk to the Deposit Insurance Fund.  Similar provisions allow the OCC and the Fed to exempt transactions from the restrictions on transactions of federal savings institutions with affiliates, and the FDIC and the Fed to exempt transactions of state savings institution with affiliates.

6.12.4.     Elimination of Exceptions for Transactions with Financial Subsidiaries.  The Act prospectively eliminates the exception from quantitative limits on bank Section 23A covered transactions entered into with financial subsidiaries on or after the date of enactment of the Act, and the exclusion of financial subsidiary retained earnings from the calculation of bank investment in a financial subsidiary. [§ 609]

The provisions regarding affiliate transactions are effective 1 year after the Transfer Date.