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F ederal r eser ve Bank of Dallas
DALLAS, TEXAS
75222
C irc u la r No. 79-7
Jan u ary 11, 1979
PROPOSED AMENDMENT TO REGULATION O
TO ALL MEMBER BANKS
AND BANK HOLDING COMPANIES IN THE
ELEVENTH FEDERAL RESERVE D IS T R IC T :
T h e Board of G overnors of the Federal R eserve System on
December 28, 1978, issued a proposal to amend Regulation O (12 CFR
Part 2 1 5 ), w hich governs loans by a m em ber bank to its executive of
fic e rs , to implem ent certain additional requirem ents imposed by the
new section 22(h) of the Federal R eserve A c t. Section 22(h) was r e
cen tly enacted by Congress as a p a rt of the Financial Institutions Regu
lato ry and Interest Rate Control Act of 1978 (92 S tat. 3641) . The new
section, w hich becomes effective M arch 10, 1979, imposes certain re
quirem ents on loans by member banks to in sid ers o r th e ir related
in terests.
Enclosed is a copy of the B oard's proposal and press release.
Interested persons a re in vited to submit re le v a n t d ata, v ie w s ,
o r comments in w ritin g to the S e c re ta ry , Board of G overnors of the Fed
eral R eserve System , W ashington, D .C . 20551, to be received by
Jan u ary 29, 1979.
A ny questions on the proposed amendment should be directed
to M essrs. W . C . R eddick o r M a rv in McCoy of our Bank S u p ervisio n and
Regulations D epartm ent, E x t. 6274.
S in ce re ly y o u rs ,
Robert H . Boykin
F irs t V ic e President
Enclosure
Banks and others are encouraged to use the following incoming W A T S numbers in contacting this Bank:
1-8 0 0 -4 9 2 -4 4 0 3 (intrastate) and 1-8 0 0 -5 2 7 -4 9 7 0 (interstate). For calls placed locally, please use 651 plus
the extension referred to above.
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
FEDERAL
press
For immediate release
RESERVE
release
Decem ber 28, 1978
T h e Federal R eserve Board today proposed re g u la to ry rules to implement new
legislation tigh ten ing re s tra in ts on lending by member banks to in s id e rs . A t the same
tim e, the Board proposed sim plification of Regulation 0 , w hich would be amended by the
proposals.
T h e proposals, on w hich the Board requested comment by Jan u ary 29, 1979,
would c a r r y out requirem ents of a new section of the Federal R eserve A ct (Sec. 2 2 (h ))
included in the Financial Institutions R egulato ry and In te re st Rate Control Act of 1978.
T h e new section of the Federal R eserve A c t, w hich becomes effective March 10,
1979, imposes the fo llow ing fo u r requirem ents on loans by member banks to in sid ers or
th e ir related interests:
1.
An agg regate lending lim it of 10 percen t of the ban k's capital and
surplus on loans to an in s id e r (other than a d ire c to r) and a ll related
interests of the in s id e r.
2.
P ro h ib itio n of paym ent by the bank of an o v e rd ra ft by an in sid er
(other than a p rin c ip a l shareh o ld er) .
3.
A req u irem en t that e v e ry extension of c re d it by the bank to an in
sid er o r to an in s id e r's related in te re st be made on sub stantially the
same term s others w ould receive fo r a com parable transaction at the
tim e, and that no unusual ris k or other un favo rab le factor be
in v o lv e d .
4.
A req u irem en t that e v e ry extension of c re d it by the bank to an in s id e r
o r any related interest of the in s id e r that w ould exceed $25,000 in the
agg regate be approved in advance by a m ajo rity of the bank's board of
d ire c to rs , w ith the interested p a rty ab stain in g .
In sid ers a re defined as the executive o ffic e rs , d ire c to rs , and p rin c ip a l share
holders of a member bank and of any holding company a ffilia te . T h e related interests of
in sid ers a re companies and political or cam paign committees controlled by o r benefitting
the in s id e rs . These and other key terms a re fu lly defined in the proposed regulation
(Sections 215.2 and 215 .3) .
T h e B oard's proposed revisions of Regulation O to implem ent the new A ct would
p ro v id e that:
T h e lending lim it to in sid ers (oth er than d ire c to rs ) and th e ir related interests
would be 10 percen t of the b an k's capital and su rp lu s as defined by the ban k's s u p e rv is o r.
- 2 T h e C om p troller of the C u rre n c y (s u p e rv is o r of national banks) includes subordinated
capital notes in capital and s u rp lu s , w h ile the Board (s u p e rv is o r of State ch a rtered mem
b e r banks) does not. T h e Board sp ecifically requested comment on these d e fin itio n s ,
w hich a re u nd er re v ie w by the agencies.
T h e 10 percent lim it could be exceeded in the case of loans to executive officers
for housing o r educational purposes.
Any extension of c re d it to an in s id e r outstanding on Novem ber 10, 1978 (the
date of enactment of the A ct) th a t, if it had been made a fte r M arch 10, 1979 (the effective
date of the A c t ) , would exceed the 10 percent lim it, would have to be broug ht into com
pliance by M arch 10, 1980. Tw o additional o n e -y e a r extensions could be g ranted for good
cause by the a p p ro p ria te s u p e rv is o r.
Extensions of c re d it made between Novem ber 10, 1978 and March 10, 1979 that
would exceed the lim it if made a fte r M arch 10, 1979 would have to be broug ht into com
pliance by June 10, 1979. T h e C o m p troller or the a p p ro p ria te Federal R eserve Bank
could extend this p e rio d , fo r good cause, u n til March 10, 1980.
Member banks would be re q u ire d to m aintain a p p ro p ria te records of loans to
in s id e rs and to th e ir related interests.
T h e Board's proposal is attached.
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REGULATION O
(12 CFR 215)
As amended effective
LOANS TO INSIDERS OF MEMBER BANKS
CONTENTS
215.1
215.2
215.3
2 15.4
215.5
A u th o rity , Purpose and Scope
D efinitions
Extension of C re d it
G eneral P rohibitions
Extensions of C re d it outstanding
on M arch 10, 1979
215.6 Records by Mem ber Banks
215.7 Reports
215.8 C iv il Penalties
SECTION 215.1 — A U T H O R IT Y , PURPOSE AND SCOPE
(a) A u th o rity .
T h is P art is issued p u rsu ant to sections 11 ( i ) , 22(g ) and 2 2 (h ) of the Federal
R eserve A ct, as amended (12 U .S .C . 248 ( i ) , 375a, a n d ______ ) .
(b) Purpose and Scope.
T h is P art relates to the extension of c re d it by a member bank to any executive
o ffic e r, d ire c to r, o r p rin c ip a l shareholder of the member b a n k , its paren t bank holding
com pany, o r the holding com pany's other su b sid iaries (" in s id e r s " ). It also applies to the
extension of c re d it by a member bank to (1) companies con trolled by in sid ers or (2) p o li
tical o r campaign committees that benefit in sid ers o r a re controlled by them .
SECTION 215.2 — DEFINITIO NS
(a)
"E xecu tive o fficer" means an o fficer of a member bank who participates or has
a u th o rity to p a rtic ip a te , otherw ise than in the capacity of a d ire c to r, in m ajor p o lic y
m aking functions of the b an k, reg ard less of w hether: (1) the o fficer has an official title ,
(2) the title designates the o fficer an assistant, o r (3) the o ffic e r is servin g w ithout salary
- 2 o r other com pensation.!^ T h e chairm an of the b o a rd , the p re s id e n t, e v e ry vice p re s id e n t,
the c a s h ie r, s e c re ta ry , and the tre a s u re r of a member bank shall be deemed executive
o ffic e rs , unless any such o fficer is exclu d ed , by resolution of the board of d irecto rs o r by
the ban k's b y la w s , from p artic ip a tio n in major p o lic y-m a kin g fu nctio ns, other than in the
capacity of a d ire c to r of the b an k, and such o fficer does not actually p artic ip a te th e re in .
(b) "In s id e r" means an executive o ffic e r, d ire c to r, o r p rin c ip a l shareholder of:
(1) the member b a n k , (2) its p aren t bank holding company (as defined in 12 U .S .C .
1 8 4 1 (a )), o r (3) any other s u b s id ia ry of such p aren t bank holding com pany.
(c) T h e "lending lim it" fo r member banks fo r purposes of section 2 1 5 .4 (c ) of this
P art shall be an amount equal to 10 percent of the bank's capital and unim paired surplus
as those terms a re defined by its a p p ro p ria te federal banking agency.
(d) "M em ber bank" means any b an kin g institution that is a member of the Federal
R eserve S ystem .
(e) "P rin c ip a l shareholder" means any in d iv id u a l o r company (other than an in
sured bank) that d ire c tly o r in d ire c tly , o r acting through o r in concert w ith one or more
persons, ow ns, controls, o r has pow er to vote more than 10 percent of any class of voting
securities of a member b a n k . H o w ever, fo r the purposes of section 2 1 5 .4 (c ) of this P a rt,
w here the member bank is located in a c ity , tow n, or v illa g e w ith less than 30,000 in pop
u latio n , this percentage shall be "m ore than 18 p e rc e n t." For the purpose of this d e fin i
tio n , shares held by any member of an in d iv id u a l's immediate fam ily (as defined in
section 2 0 6 .2 (k) of this ch ap ter) shall be deemed to be held by the in d iv id u a l.
(f) "Related interest" means (1) any company (oth er than an insured ban k) con
tro lle d by an in sid er or (2) any political o r cam paign committee, the funds or services of
w hich w ill b en efit an in s id e r o r that is controlled by an in s id e r.
(g) "C om pany," "c o n tro l," " o v e rd ra ft," and "person" shall have the meaning p ro
vided in sections 22(h) (5) and (6) of the Federal Reserve A c t, (12 U .S .C . ________ ) .
SECTION 215.3 — EXTENSION OF CR ED IT
(a)
An extension of c re d it is the m aking o r renew al of any loan o r the extending of
c re d it in any m anner w h atso ever, and includes:
1/ T h e term is not intended to include persons who may have official titles and may e x e r
cise a c e rtain m easure of d iscretio n in the perform ance of th e ir d u tie s , includin g discretion
in the m aking of loans, but who do not p a rtic ip a te in the determ ination of m ajor policies of
the bank and whose decisions a re circum scribed by policy standards fixe d by the top man
agement of the b an k. For exam ple, the term would not include a m anager o r assistant man
ag e r of a branch of a bank unless he p a rtic ip a te s , o r is authorized to p a rtic ip a te , in major
p o lic y-m a kin g functions.
-
3 -
(1) any purchase of s e c u ritie s , o th er assets, o r obligations under
repurchase agreem ent;
(2) any advance by means of an o v e rd ra ft, cash item, o r o th er
wise;
(3) a standby letter of c re d it (o r o th er s im ila r arrangem ent how
e v e r named o r described) and an in e lig ib le acceptance, as those terms
a re defined in section 2 0 8 .8 (d ) of this chapter;
(4) the acquisition by discount, p u rch ase, exchange, o r otherw ise
of any note, d ra ft, b ill of exchange, or other evidence of indebtedness
upon w hich a person may be liab le as m ake r, d r a w e r , e n d o rser, g u a r
a n to r, o r su rety;
(5) the increase of an existin g indebtedness, except on account of
(a) accrued in terest o r (b) ta x e s , in su ran c e, or other expenses in ciden
tal to the existin g indebtedness and advanced by the bank fo r its own
protection;
(6) any advance of unearned sa la ry o r other unearned compensation
fo r periods in excess of 30 days; and
(7) an y other transaction as a re s u lt of w hich a person becomes o b li
gated to a b a n k , d ire c tly or in d ire c tly by any means w hatsoever, by re a
son of an endorsem ent on an obligation o r o th e rw is e , to pay money or its
e q u iv a le n t.
(b) Such term s , h o w eve r, do not include:
(1) advances against accrued sa la ry o r other accrued com pensation,
o r advances fo r the paym ent of au th o rized tra v e l o r other expenses in
c u rre d o r to be in c u rre d on b eh alf ot the bank;
(2) the acq uisition by a bank of an y check deposited in o r d e liv e re d
to the bank in the usual course of business unless it results in the c a r r y
ing of a cash item o r the g ra n tin g of an o v e rd ra ft;
(3) the acquisition of an y note, d ra ft, b ill of exchange, o r other e v i
dence of indebtedness (a) through a m erg er o r consolidation of banks o r a
s im ila r transaction by w hich a bank acq uires assets and assumes lia b il
ities of another bank o r s im ilar organization or (b) through foreclosure on
co llateral or s im ila r proceeding fo r the protection of the bank;
(4)
bank of
faith or
against
(a) the endorsem ent or guarantee fo r the protection of a member
any loan o r other asset p re v io u s ly acq u ired by such bank in good
(b) any indebtedness fo r the purpose of protecting a member bank
loss o r g iv in g fin an cial assistance to it; o r
- a (5)
indebtedness of $5,000 o r less a ris in g by reason of any general
arrangem ent under w hich a bank (a) acq uires charge o r time c re d it accounts
o r (b) makes payments to o r on b eh alf of p articip an ts in a bank c re d it card
p la n , check c re d it p la n , o r s im ilar p la n , p ro v id e d : (i) such indebtedness
does not in vo lve p r io r in d iv id u a l clearance o r approval by the bank other
than fo r the purposes o f d eterm in in g a u th o rity to p a rtic ip a te in the a rra n g e
ment and com pliance w ith any d o lla r lim it u n d er the arrangem ent and (ii)
such indebtedness is in c u rre d u n d er term s th at a re not more favo rab le than
those offered to the gen eral p u b lic .
SECTION 215. 4 — GENERAL PROHIBITIONS
(a) Term s and C re d itw o rth in e s s . No member bank shall extend c re d it to any in s id e r
or to any related in terest of such an in s id e r unless the extension of c re d it: (1) is made on
su b sta n tially the same term s , including in te re st rates and c o lla te ra l, as those p re v a ilin g a t
the time for com parable transactions by the bank w ith other persons not associated w ith the
bank and (2) does not involve more than the normal ris k of repaym ent or present other un
favorable featu res.
(b) P rio r A p p ro v a l. No member bank shall extend c re d it o r g ra n t a line of c re d it to
any in sid er or to any related in te re st of such an in s id e r in an amount th a t, when aggregated
w ith the amount of a ll other extensions of c re d it and lines of c re d it by the member bank to
the in sid er and to a ll related interests of the in s id e r, would exceed $25,000 unless such an
extension of c re d it or line of c re d it has been approved in advance by a m ajority of the
bank's e n tire board of d irecto rs w ith the interested p a rty abstaining from partic ip a tin g
d ire c tly or in d ire c tly in the v o tin g .
(c) A g gregate Lending L im it. No member bank shall extend c re d it to any in s id e r
(other than a d ire c to r) or to an y related in terest of such an in s id e r in an amount th a t, when
aggregated w ith the amount of a ll other extensions of c re d it by the member bank to the in
s id er and to a ll related interests of the in s id e r, w ould exceed the lending lim it of the mem
b er bank as specified in section 2 1 5 .2 (c ) of this P a rt. T h is lending lim it shall not ap p ly so
as to p ro h ib it a loan to an executive o fficer made p u rsu an t to section 2 1 5 .4 (e ) of this P a rt,
w here such loan, when aggregated w ith a ll o th er loans to the executive o fficer and the o ffi
cer's related in te re s ts , does not exceed $90,000.
(d) O v e rd ra fts . No member bank shall pay an o v e rd ra ft on an account of an in s id e r
(other than a p rin c ip a l shareholder) at such bank unless the d ra ft is made (1) pursu ant to
an automatic tra n s fe r system o r plan authorized u n d er section 2 1 7 .5 (c ) (2) of this chapter or
(2) in accordance w ith a w ritte n p reau th o rized in te re s t-b e a rin g extension of c re d it that
specifies a method of repaym ent.
(e) Extension of C re d it to Executive O ffic e rs . No member bank shall extend c re d it
to any of its own execu tive o ffic e rs , and no executive o fficer of a member bank shall borrow
from or otherw ise become indebted to such b an k, except in such am ounts, fo r such p u r
poses, and upon such conditions as a re specified in section 22(g ) of the Federal Reserve
Act (12 U .S .C . 375a) .
- 5 (f)
Extension of C re d it to P a rtn e rs h ip s . No member bank shall extend c re d it to a
p a rtn e rs h ip in w hich one o r more executive officers of such bank a re p artn e rs an d , e ith e r
in d iv id u a lly or together, hold a m ajo rity interest except as p rovided in section 22(g ) of
the Federal R eserve A ct (12 U .S . C . 3 7 5 a ).
SECTION 215.5 — EXTENSIONS OF C R ED IT OUTSTANDING ON MARCH 10, 1979
(a) C re d it Extended Before Novem ber 10, 1978.
(1) A n y extension of c re d it made by a member bank that was outstanding
on Novem ber 10, 1978, and that w ould , if made a fte r M arch 10, 1979, exceed
the lending lim it p ro vid ed in section 2 1 5 .4 (c ) of this Part shall be reduced in
amount to com ply w ith that lending lim it on or before M arch 10, 1980, and
shall only be renew ed o r extended a fte r M arch 10, 1979, on terms that w ill
b rin g such extension of c re d it into compliance w ith such lending lim it on or
before M arch 10, 1980.
(2) If a member bank is unable to b rin g any extension of c re d it outstand
ing on Novem ber 10, 1978, into com pliance w ith the lending lim it p rovided in
section 2 1 5 .4 (c ) of this P art on o r before M arch 10, 1980, the member bank
shall prom ptly re p o rt such fact to the C o m p troller of the C u rre n c y , in the case
of a national b a n k , or the a p p ro p ria te Federal R eserve B an k, in the case of a
State ch a rtered member b a n k , together w ith an explanation of the reasons why
the extension of c re d it could not be broug ht into com pliance. T h e C om ptroller
o r the R eserve B ank, as the case may b e , is authorized to extend the M arch 10,
1980 date fo r com pliance fo r not more than two additional o n e -ye ar periods for
good cause sh o w n .
(b) C re d it Extended A fte r Novem ber 10, 1978.
(1) A n y extension of c re d it made b y a member bank between Novem ber 10,
1978 and M arch 10, 1979, that w o u ld , if made a fte r M arch 10, 1979, exceed the
lending lim it p rovided in section 2 1 5 .4 (c ) of this P art shall be reduced in
amount to com ply w ith that lending lim it on or before June 10, 1979.
(2) If a member bank is unable to b rin g any extension of c re d it made
between Novem ber 10, 1978 and M arch 10, 1979, into compliance w ith the lend
ing lim it p ro vid ed in section 2 1 5 .4 (c ) of this Part on o r before June 10, 1979,
the member bank shall prom ptly re p o rt such fact to the C om ptroller of the C u r
re n c y , in the case of a national b a n k , o r the a p p ro p ria te Federal Reserve
B an k, in the case of a State ch a rtered member b a n k , together w ith an exp lan
ation of the reasons w hy the extension of c re d it could not be brought into com
p lia n c e . T h e C om p troller o r the R eserve B ank, as the case may b e, is author
ized to extend the June 10, 1979 date fo r com pliance u n til M arch 10, 1980 for
good cause shown.
- 6 SECTION 215.6 — RECORDS BY MEMBER BANKS
E v e ry member bank shall m aintain such records as a re necessary to ensure its
compliance w ith the requirem ents of this P a rt. Such records shall a p p ro p ria te ly id en tify
alt in sid ers and th e ir related interests and the amount and terms of each extension of
c re d it by the member bank to such p e rso n s.
SECTION 215.7 — REPORTS
E v e ry member bank and e v e ry executive o ffic e r of a member bank shall file
the reports re q u ire d by section 2 2 (g ) of the Federal R eserve A c t, 12 U .S .C . 375a.
SECTION 215.8 — C IV IL PENALTIES
As specified in section 29 of the Federal Reserve A ct (12 U .S .C . ______ ) , any
member bank that v io late s, o r any o ffic e r, d ire c to r, em ployee, ag en t, o r other person
p a rtic ip a tin g in the conduct of the a ffa irs of the bank who vio late s, any provision of this
P art shall be subject to a c iv il pen alty of not more than $1,000 p er day fo r each day d u r
ing w hich such violation continues.
Board of G overnors of the Federal R eserve System, Decem ber 27, 1978.
(sig ned) Theodore E . A llison
Theodore E. A lliso n
S e cretary of the Board
(SIGNED)
@FedFRASER