Federal Reserve Act - Section 23A

Front 1

What is Section 23A?

Back 1

Relations with Affiliates

Front 2

What is an affiliate?

Back 2

1. Any company that controls the bank

2. any company that is controlled by the company that controls the bank (sister company)

3. Bank subsidiary of a bank

4. Any company that is controlled by or for the benefit of the SHs who control the bank or a company that controls the bank

(share/common owners — also called interlocking)

5. Any company in which the majority of the directors are also the majority of the directors for the bank or a company that controls the bank

(share/common directors — also called interlocking)

6. A company that is sponsored or advised on a contractual basis by a bank, or by the bank's subsidiaries or affiliates. An example would be a real estate investment trust is an affiliate. — Any investment fund where a bank or affiliate of the bank is an investment advisor

7. Any company that the Board of Governors determines by regulation or order to have a relationship with the bank or any subsidiary or affiliate of the bank...

Front 3

What is NOT an affiliate?

Back 3

1. Any company other than a bank, that is a subsidiary of a bank...

2. Any company engaged solely in holding the premises of the bank

3. Any company engaged solely in conducting safe deposit business

4. Any company engaged solely in holding obligations of the US or its agencies or obligations fully guaranteed by the US or its agencies

5. Any company where control resulted from the exercise of rights arising out if a bona fide debt previously contracted...but only for a time...if no law specifying the time, 2 years...

Hint 3

• nonbank subsidiary

• holding company for bank premises

• safe deposit box company

• holding company for US securities

• control came from bona fide debt previously contracted

Front 4

When is a company or SH determined to have control over another company?

Back 4

• directly or indirectly, owns, controls, or has power to vote 25% or more of any voting class of securities of the other company (excluding shares held in a fiduciary capacity except a business trust)

• controls in any manner the election of a majority of the directors of another company

• the Board of Governors determines that (the SHs or company) exercises a controlling influence over the management or policies of the other company

________________________________

Rebuttal Presumption of Control:

• company or S/H owns or controls 15% or > of the equity capital of the bank

——must provide FRB acceptable documentation for rebuttal

Hint 4

• vote 25% of the voting shares

• controls election of the majority of the directors

• controlling influence over management or policies

Ownership or control doesn't come by virtue of a fiduciary capacity

Front 5

What is a subsidiary?

Back 5

Company controlled by another company

Front 6

What are the covered transaction?

Back 6

1. loan or

extension of credit to an affiliate

2. purchase of assets, including

assets subject to a repurchase agreement from an affiliate

3. purchase of or an investment in the securities issued by an affiliate

• a purchase of assets from the affiliate (except real & personal property specifically exempted by the Board)

• acceptance of securities

issued by the affiliate as

collateral for a loan or extension of credit TO ANY PERSON OR COMPANY

• issuance of a guarantee, acceptance, or LC, including an endorsement or standby LC, on behalf of an affiliate

• transaction with an affiliate that involves borrowing or lending of securities, to the extent that the transaction causes the bank or a subsidiary to have credit exposure to the affiliate

• a derivative transaction with an affiliate to the extent that the transaction causes the bank or a subsidiary to have credit exposure to the affiliate.

Front 7

A bank & its subsidiaries may not purchase low quality assets from its affiliates?

What is a low quality asset?

Back 7

• Substandard, Doubtful or Loss, Special Mention in the most recent ROE

• nonaccrual

• principal or interest is > 30 days P/D

• TDR

• foreclosed assets or repos

Front 8

Rebuttable presumption of control?

Back 8

Owns or controls 15% or more the equity capital of the company

Front 9

Restrictions on transactions with an affiliate?

Back 9

• the aggregate amount of the covered transaction between a bank and a single affiliate is limited to 10% of the capital stock + surplus of the bank

&

• the aggregate amount of all transaction between a bank and all affiliates is limited to 20% of the bank's capital stock + surplus

(Include unfunded amounts if provided in calculating aggregate amounts)

Front 10

Can a bank extend credit to an affiliate w/o it being secured?

Back 10

NO!

Front 11

A loan to an affiliate must be secured by collateral market value equal to?

(Not LTV but VTL — Value/loan)

Value $400

Loan $308

VTL = 130%

Back 11

• 100% of the amount of the loan if the collateral is:

• obligations of the US or its agencies

• obligations fully guaranteed by the US or its agencies as to P&I

• notes, drafts, bills of exchange or bankers' acceptances that are eligible for rediscount or purchase by the FRB

• a segregated, earmarked deposit account with the bank

(If MV=$500 then — $500/1.0)

• 110% (value/loan) if collateral is composed of obligations of any State or political subdivision of any State (If MV=$400 then — $400/1.1)

• 120% (value/loan) if collateral is composed of other debt instruments, including receivables (If MV=$300 then — $300/1.2)

• 130% if collateral is stock, leases, or other real or personality property

(If MV=$200 then — $200/1.3)

Front 12

When can a bank and an affiliate engage in a covered transaction?

Back 12

If the covered transaction is not > 10% of the bank's capital stock + surplus

&

If the aggregate amount of covered transactions for all affiliates is not > 20% of the bank's capital stock + surplus

Front 13

When might a bank & its subsidiaries purchase a low quality asset from an affiliate?

Back 13

When the bank or bank subsidiary, pursuant an independent credit evaluation, committed to purchase the asset prior to the time the asset was acquired by the affiliate

Front 14

What cannot be collateral for a covered transaction with am affiliate?

Back 14

• low quality assets

• securities or obligations issued by an affiliate of the bank

Front 15

Exemptions to restricted covered transactions?

Back 15

1. The bank may make deposits in an affiliate in the ordinary course of correspondent business

2. Give immediate credit to an affiliate for uncollected items received in the ordinary course of business

3. May make a loan or extend credit to an affiliate if it is fully secured by:

• obligations of the US or its agencies

• obligations fully guaranteed by the US or its agencies as to P&I

• a segregated, earmarked deposit account

4. Purchasing securities issued by a company of the kinds described in the BHC Act of 1956

5. Purchasing assets having a readily identifiable & publicly available market quotation & purchased at that market quotation

6. Purchasing from an affiliate a loan that was originated by the bank & sold to the affiliate subject to a repurchase agreement

Front 16

A financial subsidiary of a bank is deemed to be?

Back 16

• shall be an affiliate

• shall not be a subsidiary of the bank

Front 17

Covered transactions:

Extension of credit include?

Back 17

• loans

• purchase notes

• repurchase agreements

• overdraft

• FFS / FFP

• lease

• SBLC

• GTY

• Protecting the bank (an increase for accrued interest or taxes/insurance/other expenses to protect the bank)

• Unearned Salary Advance

• any transactions resulting in a person becoming obligated to the bank

Front 18

5 assets ineligible for collateral under 23A

Back 18

1. Intangibles (unless approved by the Board)

2. Equity & Debt Securities that are issued by the bank that represent capital of the bank

3. Low quality assets

4. Guarantees of LCs

5. Securities issued by affiliates

Front 19

What is a sister bank?

Back 19

The bank's controlling company also controls 80% of another bank—a sister bank

Sister banks are exempt from 23A requirements

Front 20

Exemptions to 23A restricted covered transactions

Back 20

• making correspondent banking deposits

• giving credit for uncollected items

• transactions covered by cash or US government securities

• purchasing securities of a servicing affiliate

• purchasing certain liquid assets

• purchasing certain marketable securities

• purchasing municipal securities

• purchasing an extension of credit subject to repurchase

• assets purchased of a newly formed member bank

• transactions under the Bank Merger Act

• purchasing an extension of credit from a bank

• intraday extensions of credit

• risk less principal transactions

• securities financing transactions

• purchases of certain asset backer commercial paper

•

Front 21

Exemptions to 23A restricted covered transactions

Back 21

• making correspondent banking deposits

• giving credit for uncollected items

• transactions covered by cash or US government securities

• purchasing securities of a servicing affiliate

• purchasing certain liquid assets

• purchasing certain marketable securities

• purchasing municipal securities

• purchasing an extension of credit subject to repurchase

• assets purchased of a newly formed member bank

• transactions under the Bank Merger Act

• purchasing an extension of credit from a bank

• intraday extensions of credit

• risk less principal transactions

• securities financing transactions

• purchases of certain asset backer commercial paper

Front 22

When is a nonbank subsidiary considered an affiliate?

Back 22

In the event that the nonbank subsidiary qualifies as a financial subsidiary.

Front 23

Sister bank exemption

Back 23

When a bank is 80% controlled by a HC, its transactions with other banks which are also 80% controlled by the same HC, are largely unrestricted.

However, still prohibited against purchasing low-quality assets from the sister bank and it is still required that all transactions be consistent with safe and sound banking practices

Hint 23

When a bank is 80% controlled by a HC, its transactions with other banks which are also 80% controlled by the same HC, are largely unrestricted.

However, still prohibited against purchasing low-quality assets from the sister bank

Front 24

Can a bank purchase a classified loan from its NONbank subsidiary?

Back 24

Yes

Front 25

If Bank A & Bank B are owned by the same BHC, how are the two banks related?

Back 25

They are both sister banks and allowed to engage in most covered transactions...excluding the purchase of low quality assets

Front 26

What if

a shareholder owns 30% of the bank &

45% of a corporation.

If the Corporation was provided an unsecured loan from the bank on preferential terms, is this a violation?

Back 26

Yes

Front 27

Is a $300,000 loan to the CEO a covered transaction under 23B?

Back 27

No

Front 28

Is a $300,000 loan to the CEO a covered transaction under 23B?

Back 28

No

Front 29

Is a checking account to an affiliate a covered transaction under 23A?

Back 29

No

Front 30

Which section of the FDI Act makes Sections 23A and 23B of the Federal Reserve Act applicable to state nonmember banks?

Back 30

Section18(j)

Front 31

Banks are considered affiliates for which regulations?

Back 31

• 23A

• BHC Act

Front 32

True or False: The Cejka Family Trust owns 25% of DEF Bank Holding Company, which owns 20% of Bank A. President Nick Cejka is proud that his family owns so much of the holding company but doesn’t want them to buy any more of the bank stock to avoid and appearance of control. The Cejka Family Trust has control over Bank A.

Back 32

True—because President Nick Cejka is President & his family owns > 15%

Front 33

Bank A has unimpaired capital and surplus of $10MM. Recently, Bank B an affiliated bank requested a loan for $1.5MM secured by $5MM in FNMA bonds. Bank A makes the loan on standard terms. What violations, if any, should be cited for this transaction?

Back 33

23A — limit on transactions is 10% of unimpaired capital+ surplus.

$1.5/$10 = 15%

Front 34

Bank A has unimpaired capital and surplus of $10MM. Recently, Bank B an affiliated bank requested a loan for $1MM secured by $5MM in FNMA bonds. Bank A makes the loan on standard terms. What violations, if any, should be cited for this transaction?

Back 34

None

$1/$10 = 10% which is the limit

Front 35

XYZ Holding Company owns 100% of Bank A, which owns 50% of a start up insurance company. Bank A made a $500M loan to the CEO of the insurance company to purchase the building, furniture, and supplies for the company. True or False: This is a transaction with an affiliate?

Back 35

True—any company that controls the bank and also controls another company is an affiliate

Front 36

A member bank and its subsidiaries may engage in a covered transaction with an affiliate only if in the case of ANY affiliate, the aggregate amount of covered transactions of the member bank and its subsidiaries will not exceed what percent of the capital stock and surplus of the member bank?

Back 36

10%

If ALL AFFILIATES instead of any, 20%

Front 37

Does issuing a LC to an affiliate qualify as a covered transaction?

Back 37

Yes

Front 38

Are sole proprietors included as affiliates for 23A purposes?

Back 38

No