A banking organization may wish to involve some of its affiliates as participants in a particular transaction, but may find itself hindered by a U.S. statute that restricts and in some cases prohibits a U.S. bank from engaging in a transaction with its non-U.S. affiliate. This month's column will provide a brief overview of these restrictions and prohibitions, known as Regulation W, focusing on those aspects more relevant to non-U.S. banks.

Legal Authority

Regulation W1 is derived from sections 23A and 23B of the U.S. Federal Reserve Act,2 which imposes quantitative and qualitative restrictions on a U.S. bank's ability to do business with its affiliates. “Bank” in this context (and as used in this column) refers to a bank with insured deposits, any other institution that is a member of the Federal Reserve System (such as an uninsured national trust company) and, for limited purposes, U.S. branches and agencies of non-U.S. banks. The legislative intent was to protect the bank from losses arising from its transactions with its affiliates.

Sections 23A and 23B are the basis for Regulation W promulgated by the Federal Reserve Board. Regulation W tightened some of the restrictions and narrowed some of the exemptions in the statute. There are some exemptions from the requirements of Regulation W, but they are narrowly drawn and narrowly construed by the Federal Reserve Board.