Academic journal article ABA Banking Journal

Federal Reserve Eases Insider Borrowing Rules

Academic journal article ABA Banking Journal

Federal Reserve Eases Insider Borrowing Rules

Article excerpt

Generally, a bank's extension of credit to insiders must be totalled; the sum cannot exceed the bank's unimpaired capital and unimpaired surplus. However, banks with less than $100 million in deposits and that are adequately capitalized had been permitted to increase the size of this "pie" to 200% of unimpaired capital and surplus. Acceptable grounds for taking this measure include the need to attract or retain directors--so a good customer doesn't have to choose between remaining on the board and remaining a customer, for example--and avoiding constriction of credit in the bank's community. The increase required a resolution of the board of directors, which had to be submitted to regulators.

The Fed has made the small bank rule permanent, but with additional standards:

1. The 200% limit would only be available to banks with CAMEL ratings of l and 2.

2. Banks above the 100% limit that become undercapitalized can retain existing loans. However, they cannot make additional insider loans or renew existing loans that would keep aggregated insider lending above the 100% level.

"Extension of credit" changed

The Fed also made three changes to its rules on extensions of credit to insiders:

1. The "tangible economic benefit" rule has been adjusted. Previously, credit granted to other parties that could be seen as benefiting an insider had to be counted as a loan to that insider. …

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