For the first time in nearly 50 years, the Federal Reserve is proposing to comprehensively update the regulation governing extensions of credit to bank “insiders,” such as board directors, executives and major shareholders.
Regulation O governs loans by covered banks to their insiders and affiliates of insiders. The proposed rule would update outdated dollar-based limits on certain types of lending to bank insiders and index them going forward, according to the Fed.
The Fed also noted that investment funds have substantially increased their ownership of banks and other public companies in recent decades, and several funds have become subject to Regulation O simply because they hold a stake in a bank. The proposed rule would exempt these funds if they meet certain criteria that constrain their influence over bank lending decisions.
“Community banks often face challenges recruiting experienced business leaders to serve as members of bank boards and as bank executives,” Fed Vice Chairman for Supervision Michelle Bowman said. “Many potential board members are business owners whose expertise is invaluable. This rule recognizes that value by providing clearer, more straightforward standards that protect against potential conflicts of interest while supporting effective governance.”
Comments on the proposal are due 60 days after publication in the Federal Register.
In addition to today’s proposal, the Office of the Comptroller of the Currency and FDIC last year announced they will not take action against banks for extensions of credit to complex-controlled portfolio companies that otherwise would violate Regulation O, provided banks satisfy certain conditions.
