A regulation is generally defined as a rule or restriction that governs human behavior. Regulation W is a guideline established by the Federal Reserve in the United States that sets terms and guidelines for financial institutions, such as banks, and their financial transactions with affiliates. This regulation applies to all federally insured financial institutions. It is expected that institutions know and practice this regulation and use it to govern all of the financial transactions that take place.
Regulations are imposed in society for a variety of purposes from management of behavior to assurance of order and to promote ethical behavior. Businesses and financial institutions need regulations to govern practices of routine business. Regulation W is the specific set of guidelines that governs the operations of federal financial institutions and their financial relationships with affiliates.
Most financial institutions often have more than one affiliate. The term affiliate may include any parties that controls or is under common control with the institution. Control, in this case, is considered to be owning more than 25% of the voting power or equity.
As affiliations grow, the complexity and number of transactions also increases, which leads to the need for changes and alterations to the regulations that govern these interactions. Sections 23A and 23B of the Federal Reserve Act are the provisions that have long governed affiliate transactions. Regulation W was published in 2003 as an extension of those sections of the regulations.
Regulation W commands that the business dealings between member banks meet certain conditions. Transactions to a single affiliate can total no more than 10% of the institution’s wealth. Transactions to all affiliate banks cannot total more than 20% of the capital. In addition, any credit that is lent to an affiliate bank must be secured credit only.
Transactions are subject to certain requirements and limits under regulation W. Failure to comply with the proper rules leads to consequences such as penalties and fines. Transactions must be planned and reviewed ahead of time to ensure that they are in compliance with the regulations. Those that do not meet the requirements initially must be restructured until they meet regulatory compliance.
Violations of regulation W by financial institutions can be substantial. Civil penalties may be applied if the institution is deemed guilty of violations. An investigation will determine if the violation was intentional or an oversight, and the penalties imposed will depend on the outcome of the investigation. If the violation is determined to have any individual gain or have affected the financial health of the institution, there may be more severe consequences.
