What Is Regulation O?
Regulation O is a Federal Reserve regulation that places limits and stipulations on the credit extensions a member bank can offer to its executive officers, principal shareholders, and directors.
The regulation is designed to prevent bank directors, trustees, executive officers, or principal shareholders ("insiders") from benefiting from favorable credit extensions.
Key Takeaways:
- Regulation O regulates the credit extensions that member bankscan offer to their "insiders."
- Regulation O requires that banks report any extensions provided to insiders in their quarterly reports.
- Regulation O defines bank insiders as directors or trustees of a bank, executive officers, or principal shareholders.
- The restrictions in place are devised to prevent bank insiders from receiving advantageous or generous credit extensions,
Understanding Regulation O
Regulation O regulates the credit extensions that member bankscan offer to individuals who are considered to be "insiders"with respect to the bank. While bank insiders are not barred from taking out loans from a bank with which they are professionally associated, federal law carefully regulates how that bank treats the insider as a customer. In addition to setting restrictions on credit extensions for bank insiders, Regulation O requires that banks report any extensions provided to insiders in their quarterly reports.
Regulation O also gives a clear definition of bank insiders, dividing them into multiple tiers of association, subject to different credit extension regulations. Insiders can be directors or trustees of a bank, executive officers (for example, the president or treasurer, or principal shareholders (individuals who own or otherwise control more than 10% of the publicly-traded shares of the institution).
Generally speaking, the restrictions in place are devised to ensure that bank insiders are not given more advantageous or generous credit extensions than the bank would provide for a non-insider. The bank cannot give credit extensions that it would not provide to a non-insider customer, nor can it extend credit beyond legal or self-imposed lending limits. One exception to this rule comes with compensation packages provided by banks to all employees, including non-insiders.
For example, if a bank has a policy of waiving certain mortgage application fees for non-insider employees (such as tellers), the same fees could be waived for the bank president, who would be an insider.
Implementation and Expansion
Regulation O lays out the reporting requirements included in two previous financial laws: the Financial Institutions Regulatory and Interest Rate Control Act of 1978 (the first iteration of Regulation O was fully rolled out by 1980)and the Depository Institutions Act of 1982.
Banks and other lending institutions are often able to find exceptions or workarounds to Regulation O, in effect, providing preferential treatment to insiders without violating any of the regulations. One of the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act provided an extendeddefinition of "credit extension"to expand the scope ofRegulation O.
Reg O covers national banks, state banks, savings associations, and insured branches of foreign banking organizations.
Special Considerations for Regulation O
Recent growth in investments in mutual funds, exchange-traded funds (ETFs), and other index-based investment products have caused a number of companies to pay greater attention to Regulation O. Large asset management companies are becoming principal shareholders through "fund complexes," organizations that invest in funds.
A complex that acquires 10% of a class of voting securities of a banking organization is considered a “principal shareholder.”
What Is the Purpose of Regulation O?
Regulation O was implemented to prevent certain bank insiders from receiving more favorable terms or benefits on loans or credit than those provided to non-insiders or other bank customers.
Who Is Considered an Insider Under Regulation O?
A Regulation O insider is a principal shareholder, an executive officer, a director, or a related interest of any of these persons.
Which Extensions of Credit Does Regulation O Cover?
Regulation O covers insider loans, where there is any sort of indebtedness upon which an insider may be liable as guarantor. Examples would include extensions of credit by a member bank to an executive officer, director, or principal shareholder of the member bank; a bank holding company of which the member bank is a subsidiary; and any other subsidiary of that bank holding company.
Does Regulation O Apply to Family Members?
Shares owned or controlled by immediate family members are attributed to the insider individual. Such immediate family members are limited to a spouse, and minor or adult children living with the insider.
The Bottom Line
Regulation O prohibits lenders from extending unfair or favorable terms to bank insiders at the expense of others. It is conceivable that a bank or bank employee could attempt to give their own preferential or special treatment, such as lower interest rates, reduced fees, more flexible repayment terms, or more cursory credit checks. Reg O outlaws such practices.
FAQs
Regulation O is the most comprehensive banking regulation relating to extensions of credit to insiders. The regulation limits the amount and type of credit that may be extended and includes reporting and record-keeping requirements.
What is the purpose of regulation O? ›
Regulation O prohibits a member bank from extending credit to an insider that is not made on substantially the same terms as, or is made without following credit underwriting procedures that are at least as stringent as, comparable transactions with persons that are non-insiders and not employees of the bank.
What are the requirements for regulation O disclosure? ›
Regulation O requires that banks report any extensions provided to insiders in their quarterly reports. Regulation O defines bank insiders as directors or trustees of a bank, executive officers, or principal shareholders.
Which of the following options is a purpose of regulation O? ›
Regulation O allows insiders access to preferential loans that are widely available to employees of your institution, as long as insiders are not given preferential treatment over employees.
What are the regulatory requirements of banks? ›
Common bank regulations include reserve requirements, which dictate how much money banks must keep on hand; capital requirements, which dictate how much money banks can lend; and liquidity requirements, which dictate how easily banks can convert their assets into cash.
What is regulation O in banking? ›
Reg O provides guidance on extensions of credit to insiders. The bank examination process typically involves substantiating that a bank is operating in accordance with the regulatory quantitative and qualitative limits and restrictions on loans to insiders.
What did regulation O implement? ›
Regulation O is the most comprehensive banking regulation relating to extensions of credit to insiders. The regulation limits the amount and type of credit that may be extended and includes reporting and record-keeping requirements.
Who is exempt from Regulation O? ›
Under the final rule, Regulation O will not apply to extensions of credit by a bank to an executive officer or director of an affiliate, provided that the executive officer or director is not engaged in major policymaking functions of the bank and the affiliate does not account for more than 10 percent of the ...
Does reg.o. apply to business accounts? ›
You ask, "If a director is the primary owner of a business account, is it necessary for us to monitor the account for Reg O overdrafts?" If the account is a business purpose account, but it is owned (individually or jointly with someone else) in an individual capacity by the director, then yes, this account would be ...
What is the penalty for violating Reg O? ›
Violations of Regulation O can result in civil penalties of more than $1 million per day per violation being assessed against the offending banking organization.
There are four primary goals of regulation: restrictive regulation, reactive regulation, proactive regulation, and transparent regulation. Many regulators draw upon some combination of these four ideals in their work. The extent to which each goal is utilized varies from regulator to regulator.
What are the 3 types of regulation? ›
Three main approaches to regulation are “command and control,” performance-based, and management-based. Each approach has strengths and weaknesses.
How often does reg.o require you to do a survey to identify all of your own banks insiders? ›
Recordkeeping Requirements Regulation O requires banks to maintain records to document compliance with its restrictions. The recordkeeping requirements include conducting an annual survey to identify all insiders of the bank itself.
What are the two types of banking regulation? ›
Bank regulation—two distinct types
There are two broad classes of regulation that affect banks: safety and soundness regulation and consumer protection regulation.
What is bank regulatory and compliance requirements? ›
Banking regulatory compliance refers to the policies and procedures that financial institutions implement to adhere to financial industry standards of conduct. Standards are set by government agencies and other regulatory bodies to maintain the stability of national and global financial systems.
What compliance do banks have to follow? ›
The FDIC promotes compliance with federal consumer protection laws, fair lending statutes and regulations, and the Community Reinvestment Act through supervisory and outreach programs. The elements of an effective CMS include Board of Directors and management oversight and a consumer compliance program.
Who is exempt from regulation O? ›
Under the final rule, Regulation O will not apply to extensions of credit by a bank to an executive officer or director of an affiliate, provided that the executive officer or director is not engaged in major policymaking functions of the bank and the affiliate does not account for more than 10 percent of the ...
Under what circ*mstances would this extension of credit be subject to reg. O? ›
Under Regulation O, an extension of credit will be attributed to an insider of the bank to the extent that the proceeds are “transferred to,” or used for the “tangible economic benefit of,” the insider or if the loan or extension of credit is made to a “related interest” of the insider.
What is the purpose of regulations in government? ›
A regulation is a set of requirements issued by a federal government agency to implement laws passed by Congress. For example, the Federal Reserve Board over the years has issued regulations to help implement laws such as the Federal Reserve Act, the Bank Holding Company Act, and the Dodd-Frank Act.
