Sec. 223.14 What are the collateral requirements for a credit transaction with an affiliate?
(a) Collateral required for extensions of credit and certain other covered transactions.
A member bank must ensure that each of its credit transactions with an affiliate is secured by
the amount of collateral required by paragraph (b) of this section at the time of the transaction.
(b) Amount of collateral required. (1) The rule. A credit transaction described in
paragraph (a) of this section must be secured by collateral having a market value equal to at
least:
(i) 100 percent of the amount of the transaction, if the collateral is:
(A) Obligations of the United States or its agencies;
(B) Obligations fully guaranteed by the United States or its agencies as to principal and
interest;
(C) Notes, drafts, bills of exchange, or bankers’ acceptances that are eligible for
rediscount or purchase by a Federal Reserve Bank; or
(D) A segregated, earmarked deposit account with the member bank that is for the sole
purpose of securing credit transactions between the member bank and its affiliates and is
identified as such;
(ii) 110 percent of the amount of the transaction, if the collateral is obligations of any
State or political subdivision of any State;
(iii) 120 percent of the amount of the transaction, if the collateral is other debt
instruments, including loans and other receivables; or
(iv) 130 percent of the amount of the transaction, if the collateral is stock, leases, or
other real or personal property.
(2) Example. A member bank makes a $1,000 loan to an affiliate. The affiliate posts
as collateral for the loan $500 in U.S. Treasury securities, $480 in corporate debt securities,
and $130 in real estate. The loan satisfies the collateral requirements of this section because
$500 of the loan is 100 percent secured by obligations of the United States, $400 of the loan is
120 percent secured by debt instruments, and $100 of the loan is 130 percent secured by real
estate.
(c) Ineligible collateral. The following items are not eligible collateral for purposes of
this section:
(1) Low-quality assets;
(2) Securities issued by any affiliate;
(3) Equity securities issued by the member bank, and debt securities issued by the
member bank that represent regulatory capital of the member bank;
(4) Intangible assets (including servicing assets), unless specifically approved by the
Board; and
(5) Guarantees, letters of credit, and other similar instruments.
(d) Perfection and priority requirements for collateral. (1) Perfection. A member bank
must maintain a security interest in collateral required by this section that is perfected and
enforceable under applicable law, including in the event of default resulting from bankruptcy,
insolvency, liquidation, or similar circumstances.
(2) Priority. A member bank either must obtain a first priority security interest in
collateral required by this section or must deduct from the value of collateral obtained by the
member bank the lesser of:
(i) The amount of any security interest in the collateral that is senior to that of the
member bank; or
(ii) The amount of any credit secured by the collateral that is senior to that of the
member bank.
(3) Example. A member bank makes a $2,000 loan to an affiliate. The affiliate grants
the member bank a second priority security interest in a piece of real estate valued at $3,000.
Another institution that previously lent $1,000 to the affiliate has a first priority security
interest in the entire parcel of real estate. This transaction is not in compliance with the
collateral requirements of this section. Due to the existence of the prior third-party lien on the
real estate, the effective value of the real estate collateral for the member bank for purposes of
this section is only $2,000 -- $600 less than the amount of real estate collateral required by this
section for the transaction ($2,000 x 130 percent = $2,600).
(e) Replacement requirement for retired or amortized collateral. A member bank must
ensure that any required collateral that subsequently is retired or amortized is replaced with
additional eligible collateral as needed to keep the percentage of the collateral value relative to
the amount of the outstanding credit transaction equal to the minimum percentage required at
the inception of the transaction.
(f) Inapplicability of the collateral requirements to certain transactions. The collateral
requirements of this section do not apply to the following transactions.
(1) Acceptances. An acceptance that already is fully secured either by attached
documents or by other property that is involved in the transaction and has an ascertainable
market value.
(2) The unused portion of certain extensions of credit. The unused portion of an
extension of credit to an affiliate as long as the member bank does not have any legal
obligation to advance additional funds under the extension of credit until the affiliate provides the amount of collateral required by paragraph (b) of this section with respect to the entire used
portion (including the amount of the requested advance) of the extension of credit.
(3) Purchases of affiliate debt securities in the secondary market. The purchase of a
debt security issued by an affiliate as long as the member bank purchases the debt security
from a nonaffiliate in a bona fide secondary market transaction.
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