Federal Reserve And FDIC Propose Long-awaited Regulation O Modernization

Regulation O generally limits and imposes procedural requirements on loans by a bank to its executive officers, directors, principal shareholders and their related interests. Although Congress enacted these restrictions to prevent preferential lending and insider abuse, the FRB has not comprehensively updated Regulation O since 1979. The proposals would retain the regulation’s principal safeguards while updating dollar thresholds, addressing its sometimes incongruous application to investment-fund portfolio companies and incorporating intervening statutory changes.

Perhaps the most immediately useful change would be to quadruple several dollar thresholds that have remained unchanged for decades. Among other changes, the FRB would increase:

• the limit for credit-card debt excluded from “extension of credit” from $15,000 to $60,000;
• the corresponding limit for certain overdraft credit plans from $5,000 to $20,000;
• the permissible amount of an inadvertent overdraft by an executive officer or director from $1,000 to $4,000;
• the limit for unsecured “other purpose” loans to executive officers from $100,000 to $400,000; and
• the threshold for prior board approval of an insider loan from $500,000 to $2 million.

The public-disclosure threshold for loans to executive officers and principal shareholders also would increase from $500,000 to $2 million. These amounts would be adjusted every five years based on nominal GDP growth since the preceding adjustment. The agencies explain that the changes should be particularly helpful to community banks, whose directors and officers often are local businesspeople with legitimate borrowing needs.

The FRB also proposes a permanent solution to Regulation O’s awkward application to large investment managers. A fund group owning more than 10% of a bank can be a principal shareholder under Reg. O, while companies in which the group also holds substantial positions can be deemed the fund group’s related interests—and thus insiders of the bank. The proposal generally would exclude such portfolio companies where the fund group remains a sufficiently passive bank investor, including by staying below specified ownership thresholds and avoiding Regulation Y’s presumptions of control. The fund group itself would remain an insider. This would replace the temporary supervisory relief first provided in 2019, and continued through December 2025. Board staff estimates that, as of year-end 2025, fund groups were principal shareholders of 66 banks and potentially controlled 2,047 portfolio companies.

The Board proposal also would implement Dodd-Frank Act provisions treating derivatives and securities-financing exposures to insiders as extensions of credit, generally using capital-rule methodologies to value those exposures. It additionally would codify Dodd-Frank requirements governing asset purchases and sales with insiders, incorporate other statutory requirements and longstanding interpretations, clarify definitions and reorganize the rule.

The FDIC proposal would amend section 337.3 of its regulations to impose substantially parallel requirements on FDIC-supervised institutions and maintain alignment with the Board’s Regulation O framework. Its primary role is therefore jurisdictional; the broader substantive renovation resides in the FRB’s proposal.

Governor Michael Barr issued a statement noting that he was voting yes in order to release the FRB’s proposal but invited particular comment on two central judgments: whether the consumer price index would be a more appropriate indexing measure than nominal GDP, and whether the proposed treatment of bank borrowers held by passive asset managers strikes the right balance. Those questions capture the proposal’s central tension—modernizing a rule that has become overinclusive and outdated without weakening its original protection against insider influence and self-dealing.

With this action from the FRB and FDIC on one of the so-called “ancient regulations,” it makes this writer wonder if Regulation W updates could be soon to follow.