Affiliate Purchases Bank Stock: Covered Transaction Under Regulation W?

Not every transaction between a bank and its affiliate is a covered transaction under Regulation W. A notable exception is that an affiliate’s purchase of stock issued by the bank is not a covered transaction.

This makes sense from a policy perspective. The purpose of Section 23A and Regulation W is to protect the bank from losses arising from affiliate transactions. When an affiliate purchases the bank’s stock, the bank is receiving capital, not extending resources to the affiliate. The transaction strengthens the bank rather than exposing it to credit or counterparty risk from the affiliate.

This means that a holding company can invest additional equity capital in its subsidiary bank without triggering Regulation W’s quantitative limits, collateral requirements, or other restrictions. Similarly, other affiliates may purchase the bank’s stock or subordinated debt that constitutes equity capital without those purchases counting as covered transactions.

However, banks should note that while the affiliate’s purchase of bank stock is not a covered transaction, the reverse may be. If a bank purchases securities issued by an affiliate, that is a covered transaction subject to all Regulation W requirements.

DM Tip: When structuring capital injections from affiliates, confirm that the transaction involves the affiliate purchasing the bank’s stock (not a covered transaction) rather than the bank investing in affiliate securities (which would be a covered transaction). Document the direction of the capital flow clearly.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.