Indemnification By A Bank To Its Parent: When Does It Become A Covered Transaction Under Reg W?

Service contracts between banks and their parent holding companies frequently include indemnification clauses. A common arrangement is for the bank to indemnify its parent for losses caused by the bank’s own negligence or willful misconduct. Does this create a covered transaction?

The answer is no. When a bank indemnifies its parent holding company in a service contract for holding company losses caused by the negligence or willful misconduct of the bank, this does not constitute a covered transaction under Regulation W.

The rationale is that such indemnification clauses are standard commercial terms that reflect the bank’s responsibility for its own actions. The bank is not assuming the affiliate’s risk or extending credit to the affiliate; rather, it is agreeing to make the affiliate whole for damages the bank itself caused. This is more akin to tort liability than to the types of financial transactions Regulation W is designed to restrict.

Under Section 23A, covered transactions include extensions of credit, asset purchases, guarantees, and similar transactions where the bank’s resources are exposed to affiliate risk. An indemnification for the bank’s own misconduct does not fit this framework because the risk originates with the bank, not the affiliate.

DM Tip: When drafting service agreements with affiliates, clearly limit indemnification to losses caused by the bank’s own negligence or willful misconduct. Broader indemnification clauses that cover affiliate losses regardless of fault could be viewed differently and may trigger Regulation W analysis.