Holding Company Indemnification Of The Subsidiary Bank – Not A Covered Transaction (Generally)

We previously discussed a scenario where a bank indemnifies its parent holding company to determine if it becomes a “covered transaction” under Regulation W. However, the opposite scenario is equally important: if a holding company indemnifies its subsidiary bank in a service contract for bank losses caused by the negligence or willful misconduct of the holding company, this also does not create a covered transaction.

This makes intuitive sense. When the holding company indemnifies the bank, the bank is the beneficiary, not the one at risk. Section 23A of the Federal Reserve Act and Regulation W are designed to protect the bank from transactions that expose it to affiliate risk, not to restrict arrangements where the affiliate compensates the bank for the affiliate’s own wrongdoing.

However, banks should be careful about the scope and direction of indemnification. The non-covered-transaction treatment applies specifically where the indemnifying party is agreeing to cover losses it caused. If an indemnification clause were structured so that the bank effectively guarantees the holding company’s performance to third parties, that could constitute a guarantee on behalf of an affiliate, which is a covered transaction.

The distinction turns on who benefits and who bears the risk. If the bank receives protection from the affiliate’s misconduct, there is no covered transaction. If the bank provides protection to or on behalf of the affiliate, that analysis changes entirely.

DM Tip: Review all intercompany service agreements to ensure indemnification clauses are properly scoped to cover only losses caused by the indemnifying party’s own conduct. Flag any clause where the bank appears to be assuming risk for affiliate-caused losses, as that may require Regulation W treatment.