Regulation F, Interbank Liabilities, implements section
23 of the Federal Reserve Act, which requires the Board to prescribe
standards to limit the risks posed by exposure of insured depository
institutions to other depository institutions. The regulation requires
banks, savings associations, and branches of foreign banks with deposits
insured by the Federal Deposit Insurance Corporation (referred to
collectively as “banks”) to develop and implement internal prudential
policies and procedures for evaluating and controlling exposure to
the depository institutions with which they do business, referred
to as “correspondents.”
The regulation establishes a general “limit,” stated in
terms of the exposed bank’s capital, for overnight credit exposure
to an individual correspondent. A bank ordinarily should limit its
credit exposure to an individual correspondent to an amount equal
tonot more than 25 percent of the exposed bank’s total capital, unless
the bank can demonstrate that its correspondent is at least “adequately
capitalized.” The regulation does not specify a limit on credit exposure
to correspondents that are at least “adequately capitalized,” but
a bank is required to establish and follow its own internal policies
and procedures with regard to exposure to all correspondents, regardless
of capital level.
“Credit exposure” to a correspondent includes assets and
off-balance-sheet items against which the exposed bank must carry
capital under the risk-based capital adequacy guidelines. Certain
transactions that carry a low risk of loss, such as transactions that
are fully secured by government securities or other readily marketable
collateral, are excluded from calculation of a bank’s credit exposure.
Netting of obligations under legally valid and enforceable netting
contracts is permitted in calculating credit exposure.
