(a) Collateral required for extensions of credit and certain other covered
transactions. A member bank must ensure that each of its credit
transactions with an affiliate is secured by the amount of collateral
required by paragraph (b) of this section at the time of the transaction.
(b) Amount of collateral
required.
(1) The rule. A credit transaction described in paragraph (a) of this section
must be secured by collateral having a market value equal to at least—
(i) 100 percent of the amount of the transaction, if the collateral
is—
(A) obligations of the United States or its
agencies;
(B) obligations
fully guaranteed by the United States or its agencies as to principal
and interest;
(C) notes,
drafts, bills of exchange, or banker’s acceptances that are
eligible for rediscount or purchase by a Federal Reserve Bank; or
(D) a segregated, earmarked
deposit account with the member bank that is for the sole purpose
of securing credit transactions between the member bank and its affiliates
and is identified as such;
(ii) 110 percent of the amount of the
transaction, if the collateral is obligations of any state or political
subdivision of any state;
(iii) 120 percent of the amount of the
transaction, if the collateral is other debt instruments, including
loans and other receivables; or
(iv) 130 percent of the amount of the
transaction, if the collateral is stock, leases, or other real or
personal property.
(2) Example. A member bank makes a $1,000 loan to an affiliate. The affiliate
posts as collateral for the loan $500 in U.S. Treasury securities,
$480 in corporate debt securities, and $130 in real estate. The loan
satisfies the collateral requirements of this section because $500
of the loan is 100 percent secured by obligations of the United States,
$400 of the loan is 120 percent secured by debt instruments, and $100
of the loan is 130 percent secured by real estate.
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(c) Ineligible collateral. The following
items are not eligible collateral for purposes of this section:
(1) low-quality assets;
(2) securities issued by any affiliate;
(3) equity securities
issued by the member bank, and debt securities issued by the member
bank that represent regulatory capital of the member bank;
(4) intangible assets (including
servicing assets), unless specifically approved by the Board; and
(5) guarantees, letters
of credit, and other similar instruments.
(d) Perfection and priority requirements
for collateral.
(1) Perfection. A member bank must maintain a security interest in collateral required
by this section that is perfected and enforceable under applicable
law, including in the event of default resulting from bankruptcy,
insolvency, liquidation, or similar circumstances.
(2) Priority. A member bank either must obtain a first priority security interest
in collateral required by this section or must deduct from the value
of collateral obtained by the member bank the lesser of—
(i) the amount of any security interest in the collateral that is senior
to that of the member bank; or
(ii) the amount of any credit secured
by the collateral that is senior to that of the member bank.
(3) Example. A member bank makes a $2,000 loan
to an affiliate. The affiliate grants the member bank a second-priority
security interest in a piece of real estate valued at $3,000. Another
institution that previously lent $1,000 to the affiliate has a first-priority
security interest in the entire parcel of real estate. This transaction
is not in compliance with the collateral requirements of this section.
Due to the existence of the prior third-party lien on the real estate,
the effective value of the real estate collateral for the member bank
for purposes of this section is only $2,000—$600 less than the
amount of real estate collateral required by this section for the
transaction ($2,000 × 130 percent = $2,600).
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(e) Replacement requirement
for retired or amortized collateral. A member bank must ensure
that any required collateral that subsequently is retired or amortized
is replaced with additional eligible collateral as needed to keep
the percentage of the collateral value relative to the amount of the
outstanding credit transaction equal to the minimum percentage required
at the inception of the transaction.
(f) Inapplicability of the collateral requirements
to certain transactions. The collateral requirements of this
section do not apply to the following transactions.
(1) Acceptances. An acceptance that already is fully secured either by attached documents
or by other property that is involved in the transaction and has an
ascertainable market value.
(2) The unused
portion of certain extensions of credit. The unused portion of
an extension of credit to an affiliate as long as the member bank
does not have any legal obligation to advance additional funds under
the extension of credit until the affiliate provides the amount of
collateral required by paragraph (b) of this section with respect
to the entire used portion (including the amount of the requested
advance) of the extension of credit.
(3) Purchases
of affiliate debt securities in the secondary market. The purchase
of a debt security issued by an affiliate as long as the member bank
purchases the debt security from a nonaffiliate in a bona fide secondary-market
transaction.
