Staff Opinion
Interpreting Regulation F

A New York state-chartered thrift institution (New York thrift) that provides services to other thrift institutions does not have federal deposit insurance. The Board has been asked whether insured banks with exposure to the New York thrift are required to comply with the Board’s Regulation F.

Regulation F implements section 23 of the Federal Reserve Act, which requires the Board to prescribe standards “to limit the risks that the failure of a large depository institution (whether or not that institution is an insured depository institution) would pose to insured depository institutions.” Section 23(c)(2) gives the Board the authority to exempt transactions from Regulation F if the exemption is in the public interest and consistent with the purpose of section 23.

Regulation F applies to banks, savings associations, and branches of foreign banks with deposits insured by the Federal Deposit Insurance Corporation (FDIC). These institutions, referred to collectively in the regulation as “banks,” are required to develop and implement internal prudential policies and procedures to evaluate and control exposure to the depository institutions with which they do business, referred to as “correspondents.” Regulation F also limits a bank’s overnight credit exposure to an individual correspondent to not more than 25 percent of the exposed bank’s total capital unless the bank can demonstrate that its correspondent is at least adequately capitalized, as defined in the regulation. These exposure limits are being phased in over two years (§ 206.7(b)).

The definition of “correspondent” in Regulation F includes domestically chartered depository institutions that are insured by the FDIC, as well as foreign banks (§ 206.2(a), (c), and (h)). As indicated in the Board’s notice accompanying the final rule, the definition of “correspondent” is limited to institutions that receive special treatment under the capital adequacy guidelines (57 Fed. Reg. 60091 (1992)). The capital adequacy guidelines provide that claims against certain foreign banks and against federally insured domestic depository institutions generally are given a 20 percent risk weighting, while claims against other types of financial institutions, including an uninsured depository institution, generally are given a 100 percent risk weighting (see, for example, 12 CFR 208, appendix A, at 3-1900).

The exemption of transactions with uninsured domestic depository institutions is consistent with the Board’s authority under section 23. As noted in the notice of proposed rulemaking, applying the regulation to uninsured domestic depository institutions would provide little benefit in risk reduction while adding significantly to the complexity of the regulation (57 Fed. Reg. 31977, (1992)). These institutions therefore are not included in the definition of “correspondent” in Regulation F. Accordingly, the New York thrift would not be a “correspondent” for the purposes of the regulation. STAFF OPS. of March 17, 1993, and Aug. 16, 1993.