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Regulation W: Definition in Banking and When It Applies


Regulation W is a Federal Reserve regulation that establishes certain restrictions and requirements for transactions between a member bank and its affiliates. It aims to prevent excessive risk exposure, conflicts of interest, intragroup transactions, and potential abuses within a financial group. The regulation applies to all banks that are members of the Federal Reserve System.


The phonetics of your phrase are:Regulation: /ˌrɛg​jəˈleɪ​ʃn/W: /ˈdʌb​əl​’yuː/Definition: /ˌdɛf​ɪˈnɪʃ​ən/in: /ɪn/Banking: /ˈbæŋ​kɪŋ/and: /ænd/ or /ənd/ When: /wɛn/It: /ɪt/Applies: /əˈplaɪz/

Key Takeaways

  • Regulation W is a Federal Reserve regulation designed to limit certain transactions between banks and their affiliates. This is to ensure that these transactions are conducted at arm’s length to prevent any favoritism or exploitation within the financial system.
  • This regulation applies to all insured banks, including foreign banks that deal in US markets, and their subsidiaries. It covers transactions like loans, asset purchases, service contracts, and investment in securities. It dictates how much banks can invest in or lend to their affiliates and the terms of these transactions.
  • Regulation W provides consumer protection by limiting the risk that banks enter into improper transactions or take on excessive levels of risk through transactions with affiliated companies. This regulation offers a layer of protection to bank consumers and the stability of the financial system overall


Regulation W is a significant business/finance term in banking as it governs transactions between banks and their affiliates, primarily aiming to protect depositors and promote the overall safety and soundness of banks. Its importance rests in its role of limiting certain types of transactions, imposing quantitative limits, and requiring a certain level of collateral for others. This regulation ensures that financial institutions do not expose themselves to excessive risk by engaging in potentially harmful transactions with their affiliates, which could lead to financial instability or unfavorable conditions for the bank’s clients. Also, in specific situations, it brings clarity to the application of sections 23A and 23B of the Federal Reserve Act, promoting transparency and systematic checks and balances in banking operations.


Regulation W primarily serves to govern transactions between member banks and their affiliates, aiming to protect these banks from potential losses that could arise due to transactions with their sister organizations. Instituted by the Federal Reserve System, one main purpose of this legislation is to establish the terms and conditions for transactions that happen between banks and their affiliates, which, as a result, minimizes the risks tied to such transactions. By doing so, it also intends to prevent any misuse of bank resources while ensuring the overall safety of the nation’s banking system.

Additionally, Regulation W regulates the pricing of such transactions to market terms, thereby ensuring fair practices in this regard. It restricts the number of secured loans that banks can issue to their affiliates, furthermore, forcing any losses from the affiliate to be borne by the creditors, and not be passed to the lending bank. In essence, it strengthens the market discipline by preventing a bank from bailing out its struggling affiliate and reduces the risk of contagion within the bank holding system, thereby substantially guarding the financial stability of the banking sector.


1. Mortgage Lending: Prior to the 2008 financial crisis and the implementation of Regulation W, numerous banks were making out loans to borrowers regardless of their capacity to repay. This led to the ultimate collapse of the housing market. After the 2008 crash, Regulation W came into force as a safeguard to such lending practices. When a person now applies for a mortgage, the bank needs to comply with Regulation W by thoroughly checking the borrower’s ability to repay the loan, mitigating the risk of default and financial crisis.

2. Interbank Transactions: Within a banking conglomerate, there may be several different entities owned by a parent company. In such situations, Regulation W is utilized to prevent conflict of interest and ensure fair practices. For example, if Bank A, owned by a parent company, wants to conduct transactions with Bank B, also owned by the same parent company, they must adhere to Regulation W. This means transactions must be made on market terms, and not provide an unfair advantage to any party within the banking group.

3. Internal Audit and Compliance: An example of Regulation W implementation can be found in audit and compliance departments of banks. Banks need to demonstrate their adherence to Regulation W to regulatory authorities. These internal departments are responsible for ensuring that policies, procedures, and activities comply with Regulation W. They would periodically conduct audits and provide training to employees about the regulation, and implement changes when necessary, such as when the Federal Reserve updates rules under Regulation W.

Frequently Asked Questions(FAQ)

What is Regulation W in banking?

Regulation W is a Federal Reserve regulation that puts limits on certain transactions between banks and their affiliates. These transactions include loans, asset purchases, and other potential risk exposures.

Who oversees Regulation W compliance?

The Federal Reserve oversees the compliance with Regulation W and has the authority to take action against any bank or affiliate that violates its provisions.

When does Regulation W apply?

Regulation W applies whenever a bank is contemplating a transaction with one of its affiliates. This can include a wide range of scenarios, such as the bank providing a loan to the affiliate, purchasing assets from the affiliate, or undertaking any other transaction which potentially exposes the bank to risk.

What is the main purpose of Regulation W?

The main purpose of Regulation W is to protect a bank from financial losses caused by transactions with its affiliates. It sets limits and rules about the kinds of transactions that banks can enter into with their affiliates to ensure that they do not take on excessive risk.

What is considered an ‘affiliate’ under Regulation W?

An affiliate, as defined by Regulation W, includes a variety of entities such as parent companies, subsidiary companies, sister companies, joint ventures, or even individuals who control the bank.

What penalties can be applied for non-compliance with Regulation W?

Non-compliance with Regulation W can lead to significant fines, cease and desist orders, removal of management or even criminal charges in severe cases.

Can a bank request an exemption from Regulation W?

Yes, a bank may request an exemption from Regulation W if it can demonstrate that the transaction in question would not pose an unreasonable risk. However, the final decision rests with the Federal Reserve.

What is the potential impact of Regulation W on the overall banking industry?

Regulation W promotes the overall safety and soundness of the banking industry by managing the risks that banks face from transactions with their affiliates. It encourages banks to manage their exposures and maintain strong oversight of transactions with affiliates.

Related Finance Terms

  • Affiliate Transactions: Regulation W governs any transaction occurring between a member bank and its affiliates, outlining the terms and conditions to prevent manipulative or abusive practices.
  • Member Bank: This is a bank that is a part of the Federal Reserve System. Regulation W applies to these banks.
  • Qualifying Transactions: These are certain transactions that come under the purview of Regulation W. The specifics of what qualifies can be intricate and detailed.
  • Federal Reserve Board: This is the group that implements Regulation W and oversees its enforcement to regulate transactions between banks and their affiliates.
  • Section 23A and 23B: These are the sections of the Federal Reserve Act where Regulation W is derived. They outline the types of transactions that are covered and the restrictions imposed.

Sources for More Information

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