Fed and FDIC Move to Raise Regulation O Insider Lending Caps

The Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) have each proposed raising the thresholds of credit that banks can extend to insiders.

The Fed’s proposal would revise its Regulation O, which restricts banks’ extension of credit to their executive officers, directors, principal shareholders and their related interests, according to a memo released Friday (July 31).

The Fed issued a notice of proposed rulemaking Friday and said it will accept public comment on the proposal for 60 days after the proposal is published in the Federal Register.

The proposal would update Regulation O’s dollar-based thresholds, index them to economic growth going forward and address the challenges the rule poses to community banks, whose board members and executives are often local business owners and civic leaders, the Fed said in a Friday press release.

Federal Reserve Board Vice Chair for Supervision Michelle W. Bowman said in the release that community banks often face challenges in recruiting business leaders as board members and executives and that the expertise of business owners can be valuable.

“This rule recognizes that value by providing clearer, more straightforward standards that protect against potential conflicts of interest while supporting effective governance,” Bowman said.

The request for comment on the proposal was approved in a unanimous Board vote.

Federal Reserve Board Governor Michael S. Barr said in a statement that while he voted in favor of releasing the proposal, he believes it raises tradeoffs, and he looks forward to public comment.

“In particular, I am interested in views on whether nominal gross domestic product is the most relevant variable to use for indexing the regulation’s lending limits, or whether the consumer price index would be more appropriate,” Barr said. “Additionally, I would like to hear a range of views on how the rulemaking can best address the treatment of banks’ loans to their corporate borrowers when passive asset managers own equity positions in both the banks and their borrowers.”

In another, separate move, the Federal Reserve said Friday that it aimed to modernize rules that have proven to be “overly burdensome and complex” by proposing updated rules regarding mutual banks and their flexibility to raise capital.

The FDIC said in a press release that the proposed rule it issued Friday would align its thresholds for certain lending limits for insiders of FDIC-supervised institutions with those proposed by the Federal Reserve.

The FDIC Board of Directors approved the notice of proposed rulemaking by a unanimous vote. The FDIC will accept comments on the proposal for 60 days after the proposal is published in the Federal Register.

“By updating these thresholds to reflect current and future economic conditions and aligning them with the FRB’s Regulation O proposal, the FDIC would standardize compliance and avoid disparate treatment between FDIC-supervised institutions and other insured depository institutions,” the FDIC said in the release.