Reg W (Regulation W) is a U.S. Federal Reserve rule that limits how banks do business with their own affiliates (related companies) so that the bank, and ultimately depositors and the deposit insurance fund, are not put at extra risk.

What Is Reg W? (In Plain English)

Regulation W is part of the Federal Reserve’s “alphabet” rules that implement Sections 23A and 23B of the Federal Reserve Act.

Its core purpose is to stop banks from giving sweetheart deals or taking excessive risk when they transact with affiliates such as sister companies, parent holding companies, broker‑dealers, or investment vehicles they control.

Key ideas:

  • It restricts certain transactions between a bank and its affiliates.
  • It caps how large those transactions can be (quantitative limits).
  • It requires collateral for certain kinds of credit to affiliates.
  • It bans low‑quality assets in many affiliate deals.
  • It requires market terms (arm’s‑length pricing).

What Does Reg W Actually Cover?

Reg W focuses on “covered transactions” between a bank and its affiliates.

Common covered transactions include:

  • Extending credit or loans to an affiliate
  • Purchasing assets (like loans or securities) from an affiliate
  • Investing in securities issued by an affiliate
  • Accepting securities issued by an affiliate as collateral for credit
  • Issuing guarantees, letters of credit, or similar obligations on behalf of an affiliate

The regulation defines “affiliate” broadly, including:

  • Companies the bank directly or indirectly controls
  • Certain investment funds or entities that the bank sponsors or advises
  • Subsidiaries and other related entities designated by regulators

The Main Limits and Safeguards

Reg W uses several guardrails to protect the bank and the financial system.

  1. Quantitative limits
    • A bank’s total covered transactions with one affiliate are capped at a percentage of the bank’s capital (often 10%).
 * Covered transactions with **all** affiliates together are also capped (often 20%).
  1. Collateral requirements
    • Certain credit transactions must be backed by high‑quality collateral, above the amount of the exposure, to absorb potential losses.
  1. No low‑quality assets
    • Banks generally cannot purchase low‑quality assets (for example, seriously troubled loans) from affiliates in covered transactions.
  1. Market terms requirement (Section 23B)
    • Transactions with affiliates must be on arm’s‑length, market‑based terms , similar to what the bank would offer an unrelated party.
  1. Reporting and controls
    • Banks must track and report affiliate transactions (e.g., via reports such as FR Y‑8) so supervisors can monitor exposures.

Why Reg W Matters Today

Reg W is a big deal for compliance, risk, and internal structuring in modern banking.

  • After the 2008 crisis and the Dodd‑Frank Act, the scope of Reg W was expanded , tightening how banks can support or move risk to related entities.
  • It helps ensure that cheap, insured deposits and access to central bank liquidity are not abused to subsidize risky activities in affiliates.
  • Violations can lead to civil money penalties , enforcement actions, and reputational damage for the institution.

Regulators continue to issue guidance and updates on how Reg W applies to newer structures and products (for example, derivatives, intraday credit, and complex financial subsidiaries).

Simple Example

Imagine BigBanc wants to buy a loan portfolio from its affiliate SmallBanc.

Under Reg W, BigBanc must:

  • Check that the total exposure to SmallBanc stays within the percentage caps of its capital.
  • Ensure the loans are not low‑quality assets.
  • Make sure the price and terms match what an independent third party would accept , not a special insider deal.

If BigBanc ignores these rules, it could violate Reg W and face penalties and supervisory action.

Quick HTML Table (for reference)

html

<table>
  <thead>
    <tr>
      <th>Aspect</th>
      <th>What Reg W Does</th>
    </tr>
  </thead>
  <tbody>
    <tr>
      <td>Scope</td>
      <td>Regulates transactions between a bank and its affiliates, including loans, asset purchases, and guarantees.[web:3][web:5]</td>
    </tr>
    <tr>
      <td>Main Goal</td>
      <td>Protect banks and the deposit insurance fund from undue risk and prevent misuse of bank resources.[web:1][web:3][web:5]</td>
    </tr>
    <tr>
      <td>Key Limits</td>
      <td>Quantitative caps on exposures, collateral requirements, prohibition on low-quality assets, and market-terms conditions.[web:3][web:5][web:9]</td>
    </tr>
    <tr>
      <td>Legal Basis</td>
      <td>Implements Sections 23A and 23B of the Federal Reserve Act under Federal Reserve authority.[web:3][web:5]</td>
    </tr>
    <tr>
      <td>Practical Impact</td>
      <td>Shapes how bank groups structure internal deals, manage risk, and design affiliate relationships.[web:3][web:5][web:9]</td>
    </tr>
  </tbody>
</table>

TL;DR: Reg W is the Federal Reserve’s rulebook that keeps deals between a bank and its affiliates limited, collateralized, and on fair market terms so those insider relationships do not endanger the bank or the financial system.

Information gathered from public forums or data available on the internet and portrayed here.