Regulations
Compliance Guide to Small Entities
Regulation F: Limitations on Interbank Liabilities
12 CFR 206
This description should not be interpreted as a comprehensive statement of the regulation. Rather, it is intended to give a broad overview of the regulation's requirements. The full regulation is available on the Government Printing Office web site.
Regulation F establishes a general limit for overnight credit exposure to an individual correspondent stated in terms of the exposed bank's capital. The regulation requires banks, savings associations, and branches of foreign banks with deposits insured by the Federal Deposit Insurance Corporation (FDIC) to develop and implement internal prudential policies and procedures for evaluating and controlling exposure to the depository institutions with which they do business.
A general description of the regulation, by section, follows.
Section 206.1 Authority, purpose, and scope
States that the purpose of the regulation is to limit the risks that the failure of a depository institution would pose to insured depository institutions and applies to all depository institutions insured by the Federal Deposit Insurance Corporation.
Section 206.2 Definitions
Defines key terms used in the regulation.
Section 206.3 Prudential standards
States that a bank must establish policies and procedures that take into account credit and liquidity risks, including operational risks, in selecting correspondents and in terminating those relationships. At least annually, these policies and procedures should be reviewed and approved by the bank's board of directors.
Section 206.4 Credit exposure
Stipulates that a bank ordinarily should limit its credit exposure to an individual correspondent to an amount 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." Certain transactions that carry a low risk of loss, such as transactions that are fully secured by government securities or other readily marketable collateral, are excluded from the calculation of a bank's credit exposure.
Section 206.5 Capital levels of correspondents
Defines "adequately capitalized" correspondents. Although the regulation does not specify a limit on credit exposure to adequately capitalized correspondents, a bank is required to establish and follow its own internal policies and procedures with regard to exposure to all correspondents, regardless of capital level.
Section 206.6 Waiver
States that if the primary federal supervisor of the bank advises the Federal Reserve Board that the bank is not reasonably able to obtain necessary services without incurring an exposure to a correspondent in excess of the regulatory limit, the Board may issue a waiver.
Section 206.7 Transition provisions
Provides for a transition period for compliance with the regulation; the transition period ended in 1995.
Back to Top
Last Update: February 10, 2017
Certainly! The regulation mentioned, 12 CFR 206, also known as Regulation F: Limitations on Interbank Liabilities, is a crucial component of risk management within the banking sector. This regulation aims to mitigate the potential risks that could arise from the failure of a depository institution, thereby safeguarding insured depository institutions.
Let's break down the key concepts within this regulation:
Regulation F: Limitations on Interbank Liabilities
-
Purpose and Scope (Section 206.1): This section outlines the regulation's objective, emphasizing the need to limit risks posed by the failure of a depository institution. It applies to all depository institutions insured by the Federal Deposit Insurance Corporation (FDIC).
-
Definitions (Section 206.2): This part clarifies the key terms used throughout the regulation, ensuring a common understanding of terminologies used.
-
Prudential Standards (Section 206.3): Banks are mandated to establish policies and procedures that consider credit, liquidity, and operational risks while selecting and terminating relationships with correspondent institutions. The board of directors must annually review and approve these policies.
-
Credit Exposure Limits (Section 206.4): This section stipulates that banks should typically limit credit exposure to an individual correspondent to a maximum of 25 percent of the exposed bank's total capital. However, exceptions are made for certain transactions deemed low-risk.
-
Capital Levels of Correspondents (Section 206.5): It defines "adequately capitalized" correspondents and requires banks to establish internal policies and procedures for exposure management, irrespective of the correspondent's capital level.
-
Waiver (Section 206.6): In instances where obtaining necessary services necessitates an exposure beyond the regulatory limit, the Federal Reserve Board may issue a waiver upon advice from the primary federal supervisor of the bank.
-
Transition Provisions (Section 206.7): This provision allowed for a transition period for compliance, ending in 1995.
This regulation essentially sets parameters for prudent risk management in interbank dealings, ensuring that banks maintain a level of exposure that is commensurate with their capital and risk tolerance. Compliance with these provisions is critical for the stability and resilience of the banking sector.
