Overview: Regulation F
Regulation F is a United States Federal Reserve regulation that is designed to limit the amount of credit exposure and overnight risk incurred by individual banks.
In other words, it deals with limitations on interbank liabilities.
Image Source: Federal Reserve System
Regulation F applies to American banks, savings associations, and branches of foreign banks whose deposits are insured by the Federal Deposit Insurance Corporation (FDIC).
According to the rules set forth in Regulation F, financial institutions that fall into these categories are required to develop internal policies and rules for analyzing and limiting credit exposure to other financial institutions.
Specifically, Regulation F stipulates that a financial institution’s credit exposure to other banks cannot exceed 25% of that institution’s overall capital. Banks with higher levels of capital may be permitted levels of credit exposure beyond 25%.
There are two main types of activity covered by Regulation F:
- services performed by large banks for smaller banks, such as the collection of checks or other banking services
- interest rate swaps, repurchases, and other market transactions
Image Source: Federal Reserve
Three of the key sections of Regulation F are broken down as follows:
- prudential standards
- credit exposure
- capital levels of correspondents
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This outlines the bank's obligation to maintain policies and procedures that analyze and limit credit risks in relationships with other banks. A bank's board of directors is required to review and approve these policies annually.
This says that a bank's credit exposure to another financial institution cannot exceed 25% of the bank's total capital. Banks with higher capitalizations may be able to circumvent this rule in some cases. Also, transactions of a more secure nature, such as government securities, are not considered a part of the bank's credit exposure.
Capital Levels of Correspondents
This says that all banks, regardless of how well capitalized they are, must maintain their own internal policies on credit exposure.
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