When an affiliate purchases assets from a bank, the transaction might seem straightforward if the bank is selling rather than buying (i.e., money coming into the bank, not out to an affiliate). But what if the affiliate does not pay immediately? If the affiliate pays for the assets at a later date, the deferred payment creates an extension of credit by the bank to the affiliate.
This is critical under Regulation W. An extension of credit to an affiliate is one of the enumerated covered transactions under Section 23A of the Federal Reserve Act and Regulation W, subject to the 10 percent single-affiliate limit, the 20 percent aggregate limit, collateral requirements, and the market-terms requirement of Section 23B.
Fed perspective: by allowing the affiliate to take possession of assets without immediate payment, the bank is effectively financing the affiliate’s purchase. The economic substance is the same as if the bank had made a loan to the affiliate, which the affiliate then used to purchase the assets.
This means that even asset sales, which might appear to reduce the bank’s exposure to an affiliate, can inadvertently increase it if payment terms are not immediate. Banks need to carefully structure the timing of consideration in intercompany asset transfers.
DM Tip: When selling assets to an affiliate, require same-day settlement or payment in full at closing (and ALWAYS consider the application of Regulation W). If deferred payment is unavoidable, treat the outstanding balance as an extension of credit for Regulation W purposes, ensure compliance with quantitative limits and collateral requirements, and monitor until fully paid.