Fed Moves To Restrict Banks

In an unprecedented step, the Federal Reserve Thursday approved a plan to apply safeguards to any bank subsidiary engaged in activities that are impermissible for the bank itself. The ruling is unusual because it appears to encroach on the turf of the U.S. Comptroller, the chief regulator of national bank subsidiaries.

The proposal, approved unanimously by all five Fed board governors, applies sections 23A and 23B of the Federal Reserve Act to the bank subsidiary. These rules are designed to protect the bank against self-dealing by the affiliates.

The changes would effectively restrict investments in subsidiaries to 20 percent of a parent company’s capital, with no one subsidiary allowed to get more than 10 percent of the capital. Additionally, the parent company couldn’t give discounted loans to the subsidiary; buy or invest in securities issued by the affiliate, or engage in other transactions that aren’t at “arm’s length.”