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4000 - Advisory Opinions

Computation of Affiliates' "Covered Transactions" under Section 23A


December 16, 1987

Gerald J. Gervino, Senior Attorney

In your letter of November 9, 1987 you, request our interpretation of what constitutes a "covered transaction" under section 23A of the Federal Reserve Act, 12 U.S.C. § 371(c)(1982), and how the statute should be interpreted for computation purposes.

The loan was 100 percent secured by securities issued by the affiliate and was thus entirely a "covered transaction" under paragraph (b)(7) of section 23A. Even though the collateral is reduced, the entire loan remains subject to the restrictions of section 23A. This is consistent with section 23A(c)(2) which states that any collateral retired or advertised must be replaced by additional eligible collateral as needed to keep the percentage of the collateral value relative to the amount of the outstanding loan or extension of credit equal to the minimum percentage required. Similarly, the fact that the value of the collateral is reduced to less than 100 percent of the outstanding loan does not negate the fact that the bank originally expended monies to fund a loan which was 100 percent collateralized by an affiliate's securities.

In your second question, you ask about a bank that makes a $50,000 loan to a borrower secured by shares of stock in two affiliated banks in which the market value of the stock is $30,000 for the first bank and $20,000 for the second bank, while the loan is in the amount of $50,000. You ask whether, in computing the amount of the loan secured by the stock of the second bank the full loan amount ($50,000) or the proportionate share covered by the stock should be used ($30,000). For purposes of the section 23A lending limit to the second bank, only $30,000 of the principal amount would be used. Similarly $20,000 of the principal amount would be used for the purpose of calculating the lending limit to the third bank. The entire amount would be included in determining the lending limit to all affiliates as a group.

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