Banking law restricts transactions between a depository institution and its affiliates, and lending to insiders, to prevent the institution being used to support related parties.
Covered transactions with affiliates include loans, purchases of assets, acceptance of affiliate securities as collateral, and guarantees. Limits apply per affiliate and in the aggregate, measured against capital.
Collateral requirements apply to extensions of credit to affiliates, at percentages that vary by collateral type, and certain assets are ineligible entirely.
Market terms. Affiliate transactions generally must be on terms and conditions substantially the same as, or at least as favourable to the institution as, those for comparable transactions with non-affiliates.
Insider lending rules restrict credit to executive officers, directors and principal shareholders and their related interests: prior board approval above thresholds, terms no more favourable than those offered to others, no more than normal repayment risk, and aggregate limits. Additional restrictions apply specifically to executive officers.
Recordkeeping and reporting obligations accompany these, and annual survey requirements catch institutions that have not tracked related interests.
Practical control. A maintained list of affiliates, insiders and their related interests, refreshed at least annually and checked against new credit approvals, is what prevents an inadvertent violation.