Federal Reserve Board Proposes Comprehensive Reforms to Rules on Lending to Insiders

On August 4, 2026, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) published in the Federal Register a notice of proposed rulemaking that would comprehensively revise Regulation O, which implements the provisions of the Federal Reserve Act that govern extensions of credit by banks to their “insiders”—i.e., their executive officers, directors, and principal shareholders—and to their insiders’ affiliates and related interests (the “Proposal”).

For banking organizations, especially larger organizations with complex insider and affiliate relationships and derivatives and securities financing activity, the Proposal could represent more than a long-deferred modernization exercise and instead be a significant regulatory change-management project.

On the same date that the Proposal was announced, the Federal Deposit Insurance Corporation (“FDIC”) approved a separate but related notice of proposed rulemaking that would raise and index certain lending thresholds for insiders of FDIC-supervised institutions (the “FDIC Proposal”). The FDIC Proposal would align certain quantitative thresholds in its rules with those in the Proposal and reduce differences in treatment across charter types, but it is narrower in scope because the Federal Reserve Act vests the Federal Reserve with primary rulemaking authority over these provisions.

Comments on the Proposal and on the FDIC Proposal are now due by November 4, 2026. This Legal Update provides background on Regulation O, summarizes the key parts of the Proposal and FDIC Proposal, and identifies practical considerations for banks.¹

Background on Regulation O

Regulation O implements two sections of the Federal Reserve Act. Section 22(g) limits loans by a member bank to its own executive officers, and imposes conditions including prompt board reporting, nonpreferential terms, periodic financial statements, and a demand-repayment condition for certain loan categories. Section 22(h) governs extensions of credit to executive officers, directors, principal shareholders, and their related interests, and prohibits preferential terms, excessive insider exposure, unauthorized overdrafts, and the knowing receipt by an insider of noncompliant credit.

Currently, Regulation O requires extensions of credit to insiders to (i) be on substantially the same terms offered to non-insiders, (ii) follow underwriting standards no less stringent than those applied to non-insiders, and (iii) receive prior approval by a majority of the bank’s entire board of directors (with the interested party abstaining) if they are above specified dollar thresholds. Individual lending limits (tied to the national bank lending limit) and an aggregate limit (generally 100% of unimpaired capital and surplus) cap total insider exposure. Overdraft restrictions, recordkeeping, and public disclosure requirements complete the framework.

The Proposal would implement the effect of several intervening developments. First, the dollar thresholds specified in Regulation O have not been adjusted since 1994 (and in some cases since 1979 or 1983), and therefore do not reflect changes due to inflation or economic growth. Second, the rise of passive fund complexes has produced compliance outcomes that Congress likely did not anticipate. Third, the Federal Reserve has not yet implemented provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) directly relevant to Regulation O: section 614 (derivatives and securities financing transactions) and section 615 (insider asset purchases and sales). Further, decades of piecemeal amendments and staff opinions have made compliance with Regulation O more challenging.

Overview of the Proposal

1. Reorganization of Regulation O

The Proposal would reorganize Regulation O into five subparts: Subpart A (general provisions and definitions); Subpart B (requirements for extensions of credit to all insiders, including market terms, lending limits, and board approval); Subpart C (requirements for certain insiders only, including the additional executive officer restrictions, the correspondent account restrictions, and asset purchase-and-sale rules); Subpart D (recordkeeping and disclosure); and Subpart E (civil penalties).

2. Updated Thresholds and Indexing

The Proposal would increase the principal dollar-based thresholds in Regulation O to reflect nominal gross domestic product (“GDP”) growth from Q4 1994 to Q4 2025, selecting 1994 as the baseline because it was the most recent year in which the Federal Reserve considered adjusting any threshold. The proposed increases to the dollar-based thresholds are as follows:

Going forward, the Federal Reserve would publish a GDP growth adjustment and adjusted thresholds every five years based on cumulative nominal GDP growth, applying specified rounding conventions, and would not publish an adjustment for any five-year period in which cumulative nominal GDP growth is negative.

The Proposal would consolidate two sets of overlapping thresholds into single “lesser of” formulations. First, the exception for extensions of credit to an executive officer for purposes other than a home mortgage or a child’s education is currently subject to three different limits. The Proposal would simplify this by permitting such credit up to the lesser of 2.5% of the bank’s unimpaired capital and unimpaired surplus or $400,000. Similarly, the requirement that a bank’s board of directors approve an extension of credit to an insider in advance is currently subject to three different thresholds. The Proposal replaces these three thresholds with a requirement for prior approval where an extension of credit, aggregated with all other extensions of credit to the insider, exceeds the lesser of 5% of the bank’s unimpaired capital and unimpaired surplus or $2 million.

The Proposal also would clarify that the credit card and overdraft plan exceptions apply on an aggregate basis per insider, not per account.

3. Qualified Fund Complex Relief

The growth of investments in depository institution holding companies by passive fund complexes has created a problem under Regulation O. When a fund complex’s investment in a depository institution holding company crosses 10% of a class of voting securities, the fund complex becomes a principal shareholder of the bank subsidiary under Regulation O. Regulation O separately presumes that a company is a “related interest” of a principal shareholder if the shareholder owns more than 10% of the company and no other person owns more. Given that a fund complex often will own more than 10% of many banking organizations, this presumption can draw many portfolio companies into a bank’s insider lending perimeter. The compliance burden of monitoring limits, obtaining approvals, and maintaining records for all these companies can be significant and disproportionate to the risks that Regulation O is designed to address.

The federal banking agencies first provided temporary relief in December 2019 to banks and fund complexes, which they subsequently extended multiple times. The Proposal would make the relief permanent by changing Regulation O so that the presumption of control for a fund complex’s investments in portfolio companies does not apply when determining whether a portfolio company is a related interest of a fund complex that is a principal shareholder of a bank, provided the complex qualifies as a “qualified fund complex.” The fund complex itself would remain a principal shareholder of the bank wherever the 10% threshold is crossed, and the actual control tests (e.g., 25% ownership, majority board election, controlling influence) would continue to apply to fund complex investments in portfolio companies.

A fund complex would qualify as a “qualified fund complex” under the Proposal if it:

• Sponsors, manages, or advises investment funds that invest in voting securities of a regulated company (i.e., an insured depository institution, bank holding company, or savings and loan holding company);
• Is not, and is not affiliated with, a bank holding company or savings and loan holding company;
• Does not meet any of the conditions that would give rise to a rebuttable presumption of control over a regulated company under the Federal Reserve’s control rule in Regulation Y;
• Does not sponsor, manage, or advise any investment fund that owns or controls more than 10% of any class of voting securities of a regulated company, with funds that share the same or substantially the same investment objective and asset composition treated as a single fund; and
• Does not sponsor, manage, or advise non-index funds that in the aggregate own or control more than 10% of any class of voting securities of a regulated company (e.g., insured depository institution, bank holding company or savings and loan holding company).

For this purpose, an “index fund” is a fund with an investment objective of tracking the risk and return characteristics of a previously specified third-party broad-based market index by holding all of the securities in the index, or a representative and preset sample of those securities, in approximately the same proportions as their representation in the index, using rules-based investing.

If a qualified fund complex were to attempt to influence a bank’s lending decisions, the Federal Reserve could revoke its qualifying status, thereby making all portfolio companies in which the fund complex has a 10% or greater investment into related interests of the bank under Regulation O.

4. Derivatives, Securities Financing Transactions, and Credit Exposure

Section 614 of the Dodd-Frank Act amended section 22(h) of the Federal Reserve Act to include within “extension of credit” a bank’s credit exposure to an insider arising from a derivative transaction, repurchase agreement, reverse repurchase agreement, securities lending transaction, or securities borrowing transaction. However, the Dodd-Frank Act did not define “credit exposure” or prescribe a measurement methodology, and Regulation O was never updated to reflect the statutory change. The Proposal would remedy these issues by defining a credit exposure, prescribing valuation methods for these transactions, and updating the regulation for the changes made by section 614.

Rather than providing a single definition of “credit exposure,” the Proposal would treat a derivative transaction, derivative netting set, or securities financing transaction with an insider as an extension of credit whenever its value, calculated under the Proposal’s valuation rules, is greater than zero. Only the gross amount of a bank’s exposure to the insider would count, measured when the transaction is entered into and on an ongoing basis thereafter using the valuation methods described below. Because the measure is tied to a calculated exposure, rather than a fixed principal amount, a bank’s remaining Regulation O capacity for an insider could fluctuate with market movements, and banks would need to monitor covered derivatives and securities financing transactions with insiders on an ongoing basis rather than only at origination.

For derivatives and derivative netting sets, the Proposal would permit a bank to value credit exposures using any methodology it is authorized to use under the federal banking agencies’ risk-based capital rules. Further, the resulting credit exposure could be reduced by the value of any qualifying cash held in a segregated, earmarked deposit account at the bank and obligations of, or fully guaranteed by, the United States or its agencies received from the insider as collateral.

For securities financing transactions, a bank could value credit exposures using either the capital rule methodology or a simplified market value method under which credit exposure equals (i) the sum of cash and fair market value of securities transferred by the bank to the insider, minus (ii) the sum of cash and fair market value of US government obligations transferred from the insider to the bank.

For other extensions of credit, the Proposal would adopt valuation principles similar to those for affiliate transactions in Regulation W. Originated credit would generally be valued at the greatest of (i) the principal amount of the extension of credit, (ii) the amount owed by the insider to the bank, or (iii) the sum of amounts provided by the bank plus any additional amounts the bank could be required to provide. Acquired credit would be valued at the total consideration given, including liabilities assumed, plus any further amounts the bank could be required to advance. Investments in or purchases of, insider debt securities would be valued at the greater of the consideration paid by the bank, reduced to reflect amortization consistent with generally accepted accounting principles, or the carrying value of the securities. The Federal Reserve observes that banks already maintain Regulation W compliance systems using substantially identical valuation methodologies, and that alignment between the two regulations is intended to minimize the need for parallel, duplicative infrastructure.

The Proposal would also expand the definition of extension of credit to include guarantees, acceptances, letters of credit, endorsements, confirmations of insider letters of credit, certain credit derivatives (including equity derivatives and total return swaps functioning as guarantees), leases that are the functional equivalent of extensions of credit, investments in insider debt securities, and material modifications of existing credit (increases in amount, extensions of maturity, or adjustments to interest rate or another material term).

5. Insider Asset Transactions and Board Approval

Section 615 of the Dodd-Frank Act prohibits a bank from purchasing assets from or selling assets to an insider unless on “market terms,” and requires advance approval by a majority of disinterested directors if the transaction exceeds 10% of the bank’s capital stock and surplus. The Proposal would codify these requirements in Regulation O. The Proposal also would make clear that, for both section 615 and section 22(h) approval requirements, every director with an interest in the transaction must abstain, and that participation in the discussion or any attempt to influence the voting constitutes indirect participation in the vote.

The Federal Reserve proposes to adopt the meaning of “market terms” from section 23B of the Federal Reserve Act, which requires terms of covered transactions between a bank and an affiliate to be at least as favorable to the bank as those prevailing for comparable transactions with non-affiliates or, absent comparables, terms the bank would offer a non-affiliate in good faith. “Purchase of asset” also would be defined consistently with Regulation W by including acquisitions for cash or other consideration, assumptions of liabilities, and certain mergers.

The board-approval mechanics for asset purchases and sales under section 615 would differ from those for extensions of credit under section 22(h), and banks would need to apply the correct test to each transaction. The difference lies in how interested directors are treated in the denominator. Under section 615, the required vote is a majority of the bank’s disinterested directors, so interested directors are excluded from the denominator, as well as from the vote. Under section 22(h), the required vote is a majority of the bank’s entire board of directors, so an interested director must abstain from voting but is still counted in determining what constitutes a majority.

By way of example, for a seven-member board with two interested directors and five disinterested directors, an extension of credit subject to section 22(h) would need four affirmative votes, because a majority of the seven-member board is four, which means four of the five directors eligible to vote must approve. However, an asset purchase or sale subject to section 615 would need only three affirmative votes, because a majority of the five disinterested directors is three. The practical effect is that section 22(h) becomes harder to satisfy as the number of interested directors grows, while section 615 does not.

6. Definitions, Attribution, Transition, and Related Issues

The Proposal addresses a number of definitional and structural issues. The Proposal would modify the definition of “executive officer” by removing “every vice president,” “the cashier,” and “the secretary” from the title-based presumption and would add to that presumption the roles of chief executive officer, chief financial officer, chief lending officer, and chief investment officer.

Regulation O and Regulation Y currently use different formulations for several concepts that both regulations use to measure ownership, which can lead a bank to reach different conclusions about the same shareholder under each regulation and to maintain duplicative analyses. To address this, the terms “acting in concert” and “class of voting securities,” which are used in the definitions of “control” and “principal shareholder,” would be aligned with Regulation Y to promote consistency in determining when aggregated holdings cross the 10% or 25% thresholds relevant to holding company structures. The Proposal would not, however, replace Regulation O’s control standard with the control framework in Regulation Y, although it would use Regulation Y rebuttable presumptions of control in the conditions for qualified fund complex status.

The Proposal would also clarify how Regulation O applies within holding company structures. A company that controls a bank would not be a principal shareholder of that bank or its affiliates, and a bank would not be a principal shareholder of itself. In addition, the Proposal would remove the exclusion for bank subsidiaries from the definition of “subsidiary” while preserving the existing exclusion for transactions between a bank and its own subsidiary, distinguish operating subsidiaries from financial subsidiaries, and confirm that insured branches of foreign banks are subject to Regulation O.

Regulation O includes a tangible economic benefit rule, which treats extensions of credit made to a borrower as having been made to another person, to the extent that the proceeds are transferred to the person or are used for the tangible economic benefit of the person. The Proposal would codify the Federal Reserve’s long-standing practice of applying this rule so that extensions of credit to the spouse of an insider or to an estate or trust in which an insider has a substantial beneficial interest are treated as having been made to the insider. Extensions of credit to the spouse of an insider would be attributed to the insider unless (i) the spouse is independently creditworthy, and (ii) repayment is not predicated on the insider’s income or assets. An extension to a related interest of the spouse would additionally require that the insider has no financial or ownership interest in, and not participate in management of, the entity. For trusts and estates, the Proposal would attribute to an insider any extension of credit to a trust or estate in which the insider has a 25% or more present or contingent beneficial interest. Separately, a trustee would be presumed to control a trust, and a settlor, appointer, or beneficiary would be presumed to control a trust only if that person has the power both to remove or replace a trustee and to limit a trustee’s power to purchase, sell, or exchange trust investments or assets. A person also would be presumed to control any company or bank that is controlled by an estate for which the person serves as executor.

The Proposal would address transitional credit that is extended to a person before that person becomes an insider. This transitional credit would not need to be conformed to Regulation O’s substantive requirements at the time the person becomes an insider but would become subject to the substantive requirements if and when the credit is renewed, revised, or extended, or for pre-existing lines of credit, 14 months after the borrower becomes an insider. Even during the transition period, the credit would be subject to Regulation O if the credit was extended in contemplation of insider status and would count toward the individual and aggregate lending limits from the date insider status attaches. The Proposal would also change the treatment of undrawn lines, which under the current framework require collateral for unused portions where credit above 15% of unimpaired capital and surplus is not fully secured. Under the Proposal, the unused portion of a line of credit would be deemed collateralized if the bank has no legal obligation to advance funds until the insider posts the required collateral, although the unused amount would continue to count toward both the 15% limit for extensions of credit that are not fully secured and the 25% overall individual lending limit.

Regulation O currently includes a broad exception that allows a bank to lend to an executive officer without regard to the general dollar caps on executive officer credit if the loan finances the officer’s residence. To qualify today, the loan must be used to finance or refinance the purchase, construction, maintenance, or improvement of a residence of the officer. The loan must also be secured by a first lien on that residence, and the officer must own the residence or be expected to own it once the loan closes. The Proposal would tighten the exception by adding two conditions to the existing first lien and ownership requirements: (i) the officer may not hold the property for investment purposes, including renting or leasing out any portion of it for income, and (ii) the officer must live at the property for at least three months each year, which need not be consecutive. The Proposal also would make a technical revision replacing “a residence” with “a single residence” to make explicit the existing statutory limit of one such loan per executive officer; that single-residence restriction would not apply to mortgage loans to directors, principal shareholders, or related interests. Separately, the Proposal would apply the additional executive officer restrictions to an extension of credit to a related interest of an executive officer where the related interest is the officer’s alter ego and has no independent means to repay the credit.

7. Correspondent Account Restrictions

Section 106(b)(2) of the Bank Holding Company Act Amendments of 1970 addresses a form of reciprocal favoritism between banks. Absent the restriction, Bank A could extend credit on preferential terms to an insider of Bank B in exchange for Bank B maintaining a correspondent account at Bank A, allowing each bank to benefit an insider of the other while avoiding the limits that would apply to lending to its own insiders.

To prevent that result, the statute provides that where a correspondent relationship exists between two banks, credit extended by one bank to an insider of the other must be on substantially the same terms as comparable credit to unrelated persons, must not involve more than the normal risk of repayment, and must not present other unfavorable features. The statute applies in both directions, covering the bank that maintains the correspondent account and the bank at which the account is maintained, and it also restricts a bank from opening a correspondent account while noncompliant insider credit is outstanding.

The Proposal would codify these restrictions in Regulation O and would specify three permissible methods for identifying the insiders covered by them: (i) an annual insider survey; (ii) a borrower-inquiry method; or (iii) an alternative approved by the appropriate federal banking agency. Institutions with extensive correspondent networks should assess which method is workable at scale.

8. Public Disclosures

Regulation O currently requires a bank, upon written request from a member of the public, to make available the names of each executive officer and each principal shareholder whose aggregate outstanding credit from the bank, including credit to that person’s related interests, equals or exceeds the lesser of 5% of the bank’s unimpaired capital and unimpaired surplus or $500,000. No disclosure is required if the aggregate amount outstanding to the insider and the insider’s related interests does not exceed $25,000, and a bank is not required to disclose the amount of any individual extension of credit. A parallel requirement applies to credit extended to those persons by the bank’s correspondent banks.

The public disclosure threshold would rise from $500,000 to $2 million, special definitions that currently apply only for disclosure purposes would be eliminated, and disclosure rules for extensions secured by nonpublic bank or holding company stock would be consolidated. Related Call Report changes would be proposed separately by the Federal Financial Institutions Examination Council.

9. FDIC Proposal

The FDIC Proposal would amend its regulations, which apply insider lending limits to FDIC-supervised institutions (i.e., insured state-chartered banks that are not members of the Federal Reserve System, insured state-chartered savings associations, and insured state-licensed branches of foreign banks).

The narrower scope of the FDIC Proposal does not mean that FDIC-supervised institutions would escape the balance of the Proposal. The FDIC’s regulations set certain dollar thresholds for FDIC-supervised institutions but otherwise apply the substance of Regulation O to them, including its definitions. As a result, the Proposal’s definitional revisions, valuation rules, attribution rules, fund complex relief, correspondent account restrictions, and public disclosure changes would generally reach FDIC-supervised institutions through that cross-reference. The FDIC Proposal instead would conform the thresholds in the FDIC’s rule so that they would match the corresponding thresholds in the Proposal.

The FDIC states that aligning its thresholds with those in the Proposal would standardize compliance and avoid disparate treatment between FDIC-supervised institutions and other insured depository institutions. Substantively, the FDIC Proposal would increase the maximum amount of credit an FDIC-supervised institution may extend to one of its executive officers for purposes other than those specifically authorized by statute from $100,000 to $400,000, and would increase from $500,000 to $2 million the amount of credit to an insider above which aggregate lending requires prior board approval. These are the same two thresholds discussed in Section 2 above, and the proposed amounts match those in the Proposal.

The FDIC Proposal would also establish an indexing methodology to adjust these thresholds automatically every five years to reflect the cumulative change in economic growth and inflation since the prior adjustment, and would simplify the method for determining the lending limit applicable to a given institution. These changes correspond to the indexing mechanism and the “lesser of” formulation discussed in Section 2 above.

Key Takeaways

The Proposal is the most comprehensive revision of the insider lending regulatory framework since Regulation O was originally adopted. Even where the Federal Reserve characterizes particular changes as nonsubstantive clarifications or structural reordering, the cumulative implementation effect will be meaningful. Given the breadth of the Proposal, the length of the comment period, the number of questions on which the Federal Reserve has solicited comment, and the need to coordinate with the FDIC Proposal, a final rule is not expected in 2026.

Banks should nevertheless take some initial steps to assess the potential impact of this rulemaking on their Regulation O compliance program. First, institutions will need to remap their insider and related-interest populations against the revised definitions of executive officer, related interest, acting in concert, principal shareholder, and affiliate, including the new attribution rules for spouses and trusts. Second, institutions that lend to portfolio companies of principal shareholder fund complexes should develop processes to verify qualifying status, monitor ongoing compliance, and maintain documentation. Third, approval workflows, aggregation logic, exception monitoring, and periodic reviews tied to dollar thresholds will need to be recalibrated, with the five-year indexing mechanism built into compliance calendars. Fourth, Regulation O compliance teams will need to coordinate with treasury, capital markets, and risk functions that currently produce derivatives and securities financing exposure calculations for capital-rule purposes. Fifth, banks with correspondent or respondent relationships should evaluate which of the prescribed insider-identification methods they can administer, and whether to seek agency approval of an alternative.

¹ This Legal Update refers to all insured depository institutions that are directly or indirectly subject to Regulation O as “banks,” except for the distinction among charter-types matters.

² To avoid confusion, the Proposal would eliminate the exception for inadvertent overdrafts from the definition of “extension of credit” while retaining this broader exception for interest-bearing overdraft credit plans. However, the Proposal would not eliminate the separate exception for inadvertent overdrafts with respect to the prohibition against overdrafts to executive officers and directors, the threshold for which would be increased to $4,000.