Regulation U: Bank Requirements and FAQs

Regulation U is a regulation issued by the Board of Governors of the Federal Reserve System (FRB) that governs the lending activities of banks. It was first issued in 1933 as part of the Glass-Steagall Act, which was designed to prevent banks from engaging in risky activities that could jeopardize the financial system.

Regulation U sets limits on the amount of credit that banks can extend to a single borrower, and it also requires banks to maintain a minimum level of capital reserves. The regulation is intended to protect banks from financial losses and to ensure that they have sufficient funds to meet their obligations to depositors.

The FRB periodically reviews Regulation U and makes changes as needed. In 2013, for example, the FRB made several changes to the regulation in order to reduce the regulatory burden on banks.

Here are some of the key requirements of Regulation U:

• Banks must maintain a minimum level of capital reserves equal to 8% of their assets.
• Banks cannot extend credit to a single borrower in excess of 15% of their capital.
• Banks must obtain prior approval from the FRB before extending credit to a borrower that is in default on a loan from another bank.

Regulation U also includes a number of exemptions for certain types of loans, such as loans to the U.S. government and loans to financial institutions.

If a bank violates Regulation U, the FRB may impose a variety of sanctions, such as fines, penalties, or even the revocation of the bank's charter.

Here are some frequently asked questions about Regulation U:

• What is the purpose of Regulation U?

Regulation U is designed to protect banks from financial losses and to ensure that they have sufficient funds to meet their obligations to depositors.

• What are the key requirements of Regulation U?

Banks must maintain a minimum level of capital reserves equal to 8% of their assets. Banks cannot extend credit to a single borrower in excess of 15% of their capital. Banks must obtain prior approval from the FRB before extending credit to a borrower that is in default on a loan from another bank.

• What are the exemptions to Regulation U?

Regulation U includes a number of exemptions for certain types of loans, such as loans to the U.S. government and loans to financial institutions.

• What happens if a bank violates Regulation U?

If a bank violates Regulation U, the FRB may impose a variety of sanctions, such as fines, penalties, or even the revocation of the bank's charter.