The Federal Reserve Board on Friday requested comment on a proposal to modernize its rule governing the extension of credit to bank "insiders"—bank executives, board members and major shareholders who could potentially influence a bank's lending decisions. The proposal updates outdated thresholds while maintaining safeguards against preferential treatment.

Regulation O, which implements provisions of the Federal Reserve Act, has not been comprehensively updated since 1979. The rule was designed to prevent the kind of insider lending abuses that historically contributed to bank failures, ensuring that loans to those with inside influence receive terms no more favorable than those offered to the general public.

The decades-long gap since the last comprehensive revision means that dollar-based thresholds set in the late 1970s have not kept pace with decades of economic growth and inflation. The rule addresses a particular challenge for community banks, where board members and executives are often local business owners and civic leaders who bring valuable perspective and expertise to bank governance, as well as information about the local economy.

Under the proposal, the Federal Reserve would update dollar-based thresholds and index them to economic growth going forward, preventing them from becoming stale again. The changes would also address unnecessary applications of the rule to passive interests in companies held by investment funds, codify other statutory requirements, incorporate long-standing regulatory interpretations, and simplify how the rule is applied.

"Today's proposal modernizes Regulation O by updating outdated dollar-based thresholds and ensuring their future relevance, while preserving necessary safeguards," said Vice Chair for Supervision Michelle W. Bowman. "Community banks often face challenges recruiting experienced business leaders to serve as members of bank boards and as bank executives. Many potential board members are business owners whose expertise is invaluable. This rule recognizes that value by providing clearer, more straightforward standards that protect against potential conflicts of interest while supporting effective governance."

Comments on the proposal are due 60 days after publication in the Federal Register. Following the comment period, the Board would review feedback and consider whether to finalize the rule, potentially with modifications.

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Federal Register notice: Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks; Bank Holding Companies (PDF)

Board memo (PDF)

Statement by Governor Barr

Board Votes