Restrictions on transactions with affiliates and loans to affiliates

II.1 Nature of Regulation I 

1. Because of the risk of contagion by affiliates it is necessary to place restrictions on the type and volume of transactions with affiliates and the resulting receivables from these affiliates.
2. Therefore, the requirements of this regulation are aimed at restrictions on transactions with (unconsolidated) affiliates and a limit on net balances due from (unconsolidated) affiliates. 

II.2 Legal basis, purpose and scope 

1. This regulation is issued pursuant to article 21, paragraph 2, sub c of the National Ordinance on the Supervision of Banking and Credit Institutions 1994 and governs certain transaction with an affiliate. The regulation draws on the authority of subject ordinance.
2. The aim of this regulation is to provide a sound basis for transactions with affiliates. All unconsolidated affiliated companies fall within the scope of the requirements.

II.3 Definitions 

For the purpose of Supervisory Regulation II, the following definitions apply: 

1. "Equity" is defined as Tier I capital as defined in the Chart of Accounts. For purposes of this regulation equity is considered at the quarter preceding the date of the transaction.
2. An "Affiliate" of a supervised credit institution is defined for the purpose of the regulation to be:
   1. Any company for which commonality of ownership exists with the credit institution: any company that controls the credit institution (parent company or other) and any other company that is controlled by the company that controls the credit institution (sister companies) and any company that controls the company that controls the credit institution (ultimate parent company or companies);
   2. Subsidiaries of the credit institution:
   3. Any company for which a commonality of directors exists with the credit institution: any company in which the majority of its (supervisory or managing) directors constitute a majority of the directors of the credit institution or any company that is controlled by the credit institution;
   4. Any company that de Bank determines to have a relationship with the credit institution or its subsidiaries and affiliates, such that transactions with that company may be affected by the relationship of the company with the credit institution, its subsidiaries or affiliates.

   The definition of affiliate does not include:
   
   Companies engaged solely in the following activities: holding the premises of the credit institution, conducting a safe deposit business, holding obligations of governments or holding real estate for execution on the short term. However, no transaction should be concluded with these affiliates other than those which are strictly necessary for the facilitation of their respective businesses to the benefit of the credit institution.

3. "Covered transactions" mean with respect to an affiliate of a credit institution all transactions mentioned below which are subject to the enforcement of this regulation and the resulting restrictions. The following transactions are ‘covered' and hence subject to restrictions: 
   1. an extension of credit to or the placement of a deposit with an affiliate;
   2. the issuance of a guarantee, acceptance or letter of credit (including a standby letter of credit) on behalf of an affiliate;
   3. a purchase of securities issued by an affiliate;
   4. a purchase of assets, including assets subject to a repurchase agreement, from an affiliate;
   5. the acceptance of securities issued by an affiliate as collateral for an extension of credit to any person or company.
4. "Company" is defined as any form of business organization irrespective of its orientation to profit and trusts (business or otherwise). However, the term does not include supervised credit institutions, supervised insurance companies and corporations of which the majority of the shares are owned by the government.
5. "Control" of a company or credit institution means that a person directly or indirectly, or acting through or in concert with others:
   1. owns or has the power to vote 20% or more of any class of voting securities of the company or credit institution;
   2. controls in any manner the election of the majority of the directors of the company or bank;
   3. has the power to exercise a controlling influence over the management or policies of the company or bank.
6. "Persons" means both natural persons and corporate persons.
7. "Subsidiary" is a company or institution in which a person holds a majority of the shares.
8. "Securities" means stock, bonds, debentures, notes or other similar obligations.
9. "Low quality assets" means an asset that falls into one or more of the following categories:
   1. an asset qualified as "substandard", "doubtful" or "loss" in the most recent report of examination of an affiliate by its supervisor ( in case of a supervised institution) or assessed to fall into one of these categories by the Bank;
   2. an asset in non-accrual status;
   3. an asset on which principal or interest payments are more than 60 days past due;
   4. an asset whose terms have been renegotiated or compromised due to the deteriorating financial condition of the obligator.
10. "Credit institution" as defined in art. 1 paragraph 1 sub c and d of the National Ordinance in the Supervision of Banking and Credit Institutions of 1994.

II.4 Applicability and Exemptions 

1. Supervisory Regulation II will be applicable to all credit institutions falling under the supervision of the Bank, except for those classes of institutions having an exemption under the regulation as mentioned in paragraph II.4.2.
2. This regulation shall not apply to any branches of foreign banks which are consolidated in their home country and for which branch the Bank has received a guarantee for all liabilities of the branch.

II.5 Covered transactions with and balances due from (unconsolidated) affiliates.

The requirements under the regulation are as follows:

1. A credit institution and its consolidated subsidiaries may engage in a covered transaction with an affiliate only if the balances due from unconsolidated affiliates are limited to 10% of equity for individual affiliates and 20% of equity in the aggregate for all affiliates.
2. For the purpose of this regulation, any transaction by a credit institution with any person shall be deemed to be a transaction with an affiliate to the extent that the proceeds of the transaction are used for the benefit of, or effectively transferred to, that affiliate.
3. A credit institution and its consolidated subsidiaries may not purchase a low quality asset from an affiliate unless the credit institution or such subsidiary, pursuant to an independent credit evaluation, has committed itself to purchase such an asset prior to the time such asset was acquired by the affiliate.

II.6 Exempted transactions with affiliates

The requirement for restrictions on (covered) transactions with affiliates shall not be applicable to:

1. any transaction (not involving low quality assets) of the credit institution with:
   • a local bank which controls 75% or more of the voting shares of the credit institution;
   • any bank in which the credit institution controls 75% or more of the voting shares;
   • a local bank in which 75% or more of the voting shares are controlled by the (holding) company that controls 75% or more of the voting shares of a credit institution.
2. making deposits in an affiliated bank or affiliated foreign bank in the ordinary course of correspondent business, subject to a restriction of 20% of equity per affiliated correspondent bank and 40% of equity in the aggregate for all affiliated correspondent banks.
3. extension of credit or the issuing of a guarantee or letter of credit on behalf of an affiliate that is fully secured by acceptable obligations of a government c.q. fully guarantees by a government, or by a segregated earmarked deposit account with the credit institutions;
4. purchasing assets having a readily identifiable and publicly available market quotation and purchased at market value or purchasing loans of sound quality from affiliate banks on an non-recourse basis;
5. purchasing from an affiliate a loan or extension of credit that was originated by the credit institution and sold to the affiliate subject to a repurchase agreement or with recourse.

II.7 Terms of transactions 

1. A credit institution may engage in a transaction (covered or exempted) with an affiliate only:
   1. on the terms and under the circumstances, including credit standards, that are substantially the same, or at least as favorable to the credit institution or its subsidiaries, as those prevailing at the same time for comparable transactions with or involving non-affiliated companies and
   2. in the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered, or would apply to, non affiliated companies.
2. In addition, any transaction (covered or exempted) between a credit institution and an affiliate shall be on terms and conditions that are consistent with safe and sound banking practices.

II.8 Grandfathering provision 

1. An affiliate relationship that becomes unpermitted as a result of the implementation of this regulation may continue for a period desired by the institution after consultation with the Bank, but may not continue for a period longer than 12 months after the implementation date of the regulation.
2. Transactions maturing in a period longer than 12 months shall be respected, provided a written request is done by the institution and which transactions are found to be reasonable and sound by the Bank based on the underlying documentation.