The Federal Reserve Board yesterday proposed new regulations to tighten restraints on banks lending money to insiders, an outgrowth of the bank practieces disclosure that led to the resignation of Bert Lance.
The proposals, mandated by the recently enacted bank reform legislation, imposes four requirements on loans by member banks to insiders or their related interests.
Banks can only lend up to 10 percent of their capital and surplus to an insider (other than a director) and all related interests of the insider.
Banks are prohibited from paying an overdraft by an insider (other than a principal sharegholder.
On every extension of credit by a bank to an insider or to an insider's related interest, the terms of the credit must be substantially the same as the terms others would receive for a comparable transaction at the time. And, no unusual risk or other unfavorable factor can be involved.
Any extension of credit by the bank to an insider or related interest that exceed's $25,000 must be approved, in advance, by a majority of the bank's board of directors, with the interested party abstaining.
For the purpose of the regulations, insiders are defined as the executive officersm, directors and principal shareholders of a member bank and of any holding company affiliate.
Related intersts of insiders are companies and political or benefitting the insiders.
The Fed also has proposed revisions in Regulation O, its insider traing rule, based on the mandates of the new act.