Insider Activities

Credit Risk

Bank insiders are allowed, with certain restrictions, to borrow from the bank. However, the bank must ensure that lending to insiders is at "arm’s length," i.e., on terms and conditions no less stringent than those offered to the general public. The one exception to this general "arm’s length" requirement is set forth in Regulation O, which provides that insiders (as defined for Regulation O purposes) may take advantage of benefit and compensation programs widely available to bank employees, as long as any loans made pursuant to such a program are not on terms any less stringent than loans to employees who are not insiders. Loans to insiders could create added credit risk to the bank when inadequate or lax enforcement of insider policies allows for special treatment of insiders who might not otherwise qualify for credit. In addition, pressure from insiders to relax credit standards for their related interests or for their friends’ interests can also cause problems. Lending to non-creditworthy insiders, offering inappropriate terms to insiders, or otherwise allowing an environment conducive to insider abuse increases the possibility of loss and violations of law and regulation to the bank.

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