Which of the following is true regarding extensions of credit to executive officers, directors, and principal shareholders?
Which of the following is true regarding extensions of credit to executive officers, directors, and principal shareholders?
The regulations governing extensions of credit to executive officers, directors, and principal shareholders stipulate that any aggregate credit exceeding the greater of either $25,000 or 5 percent of the bank's capital and surplus, but not exceeding $500,000, must receive prior approval from the board of directors. This rule ensures that significant loans to insiders are scrutinized to prevent conflicts of interest and ensure financial stability.
This guideline falls under Regulation O, which governs extensions of credit by banks to their executive officers, directors, and principal shareholders (also known as insiders). Regulation O sets forth specific restrictions and requirements for loans to insiders to prevent conflicts of interest and ensure that any credit extended is on market terms and does not pose undue risk to the bank. One of the key provisions requires that any extension of credit to an insider that exceeds the greater of $25,000 or 5 percent of the bank's capital and surplus, up to a maximum of $500,000, must receive prior approval from the bank's board of directors. This provision aims to ensure proper oversight and accountability for large loans to insiders, preventing preferential treatment and promoting the financial integrity of the bank.