Yes, a bank generally may extend more than $100,000 in loans to a majority stockholder or “principal shareholder” (who controls or has the power to vote more than 10% of the bank’s voting securities), subject to the conditions noted below.

Regulation O’s prohibition on loans to executive officers exceeding $100,000 is not applicable to principal shareholders unless a principal shareholder also is an executive officer. Rather, principal shareholders are subject to Regulation O’s general lending limit for loans made to “insiders.” Regulation O’s general lending limit for insider loans is 15% of a bank’s unimpaired capital and unimpaired surplus, with a 25% limit applying to loans fully secured by “readily marketable collateral.”

When a loan to an insider (a defined term) is secured by a perfected interest in a stock portfolio, we believe the 25% lending limit for loans secured by “readily marketable collateral” would apply. Although Regulation O does not define “readily marketable collateral,” it does refer to “reliable and continuously available price quotations” for such collateral, and other banking laws provide definitions of readily marketable collateral.

The Illinois Department of Financial and Professional Regulation (IDFPR) has issued an interpretive letter defining “readily marketable collateral” under the Illinois Banking Act, providing that “[a]s the [Illinois Banking Act] does not define readily marketable collateral, the [Illinois Savings Bank Act], OCC and FDIC definitions may be used for guidance. . . . Fundamentally, readily marketable collateral is a financial instrument or bullion traded at market value on a daily bid-and-ask price market.”

Also, the Illinois Savings Bank Act and the OCC’s general lending limit rules each define readily marketable collateral to include “financial instruments,” which are defined to include stocks. Consequently, we believe a loan to a principal shareholder that is fully secured by a stock portfolio would be subject to the higher 25% lending limit for insider loans secured by readily marketable collateral.

Additionally, we note that advance board approval may be required for any extensions of credit to an insider over $500,000 (or 5% a bank’s unimpaired capital and unimpaired surplus, if that is a lower amount). Also, we note that both Illinois and federal law prohibit a bank from making a loan secured by shares of its own stock.

For resources related to our guidance, please see:

• Regulation O, 12 CFR 215.2(m)(1) (“Principal shareholder means a person (other than an insured bank) that directly or indirectly, or acting through or in concert with one or more persons, owns, controls, or has the power to vote more than 10 percent of any class of voting securities of a member bank or company. Shares owned or controlled by a member of an individual's immediate family are considered to be held by the individual.”)

• Regulation O, 12 CFR 215.2(h) (“Insider means an executive officer, director, or principal shareholder, and includes any related interest of such a person.”)

• Regulation O, 12 CFR 215.2(i) (“Lending limit. The lending limit for a member bank is an amount equal to . . . 15 percent of the bank’s unimpaired capital and unimpaired surplus in the case of loans that are not fully secured, and an additional 10 percent of the bank’s unimpaired capital and unimpaired surplus in the case of loans that are fully secured by readily marketable collateral having a market value, as determined by reliable and continuously available price quotations, at least equal to the amount of the loan. . . .”)

• FDIC Real Estate Lending Standards, Appendix A to Part 365 (“Readily marketable collateral means insured deposits, financial instruments, and bullion in which the lender has a perfected interest. Financial instruments and bullion must be salable under ordinary circumstances with reasonable promptness at a fair market value determined by quotations based on actual transactions, on an auction or similarly available daily bid and ask price market.”)

• Illinois Banking Act, 205 ILCS 5/32 (“The liabilities to any state bank of a person may exceed 25% of the unimpaired capital and unimpaired surplus of the bank, provided that (i) the excess amount from time to time outstanding is fully secured by readily marketable collateral having a market value, as determined by reliable and continuously available quotations, at least equal to the excess amount outstanding; and (ii) the total liabilities shall not exceed 30% of the unimpaired capital and unimpaired surplus of the bank.”)

• IDFPR Interpretive Letter (May 28, 2019) (“As the [Illinois Banking Act] does not define readily marketable collateral, the ISBA, OCC and FDIC definitions may be used for guidance. Fundamentally, readily marketable collateral is a financial instrument or bullion traded at market value on a daily bid-and-ask price market . . . . Fundamentally, readily marketable collateral is a financial instrument or bullion traded at market value on a daily bid‐and‐ask price market.”)

• Illinois Savings Bank Act, 205 ILCS 205/6013(g) (“For the purposes of this Section, the term ‘readily marketable collateral’ means financial instruments or bullion that are salable under ordinary circumstances with reasonable promptness at a fair market value on an auction or a similarly available daily bid-and-ask price market. ‘Financial instruments’ include stocks, bonds, notes, debentures traded on a national exchange or over the counter, commercial paper, negotiable certificates of deposit, bankers' acceptances, and shares in money market or mutual funds.”)

• OCC Lending Limit Rules, 12 CFR 32.2(v) (“Readily marketable collateral means financial instruments and bullion that are salable under ordinary market conditions with reasonable promptness at a fair market value determined by quotations based upon actual transactions on an auction or similarly available daily bid and ask price market.”)

• OCC Lending Limit Rules, 12 CFR 32.2(p) (“Financial instrument means stocks, notes, bonds, and debentures traded on a national securities exchange, OTC margin stocks as defined in Regulation U, 12 CFR part 221, commercial paper, negotiable certificates of deposit, bankers' acceptances, and shares in money market and mutual funds of the type that issue shares in which national banks or savings associations may perfect a security interest. Financial instruments may be denominated in foreign currencies that are freely convertible to U.S. dollars. The term “financial instrument” does not include mortgages.”)

• Regulation O, 12 CFR 215.4(b)(1) (“Prior approval.

(1) No member bank may extend credit (which term includes granting a line of credit) to any insider of the bank or insider of its affiliates in an amount that, when aggregated with the amount of all other extensions of credit to that person and to all related interests of that person, exceeds the higher of $25,000 or 5 percent of the member bank's unimpaired capital and unimpaired surplus, unless: (i) The extension of credit has been approved in advance by a majority of the entire board of directors of that bank; and (ii) The interested party has abstained from participating directly or indirectly in the voting.

(2) In no event may a member bank extend credit to any insider of the bank or insider of its affiliates in an amount that, when aggregated with all other extensions of credit to that person, and all related interests of that person, exceeds $500,000, except by complying with the requirements of this paragraph (b).”)

• Illinois Banking Act, 205 ILCS 5/37(2) (“It shall not be lawful for a state bank to make any loan or discount on the security of the shares of its own capital stock or preferred stock or on the security of its own debentures or evidences of debt which are either convertible into capital stock or are junior or subordinate in right of payment to deposit or other liabilities of the bank.”)

• Federal Deposit Insurance Act, 12 USC 1828(v)(1) (“No insured depository institution may make any loan or discount on the security of the shares of its own capital stock.”)