Sec. 223.23 What valuation and timing principles apply to purchases of and investments in securities issued by an affiliate?

(a) Valuation.

(1) In general. Except as provided in paragraph (b) of § 223.32 with respect to financial subsidiaries, a member bank’s purchase of or investment in a security issued by an affiliate must be valued at the greater of:

(i) The total amount of consideration given (including liabilities assumed) by the member bank in exchange for the security, reduced to reflect amortization of the security to the extent consistent with GAAP; or

(ii) The carrying value of the security.

(2) Examples. The following are examples of how to value a member bank’s purchase of or investment in securities issued by an affiliate (other than a financial subsidiary of the member bank).

(i) Purchase of the debt securities of an affiliate. The parent holding company of a member bank owns 100 percent of the shares of a mortgage company. The member bank purchases debt securities issued by the mortgage company for $600. The initial carrying value of the securities is $600. The member bank initially must value the investment at $600.

(ii) Purchase of the shares of an affiliate. The parent holding company of a member bank owns 51 percent of the shares of a mortgage company. The member bank purchases an additional 30 percent of the shares of the mortgage company from a third party for $100. The initial carrying value of the shares is $100. The member bank initially must value the investment at $100. Going forward, if the member bank’s carrying value of the shares declines to $40, the member bank must continue to value the investment at $100.

(iii) Contribution of the shares of an affiliate. The parent holding company of a member bank owns 100 percent of the shares of a mortgage company and contributes 30 percent of the shares to the member bank. The member bank gives no consideration in exchange for the shares. If the initial carrying value of the shares is $300, then the member bank initially must value the investment at $300. Going forward, if the member bank’s carrying value of the shares increases to $500, the member bank must value the investment at $500.

(b) Timing.

(1) In general. A purchase of or investment in a security issued by an affiliate remains a covered transaction for a member bank for as long as the member bank holds the security.

(2) A member bank’s purchase of or investment in a security issued by a nonaffiliate that becomes an affiliate of the member bank. A member bank’s purchase of or investment in a security issued by a nonaffiliate that becomes an affiliate of the member bank must be treated according to the same transition rules that apply to credit transactions described in paragraph (b)(2) of § 223.21.