Why Reg W Makes Warrant Banking a No-Brainer for Innovation-Focused Banks

Let us share something that's been hiding in plain sight for innovation-focused bankers: Regulation W gives you explicit permission to transform your lending business through stock warrants. After diving deep into the regulatory framework, we're convinced this is one of the most underutilized opportunities in banking today.

The Regulatory Green Light Is Clearer Than You Think

The Federal Reserve and OCC have been consistently supportive of warrant banking for decades. Let's look at the explicit regulatory backing:

• Regulation W Section 223.42(c)(3) recognizes warrants as legitimate "consideration for a loan" alongside traditional interest
• 12 CFR § 7.1006 explicitly states that banks may "take as consideration for a loan a share in the profit, income, or earnings from a business enterprise of a borrower, or a stock warrant"
• OCC Interpretive Letter #992 provides clear guidance on how banks can even exercise warrants (with immediate sale) without violating restrictions

This isn't new or experimental - it's established regulatory practice that innovation-focused banks have been using for years to drive superior returns.

SVB's $560M Secret Weapon Wasn't Actually Secret

Silicon Valley Bank's success wasn't just about being in the right place at the right time. Their warrant program generated $560M in gains in 2022 alone. More importantly, as a risk management tool the warrant gains offset credit losses over 21 consecutive years. This was a deliberate strategy backed by solid regulatory understanding.

What's fascinating is that they simply maximized what Reg W already allowed. Any bank with the right infrastructure can do the same.

What Innovation Bankers Need to Know About Implementation

When implementing a warrant program under Reg W, there are many key compliance considerations:

1. Structuring Considerations: Warrants must be taken as "consideration for a loan" - meaning they should be documented alongside your credit facilities, not as separate transactions.
2. Market Terms Requirement: Section 23B requires that your overall deal terms (including warrant components) be "substantially the same" as would be offered to non-affiliates. This gives you flexibility in how you structure deals, provided you can demonstrate market reasonableness.
3. Valuation and Monitoring: Reg W doesn't dictate specific valuation methodologies, but your bank should have consistent policies for determining appropriate warrant coverage and tracking positions.
4. Exercise Limitations: Traditionally, regulatory guidance limited banks from exercising warrants. However, OCC Interpretive Letter #992 now provides a clear pathway to exercise warrants by immediately selling the resulting shares.

The Practical Reality: Implementation Is the Challenge, Not Regulation

In my conversations with dozens of regional and community banks, I've found that regulatory uncertainty isn't actually the primary barrier - it's implementation. Banks struggle with:

• Developing standardized warrant documentation
• Building valuation models that satisfy both business and compliance needs
• Creating effective processes for managing warrant positions over time
• Training lending teams to effectively communicate warrant structures to clients

This is exactly why we built our platform - to handle these practical implementation challenges while ensuring regulatory compliance at every step.

Next Steps for Forward-Looking Bankers

If you're serious about bringing warrant banking to your institution:

1. Review the specific Reg W provisions with your compliance team - they'll likely be surprised at how supportive the framework is
2. Identify the client segments would benefit most from this approach
3. Develop a starter warrant program with our proven documentation and processes
4. Consider how our purpose-built infrastructure makes sense to scale your program responsibly

The regulatory foundation is solid. The business case is proven. The only question is whether you'll be at the forefront of this opportunity or watching others capitalize on it.

We'd be happy to walk through the specific regulatory provisions in more detail anytime. We've helped others navigate this journey and seen firsthand how transformative it can be when done right.