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Information > Financial Terms > This page Security Loans Loans
secured by the pledge of securities collateral.
Loans by banks on securities for the purpose of purchasing or carrying
listed stocks on margin are subject to Regulation U of the Board of Governors
of the Federal Reserve System, requiring the same initial margin requirements
as for loans to brokers to finance such customers under Regulation T of
the board and dealers under Regulation G of the board.
The margin requirement has fluctuated over the years from a low
of 25% in 1934 to 100% (no margin), in accordance with the board's view
as to proper margin in the light of the overall credit position.
By curbing the leverage provided by margin buying, margin regulation
tends to be a stabilizing influence on the market; conversely, a reduction
in margin requirements adds to such leveraged buying power.
Because of relatively high margin requirements in recent years,
security loans have not been the problem they were in the late 1920s,
when brokers' loans by banks reached record totals, with banks attracted
by high rates and allowed to act for "others" in placing such loans. An
additional direct power to curb the volume of security loans is vested
in the Board of Governors of the Federal Reserve System by Section 11(m)
of the Federal Reserve Act, which provides that upon the affirmative vote
of not less than six of its members, the board of governors shall have
power to fix from time to time the percentage of individual bank capital
and surplus that may be represented by loans secured by stock or bond
collateral made by a member bank within each Federal Reserve district.
No such loan shall be made by any such bank to any person in an
amount in excess of 10% of the unimpaired capital and surplus of the bank. |