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Security loans at banks and nonbanks: Regulation U

Listed author(s):
  • Peter Fortune
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    Over the years, the Board of Governors of the Federal Reserve System has established margin regulations to limit purpose loans by banks and nonbanks to broker-dealers or other borrowers. In this study, the author reviews those regulations affecting security lending by banks and nonbanks. He examines data on security loans during the 1920s and 1930s, as well as in recent years, noting that security lending by banks and borrowing by broker-dealers often diverge-the popular notion that the two are tightly linked is not correct-and that during the 1920s the volume of loans by banks to brokers may have been driven less by margin loans than by new issues of stocks and bonds by corporations. Also, during the 1928-29 episode, security loans by nonbank lenders, domestic and foreign, became increasingly important. The author points out that these observations have recent parallels. ; The author also looks at the credit absorption hypothesis popular in the 1930s, which argues that margin loans diverted credit from legitimate business uses to speculation, thereby weakening the financial positions of businesses. While the credit absorption view suggests that an increase in bank security loans should result in higher business loan rates relative to other short-term interest rates, the author finds no such effect. He concludes that the recent evidence suggests no credit absorption from bank security loans.

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    Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

    Volume (Year): (2002)
    Issue (Month): Q 4 ()
    Pages: 19-40

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    Handle: RePEc:fip:fedbne:y:2002:i:q4:p:19-40
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