Security Loans

Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority and you can order it here)

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.  

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