Regulation U Explained: Bank Requirements & Securities Lending

What is Regulation U?

Regulation U is a Federal Reserve rule that restricts how much credit banks and similar lenders can extend when securities are used as collateral to purchase additional securities (margin lending). Its primary aim is to limit leverage that could amplify losses for borrowers and lenders.

Key points
* Maximum loan-to-value (LTV) for loans used to buy securities: 50% of the market value of the pledged securities.
* Banks must obtain a written “purpose statement” (Form U‑1) for loans over $100,000 that are secured by securities.
* Applies mainly to commercial banks, savings and loan associations, credit unions and similar institutions; broker‑dealers are not covered in the same way.
* Some exemptions and different oversight regimes apply to nonbank lenders and certain employee stock plan loans.

How Regulation U limits leverage risk

By capping the percentage of a security’s market value that can be lent for the purpose of buying more securities, Regulation U reduces the amount of borrowed capital used in margin purchasing. That decreases the potential for large, leveraged losses that could threaten borrowers’ solvency and lenders’ safety and soundness.

Who and what is covered

• Covered lenders: commercial banks, savings and loan associations, credit unions and insurance companies when extending credit secured by marketable securities for the purchase of additional securities.
• Covered collateral: stocks, mutual funds and other market-traded securities.
• Exclusions/limitations: broker‑dealers operate under different margin rules; nonbank lenders face different oversight; certain loans (for example, some loans related to employee stock option plans) may be exempt.

Compliance requirements for banks

• Purpose statement (Form U‑1): Required when a loan is secured by securities and exceeds $100,000. The lender must document that the credit will not be used to purchase or carry margin stock (or must disclose if it will).
• 50% limit: If the loan’s purpose is to buy securities, the bank may not advance more than 50% of the market value of the collateral securities.
• Loans secured by securities for other purposes are not subject to the 50% federal limit under Regulation U, though other internal or regulatory limits may apply.

Practical example

If a borrower pledges $400,000 in securities as collateral to buy more securities, the maximum loan the bank may extend for that purpose is 50% × $400,000 = $200,000. If collateral increases to $500,000, the allowable loan rises to $250,000.

Exceptions and special cases

• Nonbank lenders: Not all provisions apply the same way; different statutes or supervisory frameworks may govern them.
• Employee stock plans: Loans secured by or made under certain employee stock option plans can be exempt from Regulation U.
• Other regulatory limits: Regulators or banks may impose stricter limits than Regulation U requires.

Brief history

Regulation U’s coverage of securities credit extended by commercial banks began in 1936 as part of broader efforts to curb speculative credit and protect financial stability.

Conclusion

Regulation U is a risk‑control tool that limits how much credit lenders can provide when securities are pledged to buy more securities. Its core effects are the 50% LTV cap for margin purchases and the Form U‑1 disclosure requirement for larger secured loans, both intended to reduce excessive leverage in securities markets.