From an old Kirchman manual
Regulation U is one of the few regulations whose purpose is neither the protection of the safety and soundness of banks nor the protection of a bankâ€˜s customers. Its purpose is to limit the amount of credit available to the securities market and thereby reduce the increased market volatility which it causes. Regulation U was promulgated pursuant to the Securities Exchange Act of 1934; it limits the amount a bank may lend upon the collateral of equity securities where the purpose of the loan is to acquire or carry the securities.
No bank or any affiliate of a bank (including a bank holding company or a bank subsidiary) may extend any purpose credit, secured directly or indirectly by margin stock, in an amount that exceeds the maximum loan value of the collateral securing the credit. If a bank is extending a new credit, the credit will be secured by margin stock and the purpose of the credit is either to purchase the margin stock or to refinance a loan that was originally made to purchase the margin stock, the loan may not exceed 50% of the stockâ€˜s current value.
Â§221.7(a) To fall under the restrictions of Regulation U a loan must pass the following tests:
-o-The stock involved must be margin stock. Lending on the collateral of nonmargin stock, such as the stock of a closely held corporation is not restricted.
-o-The loan must be secured directly or indirectly by the margin stock. A loan is indirectly secured by stock if the borrowerâ€˜s right to sell, pledge, or dispose of the stock is restricted; or if the exercise of such a right gives the bank the right to accelerate the maturity of the credit.
-o-The purpose of the loan must be to purchase or carry margin stock.
Integrity. With it, nothing else matters. Without it, nothing else matters.