In reading Reg. U it states that a bank can loan 50% of the current market value of the stock. Current market value is defined in 221.2 as either the closing sale price of the security on the preceding business day or if the credit is used to finance the purchase of the security, the total cost of purchase. Does this mean that if a loan is secured by stock and the purpose is something other than to purchase the stock that the max. loan value is 50% of the value but if the purpose is to purchase the stock, the max. loan value is 50% of the purchase price? Also if the loan is to exercise an option is the max. loan value 50% of the current market value? In other words, does the fact that the loan is for the purpose of exercising an option change the 50% loan value? Thanks.

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Does this mean that if a loan is secured by stock and the purpose is something other than to purchase the stock that the max. loan value is 50% of the value but if the purpose is to purchase the stock, the max. loan value is 50% of the purchase price?

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If it is the purchase of stock - 50% is your number. If it is for other purposes - that number is up to the bank.

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In other words, does the fact that the loan is for the purpose of exercising an option change the 50% loan value?

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"Exercising an option"? - if you are talking about exercising an option to take control of a stock - that is the same as a purchase and your loan could be no greater than 50% of the value of the underlying stock at the time the person exercised the option.

Ricarey: This was the answer I gave to senior management but they want to refer to section 221.4 (b) (Employee stock option, purchase, and ownership plans)as giving them the right to exceed the 50%. Any thoughts about this section?

Are they exercising stock options in the bank or bank holding company? If not - the bank is not a "plan lender". A "plan lender" is a lender who is also the issuer of the collateral. If you are, there are other restrictions on lending on your own stock that needs to be reviewed.

I have a similar question. Lender is working on loan where customer is exercising some stock options and the cost is $6 million. He is planning to increase a line of credit to cover the $6 million cost but there is $8 million in taxes that he wants to finance in another loan. The current market value is $25 million and he wants to know if he can use that as the current market value of the collateral for the $8 MM tax loan? Section 221.2 (1) (iii) states that "If the credit is used to finance the purchase of the security, the total cost of purchase, which may include any commissions charged" is the "current market value." If capital gains taxes are considered as credit "used to finance the purchase" then it appears he would have to use the cost or market standard which would be of $6 million. Is this also stating that the loan could not be more than $3 million (50% of the cost)? Thank you.

The definition under current market value 221.2 has three options, which are separated by an "or". If this stock is publicly traded, I would use (i) and if not, I would use (ii) rather than (iii).

If you refer to 221.123, it indicates that the contemporaneous payment of capital gains tax would be purpose credit when extended by a plan lender. Without other guidance, I would have to opine that the same would be applicable to a non-plan lender.

The stock is not our bank holding company stock so we would not be a plan lender, but I also thought that the tax loan would still be considered purpose credit.