Recent sharp increases in levels of borrowing
by investors to buy stocks have worried the Federal Reserve enough
to make it study the trend, Fed Chairman Alan Greenspan told
But the central bank is reluctant to exercise its authority to
tighten limits on such borrowing, a practice known as buying on
margin, he told the Senate Banking Committee during his nomination
hearing Wednesday. Studies have suggested that a rising level of
stock prices is unrelated to liberal margin requirements, Greenspan
Investors buy securities on margin by borrowing part of the
purchase price from their brokerage firm and putting up the
securities as collateral for the loan.
"We have been reluctant to move margin requirements which
clearly would have no effect on large investors" who can get
credit to trade stocks in other ways, Greenspan said.
The Fed has not changed margin requirements, which generally
limit borrowing to 50 percent of a stock's purchase price, since
1974. Brokerage firms are allowed to set limits higher than 50
percent for their customers but they cannot make them lower.
Greenspan acknowledged, though, that upward spikes in margin
levels in November and December that were cited at the hearing by
Sen. Charles Schumer, D-N.Y., had caught the Fed's attention and
were under study.
"I can't say where this particular endeavor on our part is
going to come out," Greenspan said. When Schumer asked whether the
Fed was worried about the apparent trend, he answered, "Obviously,
we are. ... If we were not worried we would not be studying it."
Schumer said some people active on Wall Street had told him they
"are truly troubled by this."
Richard Bove, senior vice president for research at brokerage
firm Raymond James Financial, said that if the Fed were to increase
margin requirements, "it would have a devastating impact" on
Investors would be forced to scramble to come up with more cash
and the market would suffer as a result, Bove said in a telephone
interview from St. Petersburg, Fla.
Last April, the brokers' group that operates the Nasdaq Stock
Market warned investors about excessive use of margin borrowing as
swings in the market were becoming a regular occurrence.
The risks of buying on margin increase in tandem with the
volatility of the markets, said NASD Regulation, the self-policing
arm of the National Association of Securities Dealers.