# Regulation U Explained: Bank Requirements & Securities Lending

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> **Definition**
>
> Regulation U is a Federal Reserve regulation that limits the amount of credit that lenders can extend for loans secured by securities, specifically for purchasing additional securities.

## What Is Regulation U?

Regulation U is a [Federal Reserve Board](https://www.investopedia.com/terms/f/frb.asp) regulation that governs loans involving securities as collateral for buying additional securities on margin. The primary purpose of Regulation U is to mitigate the risks associated with margin leverage. Commercial banks, savings and loan associations, and credit unions are typically affected, while the securities involved include [stocks](https://www.investopedia.com/terms/s/stock.asp), [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp), and other market-traded securities.

[Regulation U](https://www.federalreserve.gov/supervisionreg/regucg.htm) limits the loan amount, specifying the maximum of 50% of the collateral securities' market value. However, there are exemptions and instances where different oversight applies, like nonbank lenders and employee stock option plans.

### Key Takeaways

*   Regulation U limits loan amounts to 50% of the market value of securities used as collateral.
*   Bank [lenders](https://www.investopedia.com/terms/l/lender.asp) must use Form U-1 for loans over $100,000 secured by securities.
*   The regulation applies to entities like banks, credit unions, and insurance companies, but not broker-dealers.
*   Regulation U aims to limit risks associated with high leverage in securities trading.
*   Some exemptions exist, such as loans against employee stock option plans.

## How Regulation U Mitigates Leverage Risks

Regulation U aims to reduce risks from margin leverage in trading, especially when given excessively to individuals or businesses. By limiting margin, Regulation U seeks to reduce potential losses for borrowers and banks when leverage leads to big losses.

Regulation U specifically focuses on leverage extended with securities as collateral, for the purchase of additional securities. The rule applies to banks, loan associations, credit unions, insurance companies, and companies with stock plans.  
  
  
Regulation U sets a limit on the maximum loan amount an entity can issue to a borrower securing the loan against stock or other securities for the purpose of buying more securities. The maximum loan value that can be offered is 50% of the collateral securities’ market value.

> **Important**
>
> Regulation U is designed to put a floor on potential losses that borrowers and banks or lenders can suffer in instances where leverage can lead to big losses relative to the capital that was made available.

## Compliance Guidelines for Banks Under Regulation U

Regulation U has two important requirements that bank lenders must comply with. First, a bank lender must obtain a purpose statement (Form U-1) for loans secured by collateral that exceed $100,000. Second, a bank lender can only extend credit for 50% of the value of the securities used as collateral on the loan if the loan is to be used for securities purchases.

Regulation U specifically applies to secured loans extended for the purpose of buying securities. This is why purpose statements are important for complying with Regulation U. Purpose statements are more strictly enforced for loans exceeding $100,000. Banks face no Federal Reserve limits on loans using securities not meant for buying more securities.

### 1936

The year Regulation U first began covering securities credit extended specifically by commercial banks.

## Practical Examples of Regulation U Limits

For example, assume a borrower would like to borrow money from a bank for the purpose of buying [securities](https://www.investopedia.com/terms/s/security.asp) and the borrower plans to use $400,000 in securities as collateral. The loan would require a Form U-1 disclosing the purpose of the loan. Since the loan is for the purpose of buying more securities, the maximum amount of credit the bank can extend to the borrower is $200,000. If the borrower increased the amount of collateral he was willing to use to secure the loan to $500,000 then the bank could offer him a loan for $250,000.

## Exceptions and Exemptions in Regulation U

Some exceptions to Regulation U may apply. Nonbank lenders are subject to slightly different oversight when lending with securities as collateral. Additionally, loans offered against employee stock option plans may be exempt from Regulation U requirements.

> **Article Sources**
>
> 1.  Board of Governors of the Federal Reserve System. "[Regulation U: Credit by Banks or Persons other than Brokers or Dealers for the Purpose of Purchasing or Carrying Margin Stocks](https://www.federalreserve.gov/supervisionreg/regucg.htm)."