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Difficulty: EasyFederal Reserve Board (FRB) and Margin Regulation

Under the regulatory framework established by the Federal Reserve Board, which regulation specifically governs credit extended by commercial banks to customers who pledge securities as collateral to purchase margin stock?

  1. Regulation UAnswer
  2. B
    Regulation T
  3. C
    Congressional Fiscal Policy
  4. D
    FINRA Maintenance Rules

Answer

Regulation U governs credit extended by commercial banks for purchasing margin stock.
Regulation U was created by the Federal Reserve Board under authority of the Securities Exchange Act of 1934. It explicitly dictates credit rules and margin requirements when commercial banks lend money to customers or broker-dealers using margin stock as collateral.

Step-by-Step Solution

1
Identify the regulator and lending institution
The scenario specifies Federal Reserve Board regulation over commercial bank credit.
Federal Reserve regulations are divided based on which type of entity extends credit for margin stock purchases.
2
Select the appropriate Federal Reserve regulation
Regulation U covers bank lending to customers and broker-dealers, while Regulation T covers credit extended by broker-dealers to customers.
Commercial bank lending using stock as collateral falls under Regulation U authority.

Key Concept

Federal Reserve Board Margin Regulations (Regulation U vs. Regulation T)
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Topics

Federal Reserve Board (FRB) and Margin Regulation

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