Regulation U

Regulation U governs the extent to which a bank can issue loans to its customers that are then used to acquire securities on margin. By limiting the amount of leverage that investors are allowed to take on, their potential losses from a subsequent decline in the value of securities held is reduced. The regulation states that the maximum loan that can be extended is a set percentage of the current value of the margin stock being held by the borrower. The Regulation is promulgated by the Federal Reserve Board.