The Federal Reserve Board is studying whether it should continue to regulate the buying of stock on the margin or turn that function over to another government agency, such as the Securities and Exchange Commission, or to the securities industry.
A Federal Reserve Board official cautioned that the fact his agency is studying its stock market credit regulation does not mean the agency is ready to propose that it abandon the function. He said that some Wall Street groups, such as the Securities Industry Association, have proposed that the industry, rather than the federal government, set requirements for buying stock on the margin; that is, with borrowed money.
The proposal came in response to a Federal Reserve request last December for public comments on its margin regulations. However, an official said he thinks some securities industry groups have misinterpreted that Fed request as an indication that the central bank is ready to propose that it stop setting the stock credit rules.
That is not the case, he said. "Those stories are being generated out of the market. There is no hot proposal here."
For 50 years, as result of the speculative excesses that led to collapse of the stock market in 1929, the Federal Reserve Board has regulated the amount of credit a bank or a broker can extend to a customer who wants to buy stock.
Today a stock purchaser can borrow no more than 50 percent of the purchase price of a stock. He must come up with cash for the rest. At periods in the last half century, the margin, or down payment, requirement has been much higher than 50 percent; sometimes it has been lower.
Congress enacted margin requirements because it felt that the ease with which individuals were able to borrow to buy stock led to the excessive risk taking, excessive credit creation and heavy stock buying that pushed prices so high in 1929 that a crash was inevitable.
Securities industry groups that would be in favor of taking over regulation of margin credit say they are not willing to make it a hot political issue.
A Federal Reserve Bank of New York study last year concluded that the central bank's regulation of stock market credit was complex and probably imposed some unfair burdens on brokerage firms and their customers. Some officials of the New York Fed believe that the government could abandon margin credit regulation with little, if any, adverse impact on the economy or the stock market.
One top New York Fed official said the study showed that the evidence on which Congress decided to impose stock market credit regulations was not as solid as it appeared to be in 1933. Nevertheless, he said, even at the New York Fed, which is closer to Wall Street regulation that the staff at the board headquarters in Washington, there is little sentiment to move the central bank out of controlling the amount of credit that can be extended for stock purchases.
William Fitzpatrick, general counsel of the Securities Industry Association, said his group proposed that the industry rather than the government oversee margin credit because industry officials are "closer to the scene" and could be more flexible in applying margin requirements.
The SIA proposal would give the function to the so-called self-regulatory organizations--the stock markets and the National Association of Securities Dealers. The proposal also would create an oversight board composed of representatives of all the self-regulatory bodies and individual firms. The oversight board could veto a change in margin requirements by any stock exchange.
The SIA proposal would give emergency powers to a federal agency--the Federal Reserve is the logical one, Fitzpatrick said--so that the government could reverse industry decisions if it felt it had to.
Fitzpatrick said that whatever the merits of margin regulation in 1933, stock market credit is now an infinitesimal part of the total credit in the United States. Furthermore, he said, rules that require stock brokers to have a minimum level of capital (reserves) and rules regarding the treatment of customers are much better safeguards than margin rules against the kind of speculative frenzy that gripped the industry in 1929.
He noted that in futures trading, the commodity exchanges already set the amount of margin required to purchase a futures contract and that the Commodities Futures Trading Commission has the authority to intervene in an emergency. He said the trade association's proposal for stock credit would parallel the margin regulations in the futures business.
Even if the trade association position is solid, said a top executive at a Wall Street firm, he sees no groundswell of support among the individual securities firms that make up the association. "Self-regulators are like regulators everywhere. They want more to regulate," he said.
Another executive of a Wall Street firm said he thinks margin regulations are good, that they prevent stock purchasers from getting in over their heads.
Presumably Congress would have to change the laws if margin credit regulation were to be transferred to the industry--or even to the Securities and Exchange Commission, which some observers think is a more logical agency to control margin stock purchases.
"It's hardly a hot topic in Congress," one federal official said. "And if congressmen sit around and think about it, they'd probably feel more comfortable with the government setting the limits. They'd worry that in bad times, industry officials might be tempted to reduce credit restrictions to stimulate buying."