DEFINITION of 'Regulation U'

The Federal Reserve Board regulation that governs loans by banks for the purchase of securities on margin. Regulation U limits the amount of leverage a bank or brokerage can extend to a borrower for the purposes of puchasing stocks, mutual funds and other market-traded securities.

BREAKING DOWN 'Regulation U'

Regulation U is designed to mitigate the adherent risk that exists when using leverage, especially when too much leverage is granted to an individual or business. By limiting the margin amount, Regulation U aims to limit the potential losses that both borrowers and banks or lenders can sustain in instances where leverage can lead to very large losses relative to the physical capital extended.

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