Scott Rothbort
5. The Fed Influences the Extension of Credit
The Fed also controls the rules regarding the extension of credit by financial institutions to the public. A few of the more important credit-related Fed regulations that affect the individual (as a borrower or investor) are:- Regulation T
- Regulation U
- Regulation X
- Regulation Z
and dealers . In a more general sense, this Fed regulation covers the rules for margin lending (see margin account ). I cover borrowing on margin in more depth in "Understanding Leverage."
Regulation U. This controls the extension of credit on margin-lending by banks and other financial institutions that are not registered broker-dealers . For example, Morgan Stanley (MS Quote - Cramer on MS - Stock Picks) is a broker dealer so it is subject to Regulation T, but when a commercial bank like SunTrust(STI Quote - Cramer on STI - Stock Picks) lends on margin outside of its broker-dealer division, then it is subject to Regulation U.
Regulation X. This applies provisions of Regulations T and U to the extension of credit outside the U.S. for borrowers that are subject to regulation within the U.S. It is because of Regulation X that many hedge funds establish offshore funds for non-U.S. investors.
Regulation Z. Commonly referred to as the "Truth in Lending Act," this regulation ensures uniformity for computing the cost of credit, disclosure of credit terms and for resolving errors on certain types of credit accounts.
Fed Homework
To strengthen your understanding of what the Fed does, how it works and its overall impact on the markets and you, I suggest the following homework:
- Read several FOMC minutes at www.federalreserve.gov/FOMC/#calendars and start to form your take on what the FOMC said and how the markets interpreted its decisions.
- Read related articles by the financial and business press. Then incorporate what you read into your new understanding of how the Fed works.
- See if you can forecast the FOMC's next move. Why? This might help you determine your investing and borrowing strategies. How? To be a savvy investor you need to be able to somewhat anticipate earnings, the economy and interest rates. If you want to be ahead of the curve, then solely reacting to news is not sufficient.
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