We don’t know how much total leverage there is, but from the trends in margin debt, we know it’s huge and ballooning.
A big part of the leverage in the stock market is not tracked and no one knows what it is. Occasionally, a tidbit bubbles to the surface when something blows up, such as the Archegos fiasco.
Another part of stock-market leverage, “Securities-Based Lending” (SBL), can be found on bank balance sheets if banks choose to disclose it. But not many banks disclose it, and no one tracks this in a summary figure, and we don’t know what the totals are. But they’re big.
For example, Bank of America disclosed $45 billion in SBL in its 10-Q filing with the SEC for Q1. This was up 25% from a year earlier. The bank says that securities-based lending has “minimal credit risk” for the bank because the collateral – namely stocks and other liquid securities – has a market value that is “greater than or equal to the outstanding loan balance.”
On this basis, a customer with a portfolio of securities valued at $1 million could borrow up to $1 million against these securities and then take the money and buy something else with it, including real estate or cryptos or pay for a divorce settlement. When the market value drops enough, the customer has to either bring in new money or start selling securities in the portfolio – which is when forced selling sets in.
JPMorgan, in its 10-Q filing, does not separate out its SBL, but only says that it grew in Q1. Goldman Sachs, in its 10-Q filing, does not separate its SBL out either.
So no one knows how much leverage there is in the stock market in terms of these securities-based loans. There are many other forms of leverage, including those that took down Archegos Capital Management and caused banks over $10 billion in losses – $5.5 billion in losses at Credit Suisse alone.
But there is one form of stock-market leverage that is tracked: Regular margin loans at brokers that are reported by brokers to FINRA, which then reports them on a monthly basis, which it just did, and they’re a doozie.