A Glimpse at Hidden Stock Market Leverage of “Securities-Based Lending,” as Known Stock Market Leverage Spikes to WTF High
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.
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