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Margin lending caution prevails

MARGIN lending is not the high-risk activity of popular mythology, judging by the latest Reserve Bank analysis of the market.

Total margin lending grew by 32 per cent over the 12 months to March 2002, to reach $9.7 billion.

Over the same period, the value of underlying security (shares or managed funds) increased by 37 per cent, to $21.6 billion.

Consequently, average leverage dipped slightly to 45 per cent – the lowest level since the Reserve Bank began surveying margin lenders in 2000.

This means that borrowers hold an average of $100 in security for every $45 of margin debt.

This ratio is well below the 80 per cent lending limit applied by most margin lenders.

The Reserve Bank also found that borrowers increasingly are investing in managed funds rather than direct shares.

In March 2002, 40 per cent of margin loans were invested in managed funds, up from 25 per cent one year earlier.

The number of margin calls – ie a requirement for borrowers to provide extra security, usually because their shares have fallen in value – was 177 per day during March.

To put this in context, the number of borrowers with margin loans was 109,000 and the average loan size was $88,916.

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