Margin For Error

The slow train wreck that is margin lending continues its downward spiral, with the Reserve Bank of Australia revealing on Friday that margin calls in the final quarter of 2008 hit an all time high.

In its February Statement on Monetary Policy the RBA revealed there were 10 margin calls per 1,000 clients per day during the December quarter, more than double the 4.9 average for the highly volatile equity markets in 2008, and over five times the 1.8 average for the period from 2000 to 2007.

It will be interesting to see the figures for the first quarter of 2009 considering the disastrous start to the year markets had, when the central bank releases those figures in a few months.

The big jump in margin calls could be a strong signal margin lenders are running out of collateral to support their loans, as the decline in the benchmark All Ordinaries for the quarter was around 1,000 points, much less than the 1,800 point decline in the first nine months of 2008.

The share market volatility over the last 18 months has changed the face of geared equity investing, with many margin lenders cutting the loan-to-value ratio for stocks, and completely removing others.

The RBA statement commented that, the increased frequency of margin calls in 2008 reflects both the extreme volatility in equity markets throughout the year, and the sustained declines in share prices, which have pushed up investor gearing levels.

The bank added that margin lending has now fallen by around 50 per cent from its peak.