But the central bank is reluctant to exercise its authority to tighten limits on such borrowing, a practice known as buying on margin, he told the Senate Banking Committee during his nomination hearing Wednesday. Studies have suggested that a rising level of stock prices is unrelated to liberal margin requirements, Greenspan said.

Investors buy securities on margin by borrowing part of the purchase price from their brokerage firm and putting up the securities as collateral for the loan.

"We have been reluctant to move margin requirements which clearly would have no effect on large investors" who can get credit to trade stocks in other ways, Greenspan said.

The Fed has not changed margin requirements, which generally limit borrowing to 50 percent of a stock's purchase price, since 1974. Brokerage firms are allowed to set limits higher than 50 percent for their customers but they cannot make them lower.

Greenspan acknowledged, though, that upward spikes in margin levels in November and December that were cited at the hearing by Sen. Charles Schumer, D-N.Y., had caught the Fed's attention and were under study.

"I can't say where this particular endeavor on our part is going to come out," Greenspan said. When Schumer asked whether the Fed was worried about the apparent trend, he answered, "Obviously, we are. ... If we were not worried we would not be studying it."

Schumer said some people active on Wall Street had told him they "are truly troubled by this."

Richard Bove, senior vice president for research at brokerage firm Raymond James Financial, said that if the Fed were to increase margin requirements, "it would have a devastating impact" on stock prices.

Investors would be forced to scramble to come up with more cash and the market would suffer as a result, Bove said in a telephone interview from St. Petersburg, Fla.

Last April, the brokers' group that operates the Nasdaq Stock Market warned investors about excessive use of margin borrowing as swings in the market were becoming a regular occurrence.

The risks of buying on margin increase in tandem with the volatility of the markets, said NASD Regulation, the self-policing arm of the National Association of Securities Dealers.