If you’re looking to access Lombard credit, congratulations… you’ve stumbled across one of the oldest secrets in the banking world. In fact, as you’ll see below, Lombard credit predates modern banking and has been used by some of the wealthiest families in Europe for over 500 years.
Lombard credit is asset-backed financing that is collateralized against liquid investments. Such collateral often includes stocks, bonds, exchange-traded funds, and life insurance that is already in the custody of the lending bank. This arrangement, known as Lombard lending, can result in favorable credit terms (e.g. interest rates) for clients.
In this article, we’re going to explain how to access Lombard credit. We’ll also discuss who should be using Lombard loans and share some examples of when Lombard credit actually makes sense.
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Lombard credit predates modern banking. In the west, it traces its roots back to Northern Italy in the 12th century, a region known as Lombardy. Here, the Franciscan Order of monks was permitted to engage in Lombard lending, allowing them to circumvent the restrictions imposed by the Vatican on charging interest.
Over the following centuries, goldsmiths, bankers, money-lenders, and pawnbrokers originating from Lombardy arrived in all major European cities. And, they set up their pawn shop style institutions, expanding Lombard credit and laying the groundwork for modern banking.
In many major European cities, such as London, Paris, Dublin, and Hamburg, important streets still carry the name Lombard, marking the place where these early financing outfits first set up shop.
So, it’s no surprise that this 500-year-old practice still continues today. And, it’s still practiced by some of the oldest and most well-established banks across the world. Likewise, it’s not surprising that wealthy families continue to use Lombard credit as a tool in their banking arsenal to make the most out of their financial relationships and increase their personal wealth.
Now, let’s take a look at when you should consider using Lombard credit and who should use Lombard credit. Interestingly, it’s not just for the super-rich.
Before diving in, it’s important to have a solid understanding of how Lombard credit (or Lombard loans) actually work.
As shared above, Lombard credit refers to borrowing from a bank against other investments, or collateral. While this may sound a lot like a standard mortgage, it’s not. To this end, we’ll discuss the specific differences between Lombard loans and mortgages below.
With a Lombard loan, banks typically have (or take) custody of other liquid assets, such collateral often includes stocks, bonds, exchange-traded funds, and life insurance. In some instances, this can also include less liquid investments but that usually requires a strong pre-existing relationship with the bank.
In most instances, because the bank has custody of the collateral, which in most cases can be converted quickly to the case in the event of a default, the borrower can usually obtain favorable interest rates.
Additionally, as we’ll discuss in the following section, most Lombard loans are provided on a fixed basis. This means that at the end of the Lombard credit term, both the bank and the borrower expect the loan to renew.
In this article, we’ll discuss Lombard credit as it relates to the needs of private banking clients. We’ll save any discussion about interbank Lombard facilities for another day.
Generally speaking, Lombard credit refers to borrowing against your assets. But unlike taking out a mortgage on a house or financing for a vehicle, Lombard credit is typically tied to liquid, “cash-like” investments and is available on a revolving basis.
This can include investments such as stocks, bonds, exchange-traded funds, other portfolios, and even life insurance. Of course, each bank has its own policies for what they will and will not accept.
Now, you might be wondering why someone with liquid wealth would ever want to use Lombard credit? Well, there are countless situations where a private banking client may find themselves wanting to access Lombard credit.
For instance, if you’re interested in making a new investment (or large purchase), you might need to liquidate a portion of your existing investments to afford the purchase in cash. Instead of cashing out, you could consider Lombard credit as an alternative option.
This is especially attractive since selling existing investments could result in losses or capital gains tax, additional transaction fees, and the opportunity cost of not holding your existing investment long term.
Instead, you can use Lombard credit to leverage your existing portfolio to unlock additional financing at favorable rates. At the same time, you eliminate the negative consequences of selling any existing investments.
Since Lombard credit is collateralized against existing liquid assets, the rates that banks charge are often very attractive. This makes sense for a number of reasons, especially since the assets held as collateral are already in the lending bank’s custody, whether directly via bank products or indirectly through the bank’s investment arm.
With this in mind, let’s consider a few factors impacting Lombard loan interest rates that prospective borrowers should know:
Additionally, by extending Lombard credit to clients, banks are able to simultaneously encourage clients to purchase additional securities, invest in other bank products, or use other forms of bank financing–resulting in higher commissions and transaction fees for the bank.
So, it’s also in the bank’s own interest to ensure that Lombard loan interest rates are attractive to clients. Lombard loans help both the bank and the client make more money.
Like all financial products, the benefits of Lombard credit ultimately depend on the individual accessing the service. Likewise, one of the main catalysts which will determine how beneficial Lombard credit can be is the reason why someone is accessing a Lombard facility.
That said, there are some general benefits that most borrowers are looking to access when obtaining Lombard credit from their bank, including:
Of course, just because these benefits are of interest to you doesn’t mean you should use Lombard credit. With this in mind, let’s take a look at who should actually consider Lombard credit.
Now that you know what to expect when it comes to Lombard credit, let’s discuss who should consider Lombard facilities and whether it’s a good option for you.
First, as mentioned above, you don’t need to be “super-rich” to access the benefits of Lombard credit. But, you will need to have some money. After all, this is predominantly a service offered to private banking clients who already have existing portfolios.
For this reason, Lombard credit is best suited to those clients who have an established relationship with a private bank and have a liquid investment portfolio. Or, those who are able to establish a relationship with a private bank by making a sizable deposit. This typically requires at least US $1mm starting out. But in most instances, private banks want to see between US $3mm and $5mm to get started.
In all cases, if you want Lombard credit, make sure the bank that you’re considering is able to offer this to you. This means confirming the bank’s specific requirements and also ensuring that the bank is able to use the type of collateral you have to facilitate Lombard credit for your intended purposes.
A common misunderstanding among prospective borrowers involves the pros and cons of a Lombard loan vs a mortgage loan. In fact, in some instances, many people approach Lombard loans as a form of a reverse mortgage. But, this isn’t accurate.
Unlike a mortgage, Lombard loans require the borrower to hold liquid (or cash-like) assets. This is in contrast to mortgage loans which are often determined through a combination of the underlying value of a fixed asset (e.g., property) and the borrower’s ability to service the loan.
In reality, Lombard loans are tools that enable clients of private banks to make more money, enabling them to leverage existing investments without the need to liquidate their existing holdings. Likewise, they enable the bank to do the same through interest payments on investments that they are already holding custody of.
Not only does this help both parties increase their economic prospects, but it also builds a stronger and longer-term relationship between the bank and the borrower. Something that many banks and clients ignore in private banking today.
Like any financial transaction, there are risks. And before deciding to access Lombard credit facilities you need to understand how these risks could impact you, your current investments, and future acquisitions.
Naturally, as with any asset-backed credit facility, you could lose the assets that you put up as collateral if for any reason you are unable to meet your payments.
Additionally, since Lombard credit is loaned against the value of the collateral, you can expect the bank to demand additional collateral if the value drops (for instance a loss in value of your securities) below the agreed-upon loan to value (LTV) of the credit facility. This is known as a margin call, and it’s especially important to understand during times of market volatility.
With this in mind, before using Lombard credit, you need to make sure you understand all of the associated risks and what you stand to lose. So, make sure to speak with a qualified advisor before making any decisions.
If you want to know which banks offer Lombard credit, what their minimums and rates are, what types of financing strategies are available to you, and how to get started, we can help.
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