Understanding Lombard loans

What is a Lombard loan?

Aimed exclusively at wealthy or even very wealthy and informed clients, Lombard loans provide a credit line to help you meet short-term liquidity needs without being forced to touch your assets. A key feature of a Lombard loan is that it is granted in return for pledging assets held in a securities portfolio at the lending bank. But don’t worry – as intimidating as this might sound, all it means is that in exchange for the loan from your bank, you pledge some of your movable assets (cash deposits, stocks, bonds, etc.) as collateral. The real loan amount granted equates to a fraction of the value of these pledged assets.

Why take out a Lombard loan?

Lombard loans can give you extra liquidity in several different situations without requiring you to adapt your wealth strategy. They allow you to:

• gain leverage on your investments without needing to sell other assets such as stocks or bonds, in order to get the liquidity you need;
• infuse your securities portfolio with the extra cash needed to diversify;
• gain access to substantial liquidity in different currencies if you see an attractive investment coming up;
• etc.

As well as being flexible in terms of duration, amount or currency, one of the other major advantages of a Lombard loan is the option to change the loan limit at any time by modifying the assets you pledge.

What are the risks?

Lombard loans are closely tied to the financial markets and their inherent risks. This means that the main risk is the risk of capital loss if markets fall. Depending on the currency, Lombard loans are also subject to exchange risk. Furthermore, as the loan rate changes over time and depending on fluctuations in the value of the securities in your portfolio, you may need to increase the value of the assets pledged as collateral or accept a loan reduction. And of course, if you are not in a position to meet these requirements, your bank may liquidate, i.e. sell, the pledged assets to recuperate the capital lent.

Is a Lombard loan right for you?

That depends on your specific situation, so there is only one real answer we can give you: talk to one of BIL’s Private Banking experts!