Concept
Lombard lending is a loan secured by a liquid portfolio of securities. The client pledges stocks, bonds, or funds and receives a credit line without selling assets: the portfolio remains in ownership, dividends and coupons continue to accrue, and cash is deposited into the account. The name comes from Lombard merchants who lent against movable collateral.
Origins
Modern lombard lending grew out of private banking practice: for a wealthy client with a large portfolio, it is more convenient to borrow against it than to sell assets and trigger capital gains tax. Today, not only securities are accepted as collateral, but also cash balances and even life insurance policies.
How the Limit Is Calculated
The bank assigns each asset class an advance rate (LTV). High-quality government bonds yield the highest percentage, diversified funds—medium, individual volatile stocks—low; concentrated or illiquid positions may not be accepted at all. On average across a portfolio, the limit is often around 60%; for reliable bonds—higher. The credit is structured as a flexible credit line or as a term tranche.
Rate
The interest rate on lombard lending is floating: a benchmark (SOFR, EURIBOR, SARON) plus the bank's margin. Since the loan is secured by collateral, the rate is usually lower than for an unsecured loan. The flip side is that when base rates rise, the cost of servicing increases.
Use Cases and Premium Financing
Lombard lending is used to obtain liquidity without selling assets: to finance the purchase of real estate or a business stake, to cover a cash flow gap, less often—to add leverage and buy more assets. A special case is premium financing: the bank finances the payment of large insurance premiums, including for PPLI, with the policy and other assets serving as collateral. This way, capital is not withdrawn from investments for insurance purposes.
⚙️ The main risk of lombard lending is a margin call. If the value of the collateral falls below the threshold, the bank demands additional collateral or sells part of the portfolio, often at the worst moment in the market. Therefore, a conservative LTV and safety margin are more important than the maximum limit.
Leverage Works Both Ways
🔗 Related
Private banking · BNY Mellon — custody · Discretionary portfolio management · Bank ratings · PPLI
Lombard lending is a standard banking product, but leverage amplifies both profit and loss. With a floating rate and volatile collateral, the borrower bears a double risk: rising interest rates and falling collateral simultaneously. For living off lombard proceeds, practitioners cite a portfolio of €8–10 million to have enough buffer against margin calls.
🍓 Lombard lending is good as a liquidity tool against a high-quality diversified portfolio and with moderate LTV. As a method of permanent leverage, it is dangerous: floating rates and margin calls turn a temporary drawdown into a forced sale.
This material is for informational purposes only and does not constitute individual advice.