What is a Lombard Loan and why can it be a strategic financing tool?
A Lombard loan allows investors to access liquidity without selling their financial assets. But how does it work, what are the risks and when does it make sense?
At any point in time, the need for liquidity may arise. Parents may wish to finance their child’s education abroad without taking out a traditional consumer loan or selling long-term investments. In another scenario, an investor holding a securities portfolio may want to seize a market opportunity, such as the sharp market correction observed at the start of the COVID period, followed by a strong rebound, but may not have sufficient cash available.
In such situations, selling assets is not always the preferred option. Doing so can disrupt long-term investment strategies, crystallise losses or trigger unwanted tax consequences.
An alternative exists: borrowing against existing assets. This solution is known as a Lombard loan.
Over recent years, the investor base has become increasingly diverse. While profiles differ, many investors share the same objective: optimising the management of their assets. As part of this optimisation process, some investors use their financial portfolio as collateral to obtain liquidity, which can then be deployed for financial, entrepreneurial or real-estate projects.
The term “Lombard loan” originates from Italian bankers who, as early as the Middle Ages, practised lending against collateral, accepting valuables such as gold and silver. This allowed merchants to finance their activities without selling their assets, a principle that remains relevant today.
What is a Lombard loan?
A Lombard loan is a credit facility granted by a bank or financial institution in exchange for pledged liquid financial assets. Instead of selling a portfolio, the borrower temporarily pledges it as collateral to obtain liquidity.
In practice, an investor interested in a Lombard loan approaches a bank, which then assesses the pledged portfolio based on several criteria, including:
- asset quality
- volatility
- liquidity
- currency exposure
- level of diversification
Based on this assessment, the bank determines a loan-to-value (LTV) ratio, also known as the collateralisation ratio. The LTV represents the percentage of the portfolio’s value that the bank is willing to lend.
Below are illustrative LTV ranges commonly observed in the market. These ranges are indicative only and may vary significantly depending on the institution, market conditions, asset composition and currency:
- Equities: 40%–50%
- Investment-grade bonds (AAA to BBB-): 60%–70%
- Unit-linked life insurance policies: 40%–60%
- Certain cryptocurrencies: up to 40%–60%, subject to strict conditions and higher volatility constraints
If a portfolio lacks diversification, for example, if it is composed exclusively of a single asset class such as cryptocurrencies, the bank may apply a reduction to the LTV, often around 10 percentage points.
Once the LTV is determined, the bank grants a maximum credit line that the borrower can generally use with a high degree of flexibility, subject to contractual conditions.
Practical examples
Example 1
An investor holds an equity portfolio valued at EUR 500’000.
With an LTV of 50%, the investor may obtain up to EUR 250’000 in liquidity without selling any shares.
Example 2
An investor holds a portfolio composed exclusively of cryptocurrencies valued at EUR 500’000.
With an initial LTV of 40% and a diversification penalty of 10 percentage points, the effective LTV becomes 30%. The investor may therefore obtain EUR 150’000 while retaining exposure to the crypto assets.
Key advantages of a Lombard loan
- Rapid implementation compared with traditional loans
- Access to liquidity without selling assets
- Continued exposure to markets and potential income such as dividends or coupons
- Use of leverage to seize investment opportunities
- Flexible use of funds, depending on the lender’s terms
- Possibility to borrow in multiple currencies, with rates linked to the relevant currency benchmarks
Key points of vigilance
Despite its flexibility, a Lombard loan involves risks that must be clearly understood.
Lombard loans are often based on floating rates linked to reference benchmarks. Fixed rates may be available in certain cases, but not systematically.
If the value of the pledged portfolio declines, the bank may require additional collateral, partial repayment or asset liquidation.
Assets used as collateral are pledged and may be subject to trading or rebalancing restrictions depending on the agreement.
“A Lombard loan therefore requires careful monitoring and prudent risk management.”
Is the Lombard loan a strategic tool?
A Lombard loan may be particularly relevant in environments where:
- interest rates fluctuate
- market volatility remains elevated
For active investors, entrepreneurs or family offices, it can become a strategic instrument. It allows for more efficient liquidity management, opportunistic positioning and international diversification, while maintaining long-term investment exposure.
Used prudently, it can also facilitate access to alternative investments, including private markets, while preserving portfolio continuity.
Lombard loans at Swissquote
At Swissquote, Lombard loans are accessible through a digital process. Accepted collateral may include:
- equities
- bonds
- investment funds
- certain cryptocurrencies, subject to eligibility criteria
The maximum credit amount is determined based on the value, liquidity and risk profile of the pledged assets. If the value of the collateral decreases, Swissquote may reduce the credit line, request additional guarantees or liquidate part of the assets in accordance with contractual terms.
Key characteristics include:
- a streamlined digital process for opening and managing the facility
- multi-currency accounts and flexibility in the type of eligible collateral
Rooted in centuries-old banking tradition, the Lombard loan has become a cornerstone of modern wealth management. It illustrates how established financial mechanisms can remain relevant in addressing contemporary challenges related to liquidity, flexibility and portfolio optimisation.
By allowing investors to access liquidity without selling their assets, a Lombard loan can support opportunistic investment strategies while preserving long-term exposure to financial markets. Once reserved for private-banking clients, it is now increasingly accessible and complements the toolbox of today’s sophisticated investors.
However, it is not without risk. Margin calls, market volatility and leverage effects require careful oversight, a solid understanding of the underlying portfolio and disciplined risk management.
In an economic environment characterised by uncertainty but also opportunity, the Lombard loan stands out as a strategic financing solution that combines responsiveness with portfolio continuity. More than a simple credit facility, it reflects an increasingly sophisticated approach to wealth management, where timing, liquidity and leverage play a central role.
The content in this article is provided for educational purposes only. It does not constitute investment advice, financial recommendations or promotional material.