The rich live by three words. Buy, borrow and die. You never sell the stock. You borrow against it to buy the house, the yacht or the movie studio. Now the banks want to sell that trick to you. A new Deloitte survey of 57 of the world’s biggest private banks and lenders puts securities-based lending at about $5.4 trillion. The Journal’s Margot Patrick reviewed the report. Banks rarely break these loans out on their balance sheets, so nobody has had numbers this good before.
Actual borrowing is closer to $1.6 trillion, because clients rarely draw the full line. The market has grown about 12% a year for ten years as asset prices rose. Around 30% of it sits in the U.S. Switzerland and Liechtenstein add about 12%. The clients are changing too. Deloitte’s Eric Gutzwiller says the product used to be for the ultra-rich. Now it’s reaching the affluent and even retail investors. A U.K. bank plans to lend against portfolios next year so people with a few hundred thousand dollars can, in its words, “adopt a billionaire mindset.”
The U.S. version is easy to find. Charles Schwab (SCHW) said in mid-October that its pledged asset line drove a 35% jump in bank-loan balances, to $72.3 billion in the third quarter. You need $100,000 in nonretirement assets. A fully digital process can approve the loan within minutes. Gutzwiller puts the typical loan at about 50% of what the collateral is worth, a figure lenders call loan to value. The rate runs roughly 1 percentage point above benchmarks. Some lenders go to 90% against crypto. Larry Ellison and Elon Musk borrow this way to avoid selling shares and the tax bill that comes with it, as we covered last week.
Why the lenders love it
Almost every dollar of fees drops straight to profit. The collateral rarely goes bad, and when it does, the lender can dump it in a hurry. There’s often no deep credit check, since the lender already holds the collateral. At traditional Swiss private banks the loans can make 25% or 30% of yearly profit. Gutzwiller says that speed doesn’t mean lenders take risks blindly. “They are then ruthless when it comes to liquidation. Immediately,” he said. Securities regulators have warned that borrowers must be told about forced sales in a downturn and the tax bill those sales can trigger.
Our read
This is investments and risk (IN04), with a tax angle. A pledged-asset line can be a fine tool. It funds a big purchase without a sale, so you keep the stock and skip a capital-gains bill for now. The risk is the mirror image. The loan is only safe while the collateral holds its value. A market drop shrinks the collateral and raises the loan-to-value at the same time. Then the lender can sell your shares without asking, right when prices are down. That sale can create the very tax bill you borrowed to avoid. Schwab isn’t a house holding.
The concrete thing in your plan is any credit line secured by your investments, margin included. This week, pull the agreement and find three things. The loan-to-value that triggers a call, how many days you get to add cash, and whether the lender can sell without notice. If you can’t answer those from memory, you don’t know your margin line yet. Read it on a sunny day. That’s what sunny days are for, and we’re glad to read it with you.