Does anybody regard themselves as an expert on them? They sound a bit too good to be true and I want to ask some questions from somebody who isn't trying to sell me one
I came across the concept of a Lombard loan today which I had not previously heard of.
Never used one but did explore it once with my bank, andas I understand its a way of getting liquidity.
A loan secured by stocks and bonds to a proportion of their value... say around 70pct for a classically constituted managed portfolio deposited at the same bank. And quite cheap as it is highly secured.
Of course you increase the risk to yourself as you are leveraging a fixed liability and have variable assets.
Thanks....
What is "cheap" ie would the dividends more than pay for the charges on blue chip stocks?
And how is the risk managed by the bank ie if the value of the portfolio falls below the threshold, do they settle then, or wait until you end the loan and reconcile then?
As always with a Swiss bank depends somewhat on the overall relationship, and the amount, but 1% over LIBOR rings a bell.
Wow, I didn't realize that a product like this existed. It seems like a very cheap way to raise finance for eg, a car -- as long as your money is earning more than LIBOR + 1%, you're better off leaving it where it is (particularly taking into account the tax penalties associated with selling stocks) and borrowing against it instead.
Are there normal minimum / maximum amounts for this sort of loan? Or are the banks somewhat flexible as long as the security is large enough to cover the loan?
Given the low interest rates being paid on cash right now, I am minimizing the amount of cash I hold. Being able to borrow against securities would give a lot of flexibility.
Is this a deal-breaker? Most Swiss banks won't touch my portfolio as I'm a 'US person' -- and I also manage my own investments (mostly low-risk blue chips).
Caviarchips has a link to the CS offering. Min 30kchf on the overdraft, 100kchf for fixed term upto 12months. The security has to be in readily tradeable quoted securities deposited or pledged to the bank I think.
Im not really sure its designed or would be granted for cheap finance, rather temporary leverage/liquidity within an investment portfolio (eg to pay a tax bill without having to sell shares in what you perceive to be a marked dip).
isn't that one of the oldest, bog-standard, secured-by-liquid-collateral kinds of loans??? I'm pretty sure almost any bank offers such a thing...
No idea - but its a great thing, delaying a bad FX position to a later date, dividends more than pay the interest...money today......its perfect
Hopefully you don't work for UBS and have an fx position 4bn out of the money!... It'll all end in tears.
Seriously, you're a big boy but that's called doubling up. Good luck though.
What's doubling up?
You double your original bet when the market falls, people often do it in casinos betting Red / Black as well.
Riiiiiiiiight.....but why is what I wrote doubling up?
Well you are sitting on an FX loss and continued exposure.
So your proposed answer rather than accepting the loss and move to a better trade is to further increase you risk by leveraging more in a different currency.
Further adverse movements will eat up your foreign currency capital even quicker.
You have effectively put more CHF capital at risk. Ergo you are "doubling up"
Ah...I see, no......that isn't it
Thanks though
A Lombard loan is similar to a deal with a pawn broker. You give some security and the bank makes no pretense at considering your ability to repay. You simply get a loan based on the security you can provide.
Here is how it could work happily in a rising market assuming you can borrow 70% of the value of the security . . .
Starting Capital in shares of value 100'000 Fr.
Use the original 100'000 Fr. shares packet as security and obtain a Lombard Loan for 70'000 Fr. which you use to purchase shares.
Use the 70'000 Fr. shares packet as security and obtain another Lombard Loan for 49'000 Fr. which you use to purchase shares.
Use the 49'000 Fr. shares packet as security and obtain another Lombard Loan for 34'300 Fr. which you use to purchase shares.
Use the 34'300 Fr. shares packet as security and obtain another Lombard Loan for 24'000 Fr. which you use to purchase shares.
Well, you could carry on but let's assume you stop here.
From your original 100'000 Fr., you have now over 270'000 Fr. in shares working for you, busily earning dividends and increasing in value all for a miserable say 2 percent interest per year of the total loan. Wow. Lombard Lombard Lombard $$$.