Lombard Loan

The modern day “lombard loan” originates from the Lombard banking system of the middle ages whereby bankers in the prosperous Lombard region of Northern Italy would operate a business model that we would recognize today as being a Pawn Shop. Unlike the modern day Pawn Shop industry, the intention was not to monopolise upon people looking to sell their possessions for fast cash, but a structural way to provide loans whilst circumventing the Catholic prohibition of profiting from money without labour- commonly known as usury.

A Lombard loan is a collateralised loan. The borrower provides collateral- often a marketable security or other liquid asset- and the lender provides a line of credit up to a pre-agreed % of the value of the collateral pledged. The loans are often open-ended and have no mandated repayment or amortization schedules and can be left ‘open’ as long as the agreed loan LTV is not violated. Loans can be repaid using cash, or in the case of a securities portfolio, using proceeds released/generated from the portfolio.

Mr. Client has a stock portfolio with a FMV of 10,000,000 USD. He needs 2,000,000 USD to renovate his house in London but does not have sufficient cash on hand to pay for it. Mr. Client does not want to sell his stock portfolio because he expects that the value of the portfolio will appreciate over time. Mr. Client pledges his 10,000,000 USD stock portfolio to his bank in exchange for a Lombard loan. His bank in turn offer him a line of credit up to 60% of the value of the portfolio.

Mr. Client takes a 2,000,000 USD loan against the value of his securities and pays the loan back over time at his convenience using dividends, and portfolio gains.