Still, secured lending in various forms has become increasingly common as banks look to deepen relationships with their wealthiest -- and most lucrative -- clients and bring in new sources of revenue. The technique enables executives and wealthy investors to unlock cash without giving up control of their holdings.
Both Credit Suisse Group AG and UBS Group AG, two of the world’s largest wealth managers, have used lending to rich clients to boost net income in recent years as they’ve shifted away from volatile investment banking.
Lombard Lending
Lombard lending, which typically involves providing a loan collateralized by a broader pool of assets than a single stock, has become a favored tool among wealth managers because of the fees it generates to structure the loans, which also pay out interest. Moreover, it helps get rid of idle cash deposits that are now costlier than ever to hold in a world of low -- and even negative -- interest rates.
Such lending made up more than half of Credit Suisse’s credit volume in the division for the first nine months of 2019, according to a December investor presentation. Cross-town rival UBS set a target of achieving $20 billion to $30 billion in net new loans a year and increase lending penetration by 40%, according to its last strategic update to investors in October 2018. A revamp of the unit in January sought to give managers more autonomy in granting loans to rich clients and accelerating approvals.
And across the wealth-management industry, the market turmoil induced by the pandemic resulted in some margin calls as stocks and other assets plummeted. Some clients had to stump up collateral to avoid defaulting, and others had to liquidate at depressed prices. This has also prompted some banks to review the setup of their lending practice and risk appetite for wealthy and corporate clients.
When executives are pledging their own company’s stock, the risks are even more concentrated.
“It’s a negative feedback loop,” said Michael Puleo, assistant professor of finance at the Dolan School of Business at Fairfield University. “The selling causes the share price to fall further and precipitates more margin calls, which can push the price lower.”
Braun’s forced Wirecard disposals took place over the two days where his company’s stock cratered 75%. His sales made up 2.1% of stock trading on June 18 and 3.5% the following day, according to a Bloomberg analysis.
His high-profile implosion means investors are even less likely to welcome pledging, according to Miller of ISS.