- A Deloitte survey of 57 of the world’s biggest private banks and other lenders, reviewed by The Wall Street Journal, estimates about $5.4 trillion is extended in securities-based lending, mostly against stock and bond portfolios but also funds and crypto. The market’s growth rate averaged 12% over the past 10 years.
- About 30% of the market is in the US, the largest share of any country in the report, or roughly $1.6 trillion of credit lines (Lumida calculation). Actual borrowing may be lower because customers don’t often fully draw their lines: Deloitte estimates actual global borrowing might be closer to $1.6 trillion, about 30% of the total extended (Lumida calculation).
- The economics favor lenders: the average loan-to-value is around 50%, borrowers pay around 1 percentage point over benchmark rates, losses on collateral are rare, and for traditional Swiss private banks the loans can generate 25% or 30% of annual profit. About 45% of customer credit lines are worth more than $2.5 million.
- The product is moving down the wealth ladder. Charles Schwab said in mid-October that its pledged asset line, available to people with at least $100,000 in nonretirement assets, drove a 35% surge in bank-loan balances to $72.3 billion in the third quarter, implying about $53.6 billion a year earlier (Lumida calculation).
What Happened?
Borrowing against stock lets wealthy investors fund purchases such as homes or yachts without selling shares, which could trigger taxes and, for founders, dilute voting rights. Billionaires including Larry Ellison and Elon Musk popularized the approach, and the Journal reported Ellison increased his bank borrowing and pledged stock in other companies to support his son’s takeover push. Deloitte’s figures include margin lending, which has soared this year, and securities regulators have warned that customers must understand the risk of forced sales in a downturn and the tax consequences. Schwab said usage grew after it launched a fully digital process three years ago that can approve loans within minutes.
Why It Matters?
Securities-based lending is a high-margin, fast-growing business for banks and brokerages because pricing is standard and collateral can be sold quickly, which is why it is spreading from the ultrahigh net worth to the affluent and retail. For investors, it is a source of leverage that ties borrowing to market prices: in a sharp selloff, falling collateral values can trigger forced sales that add to market pressure. Brokerages typically charge more for this lending than banks, and some banks lend as much as 90% against crypto, though they are “ruthless when it comes to liquidation. Immediately,” Deloitte’s Eric Gutzwiller said.
What’s Next?
Investors will watch whether Schwab and other brokerages keep growing loan balances at this pace and whether margin debt, which has soared this year, prompts tighter rules from securities regulators. New entrants are also coming, such as the UK’s Monument Bank, which plans to start lending against portfolios early next year so investors with a few hundred thousand dollars can “adopt a billionaire mindset.” A market downturn would be the key test of how quickly lenders liquidate collateral and how much forced selling follows.
Affected Tickers and Coins: SCHW, MS, GS
Source: WSJ
