Lombard loans: Under the supervisory spotlight

April 2025

In 2023 we published a short article on Lombard loans a longstanding and specialised form of personal lending which – though not in wide usage – was attracting some supervisory attention from the ECB. Fast forward to today, and the use of Lombard loans (also known as margin loans) has undergone some unexpected changes. This therefore feels like a good time for a short update on this niche lending activity.

As a reminder, our previous article on Lombard loans summarised:

• Key features: Lombard loans are a form of secured credit, typically offered to high net worth (HNW) individuals. They are usually over-collateralised with marketable financial securities, featuring regular collateral revaluations and margin calls.
• Risk management practice: The features of Lombard loans mean that banks have typically seen little need to conduct full assessments of client creditworthiness for each loan.
• Regulatory expectations: The EBA’s Guidelines on Loan Origination & Monitoring mandate regular creditworthiness assessments (including individual borrowers’ debt service capacity) - irrespective of the value of collateral.
• Scope for disagreement: Differences between regulation and industry practice could give rise to disagreement between banks and supervisors about suitable credit risk management of this niche activity.
• Recommendations for banks: Banks should prepare for greater scrutiny of Lombard loans by anticipating questions and collecting relevant data to substantiate the value of their chosen risk management approach.

The first reason is straightforward: The ECB remains focused on European banks’ use of Lombard loans.In fact, we are aware of a handful of directly supervised bankes that have received findings on Lombard Loans during recent quarters. Supervisors’ concerns remain centred on banks’ creditworthiness assessments, and more specifically on whether banks are collecting sufficient information about borrowers’ income, assets, liabilities and tax position.

The second reason is more unexpected: The use and availability of Lombard loans has begun to change. Until recently, they remained largely concentrated among HNW clients, typically provided by private banks or the wealth management arms of universal banks. Now though, it appears that Lombard loans are being provided to retail borrowers.

This typically involves ‘neobrokers’ offering loans to retail investors, secured against their personal portfolios of liquid securities and investments. For these lenders, Lombard loans are a small but appealing line of business with an attractive risk-return profile. Although these loans are far smaller than in the HNW arena, the other features remain unchanged: Short-term credit, collateralised against clients’ investment holdings, and with periodic margin calls in response to fluctuations in the value of collateral.

As before, European authorities can be expected to be concerned about any failure to comply with the EBA’s requirements on creditworthiness. Furthermore, there are several reasons why the emergence of ‘Lombard retail’ might prompt additional supervisory concerns, such as:

• Loans being offered via mobile apps, rather than by relationship managers with a good knowledge of the borrower.
• Loan decisions being made by algorithms without an appropriate ‘three lines of defence’ framework.
• Small lenders under light touch supervision by national competent authorities, who may have limited knowledge of this specialised area.
• Retail clients borrowing to make speculative investments, unlike HNW clients using loans for short-term liquidity management.

Supervisory scrutiny of neobrokers’ lending activities is increasing, and some institutions have been issued with findings. However, this is a fast-developing area and it is too soon to say exactly how the Lombard loan market – and its supervision – may evolve.

That uncertainty may create commercial opportunities, but it could also increase the risk of misunderstandings between lenders and supervisors. We look forward to a constructive debate on the treatment of Lombard loans, and encourage lenders to actively initiate dialogue on this matter with their supervisors – and to remind themselves of our previous recommendations.