The risks of Lombard lending.

The central risk of Lombard lending is that a fall in the value of the pledged collateral triggers a margin call and, if it is not cured, a forced sale of the shares. Around it sit interest-rate, concentration, liquidity, and cross-currency risk. None of these is unusual, and a well-built structure is designed to manage each. This is general information, not advice.

Market and margin-call risk

The defining risk of any Lombard loan is that the collateral securing it can fall in value. Because the loan is advanced against a percentage of the portfolio’s market value — the loan-to-value — a decline in that value narrows the cushion between what you owe and what the collateral is worth. If the fall is large enough to breach the agreed threshold, the lender issues a margin call: a request to restore the ratio, met either by posting more collateral or by repaying part of the loan. Left uncured, a margin call is what turns a paper decline into a real one.

This is the risk that deserves the most attention, and it has its own dedicated treatment. The note on margin-call risk sets out how a call is triggered, the time you have to cure it, and how conservative structuring keeps the threshold at a comfortable distance. The short version is that the loan-to-value is a risk control, not a target: the further you borrow below the maximum, the further the collateral can fall before a call is ever made.

Forced-sale and tax risk

A margin call that is not cured leads to the outcome every borrower wants to avoid: the lender sells some of the pledged shares to bring the loan back within limits. Beyond the loss of the position, a forced sale carries a second sting. A sale is a disposal, and a disposal can crystallise a capital gain and a tax liability — at a price the market has just marked down, and at a moment the borrower did not choose. The very deferral that made borrowing attractive can be undone in the worst conditions.

The tax mechanics are covered in the note on borrowing against shares and capital gains tax, which explains why borrowing itself is not a disposal but a forced sale is. The practical lesson is the same as for margin calls: headroom below the maximum loan-to-value is what keeps a forced sale a remote possibility rather than a live one. This is general information, not tax advice.

Interest-rate risk

A Lombard loan is priced as a floating reference rate in the loan currency plus a spread. That structure carries an inherent risk: if reference rates rise, so does the cost of carrying the loan, and a facility that was comfortable to service can become less so. Unlike a fixed-rate term loan, the cost is not locked at the outset; it moves with the market rate to which it is tied. This is a matter of structure rather than of any particular number — the point is the mechanism, not a rate.

The exposure is manageable. Borrowing conservatively relative to income and liquidity leaves room for the rate to move; keeping the drawn amount and the term deliberate, rather than maximal, limits how much a rate rise can bite; and understanding at the outset that the coupon can change avoids the surprise that turns a manageable cost into a strained one. The components of pricing are set out in full on the interest rates and costs page.

Concentration and liquidity risk

Not all collateral behaves alike. A single-name position — a founder’s stake, one concentrated holding — is more volatile and less liquid than a diversified portfolio, and it can move on news specific to that one company. Both traits raise risk: greater volatility means the value can swing toward a margin call faster, and thinner liquidity means the collateral is harder to value and, if it ever came to it, harder to sell without moving the price. Lenders answer this by discounting: a concentrated position supports a lower loan-to-value than a broad, liquid book, precisely because the risk it carries is higher.

The note on borrowing against a concentrated position examines this in depth. The essential mitigant is diversification: the broader and more liquid the collateral, the higher the advance it supports and the steadier its value, so a portfolio of several liquid holdings is a stronger base for borrowing than a single stock, however good that stock may be.

Cross-currency risk

A further risk arises when the loan and the collateral are denominated in different currencies — borrowing in one currency against shares priced in another. If the borrowed currency strengthens against the currency of the collateral, the loan grows in collateral terms even though the underlying value has not changed, narrowing the same cushion that a fall in the shares would. Exchange-rate movement, in other words, can trigger a margin call on its own, without the collateral itself having fallen at all.

The exposure is avoidable and can be structured for. The cleanest answer is often to match the loan currency to the collateral currency, or to the currency in which the cash is actually needed; where a mismatch is deliberate, it should be sized and understood as a distinct risk. The note on cross-currency Lombard loans sets out the choices and their trade-offs.

How the risks are managed

What unites these risks is that structure, rather than luck, is what keeps them in check. A well-built Lombard facility manages them deliberately and from the outset. Four disciplines do most of the work. Borrow with headroom below the maximum loan-to-value, so the collateral can fall — and rates and currencies can move — without breaching the threshold; treat the loan-to-value as a control, not a ceiling to be filled. Choose the recourse profile deliberately, understanding what the lender can and cannot pursue if the collateral is not enough; the note on non-recourse Lombard loans explains the trade-off. Diversify the collateral, so no single name governs the outcome. And keep custody and reporting clean, so a call is seen early and cured in time rather than discovered too late.

The result is not a risk-free loan — no borrowing is — but a facility whose risks are visible and controllable. How much can be borrowed, and at what loan-to-value, follows directly from these same considerations; the note on how much you can borrow against shares traces the link between collateral quality and the advance it supports. This is general information rather than advice, and the right structure for any borrower is a matter for a proper conversation.