The supervisory haircut behind a Lombard LTV.

A supervisory haircut — a volatility adjustment, in the language of European law — is the percentage discount a prudential regulator requires a bank to apply to the market value of pledged securities before it may treat them as reducing its exposure for capital purposes. It is not a term of the loan, the borrower never sees it, and it is not a lending limit. But it is one of the reasons a bank lender’s advance against a main-index share and its advance against an equally valuable line in a mid-cap listed company are not the same, and it is written down in public rulebooks with article numbers attached. This note sets out where it comes from. It states no loan-to-value, no rate and no offer, and it is general information rather than legal, tax or regulatory advice.

Two rulebooks sit behind one number

A borrower discussing a Lombard facility with a bank is having a commercial conversation: what the portfolio holds, how concentrated it is, how liquid the lines are, what recourse is on offer, what the facility will cost. Those variables are the ones set out in the note on how loan-to-value is set, and they are the honest answer to the question a borrower actually asks. Underneath that conversation, however, the bank is running a second calculation that never appears on the term sheet: how much regulatory capital the loan will consume, and how much of the pledged portfolio the supervisor will let it count as security.

That second calculation is not discretionary and it is not proprietary. It is published. The underlying standard is the Basel Framework, and specifically chapter CRE22, which governs credit risk mitigation under the standardised approach and contains the table of standard supervisory haircuts. The European enactment is Regulation (EU) No 575/2013, the Capital Requirements Regulation or CRR, in Part Three, Title II, Chapter 4 — as amended, most recently by Regulation (EU) 2024/1623, which applies from 1 January 2025. Anyone can read either, and because both are amended from time to time, a reader with a live question should work from the consolidated version in force rather than from any summary, here or elsewhere. What follows is a map of the parts of them that touch a portfolio-backed loan, and of the point at which the map stops being useful.

The simple approach and the comprehensive approach

The CRR offers a bank two ways of recognising financial collateral, and which one a given lender uses is invisible to the borrower while mattering a great deal to the answer.

Under the financial collateral simple method, at Article 222, the covered portion of the exposure is treated as if it were an exposure to the collateral itself — the risk weight of the collateral is substituted for the risk weight of the borrower — subject to a floor of 20% on that risk weight, with narrow exceptions. The collateral must be pledged for at least the maturity of the exposure and marked to market at least every six months. The method is only available to institutions calculating risk-weighted exposure amounts under the standardised approach; a bank on an internal-ratings-based approach cannot use it.

Under the financial collateral comprehensive method, at Article 223, the arithmetic runs the other way. The exposure is adjusted upwards and the collateral downwards, each by a volatility adjustment, and what remains is the uncovered amount that attracts capital. This is the method that matters for Lombard lending, because it is the one that recognises a wider universe of equity collateral and the one under which the haircut table does its work. A bank may use the supervisory adjustments published in Article 224, or, with express permission from its competent authority, its own estimates of volatility under Article 225. Two banks looking at the same pledged portfolio can therefore be applying genuinely different numbers, lawfully, and neither is obliged to explain why.

What counts as eligible financial collateral

Before any haircut is applied, the collateral has to be eligible at all — and the boundary is drawn more tightly than a portfolio statement would suggest. Article 197 of the CRR lists the instruments eligible under every approach: cash on deposit with the lending institution, debt securities meeting defined credit-quality criteria, gold, units in certain collective investment undertakings, and — the item that matters here — equities or convertible bonds that are included in a main index.

Equities that are listed but not index constituents do not appear on that list. They become eligible only by way of Article 198, which extends the universe for institutions using the comprehensive method to equities and convertible bonds traded on a recognised exchange without being included in a main index. Both “main index” and “recognised exchange” are defined terms rather than descriptions, and the lists are set out in an implementing technical standard: Commission Implementing Regulation (EU) 2016/1646.

This is worth pausing on, because it is where a regulatory rulebook and a commercial instinct meet. A lender’s reluctance on a thinly traded small-cap line is usually read by the holder as caution, or as a negotiating position. Part of it is neither. For a bank on the simple method, an unlisted or non-index equity is not eligible collateral at all, and the loan is treated as unsecured however impressive the share certificate looks. Index membership is not a badge of quality in this framework; it is a proxy for depth, price reliability and the ability to realise a position in an orderly way, which is exactly what the haircut exists to measure.

The supervisory haircut table

The standard supervisory volatility adjustments are set out in Article 224 of the CRR, following the Basel table in CRE22. The figures below are the published regulatory adjustments. They are not loan-to-value figures, they are not an advance rate, and nothing in this table is an offer or an indication of terms.

The single most consequential line is the gap between the two equity rows: on the published supervisory figures, a listed equity outside a main index is discounted by two-thirds more than an index constituent of identical market value. Nothing about the two companies need differ except membership of a list. That gap is the prudential counterpart of the liquidity and days-to-liquidate reasoning discussed in the note on borrowing against a concentrated position, and it is a large part of why a bank’s appetite thins so noticeably below the index line. No figure here is an offer, and no advance can be inferred from any of it.

Holding periods, and the formula that scales the haircut

A haircut is meaningless without a time horizon, because what it is really estimating is how far the collateral could move before the lender could realistically get out of it. The Basel Framework and the CRR therefore attach a minimum holding period to each type of transaction. Article 224(2) of the CRR sets them: five business days for repurchase, securities lending and borrowing transactions, ten business days for other capital-market-driven transactions, and twenty business days for secured lending. The published adjustments are then given for those liquidation periods, with the twenty-day column simply the ten-day figure multiplied by the square root of two.

Which period applies to a Lombard facility is a characterisation question rather than a formality. A facility documented with a margin agreement and daily remargining has the profile of a capital-market transaction; a term loan secured by a pledge and revalued periodically has the profile of secured lending, and carries the longer period and the larger adjustment. Revaluation frequency is a second and separate dimension. The published adjustments assume the collateral is revalued daily; where remargining or revaluation is less frequent than that, Article 226 — the CRR’s scaling-up provision — requires the adjustment to be scaled up by the formula H = H_M × √((N_R + T_M − 1) ÷ T_M), in which H_M is the adjustment on daily revaluation, N_R is the actual number of business days between remargining or revaluation, and T_M is the minimum holding period for that transaction type. On daily revaluation N_R is one and the formula returns the published figure unchanged.

The practical reading is straightforward, and it is one of the few places where the rulebook and the borrower’s interest point the same way: the more frequently the collateral is valued, the smaller the regulatory discount. Daily marking is not administrative fussiness on the lender’s part. It is what keeps the haircut at the bottom of its range, and it is why monitoring provisions appear in the documentation of every serious facility.

The currency-mismatch adjustment

Where the loan and the collateral are denominated in different currencies, a further supervisory adjustment applies on top of the collateral adjustment. Article 224 sets it at 8% for a ten-business-day liquidation period with daily revaluation, and at 11.314% for the twenty-business-day period — the same square-root relationship that runs through the rest of the table. Where revaluation is less frequent than daily, it is then scaled again under Article 226, exactly as the collateral adjustment is.

Note what this figure is not. It is not a view on any particular currency pair, it takes no account of whether the mismatch is between two closely managed currencies or two volatile ones, and it does not care whether the borrower has hedged in a way the lender is not party to. It is a flat, blunt supervisory add-on that applies whenever the denominations differ. It is also, structurally, the reason a cross-currency facility is sized more conservatively before any credit officer has formed an opinion: the collateral has been discounted twice, once for what the shares might do and once for what the exchange rate might do. The commercial dimension of the same problem — how an adverse currency move can raise the effective ratio and trigger a call with the share price unchanged — is set out in the note on cross-currency Lombard loans.

Correlation, own issue, and the operational conditions

A haircut is only reached if the collateral clears the operational requirements first. Article 207 of the CRR sets them out for financial collateral: the arrangement must be legally effective and enforceable in every relevant jurisdiction, the institution must have clear procedures for the timely liquidation of the collateral, the collateral must be revalued sufficiently often, and — the condition that bites hardest in this market — there must be no material positive correlation between the credit quality of the obligor and the value of the collateral. Securities issued by the obligor or by a related group entity are excluded, subject only to a narrow carve-out for the obligor’s own covered bonds posted in repurchase transactions.

That condition is not incidental to Lombard lending; it goes to the heart of the most common enquiry the instrument receives. A founder or controlling shareholder pledging a stake in the company that is also the source of their wealth is, in prudential terms, offering collateral whose value and whose own credit standing move together. Where the pledgor and the issuer are connected closely enough for the exclusion to engage is a question the lender’s credit and legal teams have to work through on the specific facts, and the answer materially changes what the bank can recognise. It is one of several reasons a controlling-shareholder facility is a different proposition from a diversified-portfolio facility, and it is why the question of who issued the shares is asked at the review stage rather than later.

How Switzerland arrives at the same place

Switzerland is not in the European Union, and the CRR does not apply to a Swiss bank. A borrower in Geneva or Zürich is nonetheless dealing with a lender working inside the same Basel material, arriving by a different instrument. The Swiss vehicle is the Capital Adequacy Ordinance — the Eigenmittelverordnung, or Ordonnance sur les fonds propres, SR 952.03 — issued by the Federal Council under the Banking Act, with the technical detail carried in the credit-risk circular of FINMA, the Swiss Financial Market Supervisory Authority. The revised Ordinance implementing the final Basel III standards entered into force on 1 January 2025 — the same date from which the amended CRR applies on the European side.

What a Swiss private bank does with all of this is expressed in its own vocabulary rather than the supervisor’s. The internal collateral value is the Belehnungswert, or valeur de nantissement, and the advance rate applied to a given line is the Belehnungssatz. Those are credit-policy figures, set line by line and revised as markets move; they sit above the regulatory floor rather than being derived from it, and they are not published. But the prudential arithmetic underneath them is recognisably the arithmetic above, which is a fair part of the answer to why the Swiss market treats index membership, free float and currency the way it does. The market context is set out separately in the notes on Lombard loans in Switzerland and on the Switzerland market page. For completeness, the point of comparison outside Europe is different in kind rather than degree. Bank credit in the United States secured by margin stock engages Federal Reserve Regulation U, at 12 CFR Part 221, which turns on a purpose test rather than on a volatility haircut: credit extended for the purpose of buying or carrying margin stock is subject to a maximum loan value, while non-purpose credit secured by the same shares attracts a purpose statement and recordkeeping rather than an advance-rate cap. That distinction is set out on the United States market page.

What the haircut does not tell you

It would be an easy and wrong conclusion that the supervisory table sets a ceiling on a Lombard advance. It does not. A haircut determines how much of an exposure a bank may treat as secured when it calculates regulatory capital. It is not a lending limit, it does not appear in the facility agreement, and no supervisor tells a bank what loan-to-value to write. The uncovered portion of the exposure is not forbidden; it simply consumes capital, and capital has a cost.

That is the whole of the transmission mechanism, and it is worth stating plainly because it is usually stated loosely. A pledge that the rulebook recognises generously makes a loan cheap in capital, which shows up as appetite and as a finer spread. A pledge the rulebook discounts heavily, or refuses to recognise, makes the same loan expensive in capital, which shows up as a thinner advance, a wider spread, or a polite decline. None of that is visible to the borrower, and none of it is what the credit committee talks about. The relationship between structure and price is treated on its own terms in the note on interest rates and costs.

Two further limits are worth naming. First, this framework governs banks. A non-bank arranger or a private-credit lender is not calculating risk-weighted exposure amounts at all, which is one of the structural differences behind the landscape described in which private banks offer Lombard loans. Second, even for a bank, the regulatory floor is only ever a floor: the actual advance is set by credit policy, by the specific holdings, and by the recourse profile agreed with the borrower, and it is routinely more conservative than anything the capital rules would require. The borrower’s side of that question is treated at length in how much you can borrow against shares, and a transparent first estimate is available from the indicative LTV calculator. Nothing on this page is an offer, a quote, a commitment to lend, or a rate card, and no loan-to-value should be inferred from any figure in it.