Buy, borrow and die is a mantra of the rich. They love to take out loans against stock they own, so they don’t have to sell it when they want to buy other things such as mansions, yachts and movie studios.
Lend-and-thrive appears to be the approach of banks and others supplying the loans. The arrangement lets them book almost all their fees as pure profit because losses on collateral are rare and most of it can be sold quickly.
A new survey of 57 of the world’s biggest private banks and other lenders, conducted by Deloitte and reviewed by The Wall Street Journal, offers the fullest picture yet of this opaque corner of finance. Banks don’t always break out such lending on their balance sheets, and there is no central tally of how much is outstanding. The report finds that stock-based lending, better known as Lombard loans to borrowers in Europe and Asia, is increasingly available to those lower down the wealth scale.
A $5.4 trillion market
Deloitte estimates that around $5.4 trillion is extended in securities-based lending, mostly against stock and bond portfolios but also funds and crypto. The figure has risen sharply as more global wealth pours into markets and asset prices rise. Deloitte consultants said the market’s growth rate averaged 12% over the past 10 years.
“It was more of a wealth management product in the past and not for the masses,” said Eric Gutzwiller, who leads the credit business at Deloitte Switzerland. “Now, not only the ultrahigh net worth, but also more and more the lower wealth segments all the way down to the affluent—and even retail—starts to explore that product.”
Around 30% of the market is estimated by Deloitte to be in the U.S., the largest share of any country in Deloitte’s report. Other strongholds, such Switzerland and Liechtenstein, together make up around 12%.
Actual borrowing may be lower because customers don’t often fully draw on their credit lines. Deloitte estimates that actual borrowing against credit lines might be closer to $1.6 trillion.
Deloitte’s figures include margin lending, where the aim typically is to accumulate investments with less money down, rather than pawning out assets for cash to buy other things. That subset of borrowing has soared this year. Securities regulators have warned that customers must be made aware of the risk of forced sales in a market downturn and the potential tax consequences.
Easy to secure, and a boon to bankers
One perk for borrowers and for banks is the speed of this kind of lending. There is often no need for in-depth personal credit checks when the collateral is secured by the lender. Pricing is largely standard and can be calculated quickly based on the market value and liquidity of the asset.
Gutzwiller said the average loan to value is around 50%, while the charge for the borrower is around 1 percentage point over benchmark rates.
For purebred wealth managers, such as the traditional Swiss-headquartered private banks run by families or partners for generations, Deloitte said the loans can generate 25% or 30% of annual profit.
Deloitte has been studying the market since 2022, after chief risk officers at banks wanted some benchmarking.
Beloved by billionaires…
Billionaires who popularized stock-based lending include Larry Ellison and Elon Musk. Both borrow to avoid having to sell shares—which could trigger a taxes and dilute their voting rights—in companies they founded. As he was looking to support his son’s hostile takeover of Warner Bros. to form Skydance, Ellison upped his borrowing from banks and pledged stock he owns in other companies, the Journal reported.
Deloitte said a top slice of the market is driving growth of the securities-backed loans, along with higher asset prices. Around 45% of customer credit lines are worth more than $2.5 million.
…and increasingly among the less wealthy
In mid-October, Charles Schwab said its pledged asset line product 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. A spokeswoman said usage grew after Schwab launched a fully digital process three years ago that can get the loans approved within minutes.
Price lists online show that brokerages typically charge more for the lending than banks, because they usually don’t have a deeper relationship with the customer to draw on, and might still need a bank partner to provide the actual funding.
Xavier De Pauw, director of lending at Monument Bank in the U.K., said it would start lending against portfolios beginning early next year, so investors with a few hundred thousand dollars can “adopt a billionaire mindset.”
“We would like to make it available to pretty much everybody,” De Pauw said.
Since its first study in 2022, Deloitte found that some banks were becoming specialists in less-straightforward assets such as crypto, sometimes lending as much as 90% against it.
Gutzwiller said that doesn’t mean lenders are taking risks blindly.
“They are then ruthless when it comes to liquidation. Immediately,” he said.
Write to Margot Patrick at margot.patrick@wsj.com