How Lombard Lending Works: Loan-to-Value, Margin Calls and Forced Liquidation, and the Hong Kong–Singapore Regulatory Differences

A Lombard loan (Lombard lending) is a loan in which a private bank takes as collateral financial assets the client holds with it that can be valued and realised at any time, and grants a credit limit based on the value of that collateral. Collateral is typically cash deposits, bonds, listed shares and funds. The difference from a residential mortgage is that a mortgage amount is fixed once, by reference to the property price and income, whereas a Lombard limit is recalculated as the collateral's market value moves: when collateral falls in value, the available limit shrinks, and the client may even be required to top up.

What it is called in each centre, and common uses

In Hong Kong, the portion secured on shares falls under "share margin financing" for regulatory purposes; KPMG's commentary of December 2023 describes it as a key component of Hong Kong private banks' Lombard products. Private banks in Singapore more often call it securities financing or portfolio financing.

Collateral and advance rates: what the bank looks at

The loan-to-value ratio (LTV), or advance rate, is the proportion of a collateral asset's market value that the bank is willing to lend against. It is not one bank-wide figure but is set asset by asset: within the same account, deposits, bonds, shares and funds each have different advance rates, which add up to the available lending value. The table below shows direction only; specific ratios are in the bank's facility letter and collateral list.

Banks also look at concentration (the larger the share of a single security or issuer, the bigger the discount), currency (exchange rate movements are considered where collateral and loan are in different currencies) and legal enforceability (whether the assets are custodied with the bank and whether any other charge exists). Most facility documents reserve the bank's right to change advance rates and the collateral list at any time: even if market prices have not moved, the available limit may fall because of a change in the bank's risk policy.

Hong Kong: how the HKMA regulates share-secured lending

Private banking in Hong Kong is carried on by licensed banks, with the Hong Kong Monetary Authority (HKMA) as frontline regulator. For loans secured on shares, the HKMA's main reference is module CR-S-4 of the Supervisory Policy Manual (SPM).

• Letter of 22 October 2021 (B1/15C): former paragraph 7.1.4 of CR-S-4 required authorized institutions to set maximum LTVs for share collateral "in line with prevailing market norms". The HKMA considered that Hong Kong's private banking business had become more global since 2007, that the requirement was "no longer appropriate", and removed it from the date of the letter. The letter states, however, that the change "does not signify any intention to relax existing supervisory standards": in setting LTVs, banks must take into account their own credit risk appetite, the risk characteristics of individual stocks and their margin call management capability, and the HKMA will proactively assess whether they are prudent.
• Revision of 17 November 2023 (B1/15C, B1/21C): the HKMA issued a revised CR-S-4 "New Share Subscription and Share Margin Financing" as statutory guidance under section 7(3) of the Banking Ordinance, effective 22 November 2023, the first update since the module was issued in 2007. The revision aligns with HKEX's reform of new-share settlement through the FINI platform and adds guidance on managing share margin financing risk on a holistic basis.

The SPM sets the HKMA's expectations for banks' internal risk management; it is not a contract term. What actually binds lender and borrower is the facility letter, the security deed and the general terms, where margin call ratios, cure periods and the right to realise collateral are set out.

Singapore: no dedicated rules, so the contract and client classification govern

This site found no MAS circular specific to Lombard loans or private banking securities financing. Practice in Singapore depends mainly on each bank's contract, subject to general credit risk management requirements and the MAS Guidelines on Fair Dealing (effective from 30 May 2024).

The point most directly relevant to Lombard lending comes from client classification. According to Bank of Singapore's published "Explanation of Effect of Being Treated as an Accredited Investor" (Version 10/23), under regulation 34(2) of the Securities and Futures (Licensing and Conduct of Business) Regulations, before a bank mortgages, charges or pledges a client's assets (up to the amount the client owes the bank), it must, for a retail client, inform the client of that right, explain the risks and obtain written consent; there is no equivalent requirement for accredited investors. Nor does the bank have a statutory duty to explain the risks before lending a specified product to an accredited investor (regulation 33(2)(a) of the same Regulations). Private banking clients usually open accounts as accredited investors, so collateral and realisation arrangements depend almost entirely on the contract wording. For accredited investor eligibility and the opt-in mechanism, see Private banking thresholds and services.

Margin calls and forced liquidation: one bank's terms as an example

A margin call is a notice from the bank requiring the client to restore collateral within a set time when its value is insufficient relative to the loan; forced liquidation is the bank selling collateral to repay the loan when the client fails to top up or risk rises sharply. Calculation methods, trigger levels and deadlines differ from bank to bank. The table below summarises HSBC Bank (Singapore) Limited's Lombard terms for retail and Premier clients. These are not private banking terms and are used only to illustrate the mechanism; private banks' facility letters are generally not public.

The general mechanism can be summed up in five steps:

1. Collateral falls in value, the bank lowers an advance rate, or exchange rates move, and the margin ratio drops.
2. The ratio falls below a level agreed in the contract, and the bank gives notice in the manner and within the time set out in the contract.
3. The client deposits cash, adds collateral, repays part of the loan or sells assets.
4. If the shortfall is not cured on time or the realisation level is breached, the bank sells collateral under the contract; which assets to sell and at what price is usually for the bank to decide.
5. In a sharp fall or trading suspension, realisation prices may be far below the market price at the time of the notice, and any shortfall in repayment remains the client's liability.

Interest rate benchmarks and currency

Lombard loans are mostly at floating rates, commonly structured as "benchmark rate plus the bank's margin", with the margin forming part of the bank's credit income (see Private banking fees and conflicts of interest). The benchmark depends on the loan currency: Hong Kong dollar loans often reference the Hong Kong Interbank Offered Rate (HIBOR); Singapore dollar loans often reference SORA published by MAS (the volume-weighted average rate of unsecured overnight interbank Singapore-dollar borrowing, with 1-, 3- and 6-month compounded SORA also available); US dollar loans often reference the Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. This site does not quote interest rate figures; the benchmark, interest periods and reset dates are in the loan contract.

When the loan and collateral are in the same currency, exchange rates do not affect the margin ratio. When borrowing in a low-interest currency against collateral in another currency, appreciation of the borrowing currency both raises the converted value of the debt and lowers the ratio. Rising interest rates both increase interest costs and may depress the prices of the assets invested in, squeezing the ratio from both sides.

Risk checklist and situations where it does not fit

Lombard loans generally do not suit the following situations (a summary based on the mechanism, not a regulatory rule):

1. There are no liquid funds available beyond the collateral, so a margin call cannot be met within a few business days.
2. A limit the bank can withdraw at any time is used to finance long-term, illiquid assets (such as private equity or property).
3. Collateral is highly concentrated in a single stock, especially shares of a company where the borrower works or holds control.
4. The whole plan only works if investment returns stay above the borrowing rate, with no contingency plan for rising rates or falling prices.

Interest deductibility, foreign exchange and reporting issues associated with borrowing vary by place of tax residence (applicable to Hong Kong, Singapore and Mainland China); obtain professional advice in the relevant jurisdiction. Before signing, you can check the credit terms point by point against 15 checks before choosing a private bank. If you would like help interpreting this for your own situation, you can register your needs through the contact details on this site.