Dubious strategy of Swiss banks: Loans worth millions to make the super-rich even richer

Risk management has failed and many fear that the traditional company may have more critical loans on its books.

However, the issue is not limited to Julius Baer. In recent years, almost all banks have significantly increased their loans in asset management. The reason: Low interest rates since the 2008 financial crisis have squeezed margins.

“To compensate for this, banks have significantly expanded the volume of loans,” says Andreas Venditti (51), financial analyst at Bank Vontobel. “Loans have been made particularly attractive to the super-rich, allowing them to invest more money in stocks and real estate.”

Normally this involves mortgages or classic Lombard loans where the borrower deposits a widely diversified and liquid portfolio of securities as collateral. Particularly in Asia, Venditti says, such loans are also extended to customers who own shares in only one company, sometimes even those that are not publicly traded: “These types of loans, called single-share loans, are significantly riskier.”

“Banks use this to increase their profits”

Julius Baer was particularly active in lending: in 2013 the bank recorded 20.5 billion francs of outstanding Lombard loans, and by the end of 2021 this figure reached 42 billion francs; This figure is more than double. But major Swiss banks were also striving for higher profits. Venditti: “Credit Suisse has also relied heavily on loans for asset management, while UBS has followed suit at a significantly lower level in recent years.”

However, Venditti emphasizes: “Credit volume alone is not decisive. “The important thing is to carefully examine the risks and how valuable the existing collateral is.”

Marc Chesney, 64, is generally skeptical of loans to the super-rich backed by corporate stocks, real estate or securities. “Banks use this to increase their profits,” says a professor of finance at the University of Zurich. As long as markets are aligned and prices rise, Chesney says, it will be a win-win situation for everyone. “In the event of a stock market crash or financial crisis, such loans are toxic because they further accelerate the downward spiral and destabilize the system.”

The financial market supervisory authority (Finma) also thinks this is plausible. In its “Risk Monitor 2023” report published three weeks ago, Finma evaluated the Lombard loan portfolio of Swiss banks as follows: “There is a possibility that the cuts applied by banks will be very low. This means that loans may not be covered by sufficient collateral.” In such cases, the customer’s inability to fulfill the additional payment obligation may lead to “credit defaults and losses”. “Concentration risks may also arise if loans are based solely on individual (single stock loans) or poorly diversified collateral,” Finma continued.

Sounds like a warning about the Benko case.