Can Securities Financing Fill The Gap As Banks Retreat?

In an economic environment characterised by extreme volatility, businesses and individuals can need short-term cash injections for all kinds of reasons, from making tax payments, large purchases such as property, or meeting emergency cash calls. But with the risk appetite of banks reduced by rising interest rates and market turmoil, it can be difficult to know where to turn for rapid access to cash at affordable cost[1].

One option could be securities financing, sometimes called securities-based lending (SBL). SBL allows individuals and businesses with investment portfolios to use these securities as collateral for a loan. The borrower provides a portfolio of stocks, bonds or funds as collateral, in return for a cash loan or a credit line from the lender.

Although less common as a financing method, SBL can be attractive as they are quick to set up and low cost, assuming the securities in question have a public market value. They are particularly relevant in 2023 since asset markets have been less affected by macroeconomic volatility than the banking sector. The borrower is also not restricted as to the use of funds, does not miss out on investment income, can repay at any time without penalty, and will not incur tax from selling the securities, making SBL a flexible option in many circumstances. SBL is also not ordinarily reported on a borrower’s credit history.

The lender will establish a value for the portfolio and then lend up to a certain percentage of that value. For assets traded on a liquid market, this is typically 50-95%. Since it is based on readily marketable securities, SBL is lower risk for the lender than extending a mortgage based on illiquid and hard to value property. This means SBL is reliably cheaper than most alternative funding sources. In a tumultuous global environment, Oppenheim continues to offer securities-based lending options that provide value to long-term investors, allowing ready access to liquidity while getting more value from their assets.