Lombard Lending in Modern Banking: Key Insights from Deloitte’s Global Webinar - Financial Services

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The landscape of Lombard lending is evolving rapidly, driven by emerging trends and shifting priorities within the financial sector as highlighted in our previous blog “Unlocking Value: Lombard Lending in Modern Banking – Navigating Challenges and Opportunities”. In a recent global webinar hosted by Deloitte, >150 experts and thought leaders from >40 leading financial institutions gathered to explore the future of Lombard lending and participated in an interactive survey, the results of which are presented in this blog. The discussion focused on three pivotal topics: sustainability, lending against digital currencies, and generative artificial intelligence (GenAI) in credit processes. This blog provides a summary of the webinar, highlighting the key takeaways from the discussion.

Sustainability’s rising role in Lombard lending
Sustainability has become a key focus in Lombard lending, reflecting broader shifts in the priorities of the financial services industry. The Net Zero Banking Alliance1 (NZBA), with 144 members across 44 countries managing 41% of global banking assets, is committed to aligning lending portfolios with net zero emissions by 2050 and requires members to comply with reporting requirements already as of the year of joining. The issuance of green bonds surged by over 160% from USD 339 billion in 2019 to USD 911 billion in 2022,2 highlighting investors' increasing interest in sustainable investments (which can serve as collateral for Lombard loans). Regulatory bodies are also driving this shift, introducing frameworks and roadmaps that incentivise banks to incorporate sustainability into their lending practices. For instance, the European Banking Authority (EBA) has outlined a roadmap encouraging banks to consider sustainability factors in their lending decisions.

This regulatory push, coupled with the industry’s collective dedication to sustainability, aligns with findings of the webinar survey that the majority of banks (74%) either already have sustainability targets in lending in place or are in the process of implementing them (see Figure 1).

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Figure 1: Webinar survey result - Definition of sustainability targets

Despite this momentum, integrating sustainability into Lombard lending is still in its early stages, and only 5% of banks participating in the webinar currently reflect these considerations in their Lombard operating models (see Figure 2). However, 27% of the webinar participants are planning to incorporate or are actively implementing sustainability criteria in their Lombard lending practices.

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Figure 2: Webinar survey result – Reflection of sustainability considerations in Lombard lending

This relatively low implementation of sustainability in the Lombard lending target operating models may be due to the many challenges that banks face in integrating it, particularly when compared to other credit products like Mortgages.

A significant 53% of the webinar participants struggle with data availability, particularly in obtaining pre-approval transaction information such as the source of wealth or the ultimate loan purpose, especially for equity-out loans where, due to the culture of discretion, not as many details are requested. Generally, embedding sustainability criteria into established Lombard lending processes presents another challenge. While evaluation of collateral is the most common area where sustainability aspects are considered, banks are also looking into incorporating these factors when assessing the counterparty type (i.e. private vs. corporate borrowers including industry sectors for the latter) and as part of the credit scoring logic.

To tackle the above challenges effectively and consistently in navigating the transition to Net Zero, sustainability governance should be embedded in the (Lombard) operating model of banks. This implies proper governance of processes (e.g. escalation paths for loan approvals, competency matrices), and a comprehensive framework covering relevant client segments and regions, as well as mechanisms to ensure compliance with relevant sustainability-related internal policies and external commitments (such as KPIs for the NZBA or shareholders).

While there is a clear demand and timeline for incorporating sustainability considerations, most banks are still at the early stages and will therefore face many of the previously mentioned challenges in the upcoming months.

Embracing digital currencies in Lombard lending
Digital currencies are becoming increasingly relevant in the financial sector, reflecting their growing acceptance and integration into mainstream finance. High-income earners in particular show a disproportionate affinity for digital currencies, with 25% of high-income individuals in the US investing in them, despite representing only 15% of the total population3. This trend also underscores the broader movement towards further diversification in investment portfolios. The digital currencies market, which accounted for approximately 3% (USD 2.33 trillion) of the global assets under management (AUM) in 2023, exemplifies this shift.

Leveraged trading options for digital currencies have proliferated since 2020, with numerous digital currency and retail platforms such as Swissquote and Coinbase now offering these services. Despite this growing market activity, only 11% of the webinar participants currently accept digital currencies or related securities as collateral for Lombard loans. An additional 6% are planning to extend their offerings to include digital currencies. Among those that already do, digital asset ETFs and Bitcoins are the most accepted forms of collateral, with typical loan-to-value (LTV) ratios for cryptocurrencies like Bitcoin ranging between 25% and 40% (see Figure 3), similar to LTVs observed in the market for non-listed shares or private equity funds.

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Figure 3: Webinar survey result – Anticipated Loan-To-Values for cryptocurrencies

Financial institutions face several challenges when considering the extension of Lombard lending to include digital currencies. Volatility risk is a significant concern for most webinar participants (77%), as the higher volatility of digital currencies necessitates adaptations in real-time risk assessment, LTV ratios, and margin call processes. Regulatory uncertainty presents another critical challenge, given the varying and rapidly evolving legal and regulatory requirements across different jurisdictions. Operational complexity also arises, particularly in integrating the necessary infrastructure and partners for processing digital currency transactions. Security concerns are paramount, requiring secure custody solutions and robust collateral verification processes to ensure the safety and integrity of digital currency collateral.

Industry-wide a slow growth in adoption is visible, but traditional banks still seem a bit more hesitant. However, banks can gain a competitive edge by leveraging the opportunities presented by digital currencies and effectively meeting the evolving needs of their clients, especially of the younger generations who will inherit wealth, or the growing affluent customer base.

The promise and challenges of GenAI in Lombard lending
GenAI is poised to revolutionise the financial sector, offering substantial benefits such as increased efficiency and productivity, cost reduction, innovation, and growth improvements. Global leaders are recognising its transformative potential, with 76% of Swiss executives expecting GenAI to change their organisations significantly within the next three years, and 24% anticipating such changes within the next 12 months4. For instance, recent Deloitte GenAI use cases have shown the revolutionary potential of GenAI in credit for synthesising vast amounts of proprietary data automatically (e.g. applying Large Language Models in financial statements), resulting in time savings of up to 30% for credit analysts. It is therefore no surprise that 86% of banks are planning to increase their investment in GenAI technologies in the next fiscal year, preparing for the anticipated industry and organisational disruptions.

Despite its promise, the adoption of GenAI in Lombard lending is still in its early stages. None of the webinar participants are applying it currently, but 36% are planning to implement GenAI technologies soon in their lending processes in general. Key internal applications of GenAI in Lombard lending include fraud detection, risk assessment, and collateral evaluation. Additionally, GenAI is expected to enhance client-facing processes, particularly in data collection and shortfall identification, improving overall efficiency and the customer experience.

However, the implementation of GenAI also poses new challenges (see Figure 4). Security and privacy are paramount concerns, especially regarding the protection of consumer and sensitive financial data, and mitigating cybersecurity risks in the fast-paced environment of Lombard loans and margin calls. Data quality and availability present another critical challenge, necessitating robust data governance to ensure the quality, accuracy and completeness of the golden data sources required for model inputs.

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Figure 4: Webinar survey result – Anticipated challenge when dealing with GenAI in Lombard lending

While none of the webinar participants currently leverage GenAI in Lombard lending, it can be expected that banks will use it daily as part of their lending practices already by 2025.

Conclusion
In conclusion, the webinar highlighted the ongoing need for change in the financial services industry beyond the traditional topics such as process efficiency and end-2-end digitalisation. The themes of sustainability, digital currencies, and GenAI have significant transformative potential to shape the future of both Lombard lending and credit management in general. As the financial landscape continues to evolve, staying ahead of these trends will be crucial for banks aiming to lead in the next era of banking. Deloitte remains committed to supporting financial institutions in navigating these changes, ensuring they are well-positioned to seize the opportunities that lie ahead. Contact us to explore these topics further or to discuss the future of Lombard lending.

1 United Nations Environment Programme Finance Initiative (2024)
2 S&P Global (2024)
3 Bankrate (2024)
4 Deloitte Internal Study (2024)

Key contact

Jean Francois Lagasse

Jean-François Lagassé - Managing Partner, Financial Services Industry, Switzerland and Global Wealth Management Lead

Jean-François is the Swiss Financial Services Industry Leader and a Partner within Deloitte Switzerland’s Financial Advisory business. He also leads our Global Wealth Management segment and is a member of the Swiss Executive. He has more than 20 years of professional experience in the field and has worked in the United States, Canada and Switzerland. Jean-François has successfully completed numerous M&A advisory and valuation mandates in sectors such as financial services, technology and telecom industries.

Email | LinkedIn 

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Eric Gutzwiller - Director, Financial Services Transformation

Eric is a Director at Deloitte with a focus on the Financial Services industry, especially focused on leading process optimization and digitalization as well as TOM design projects. He brings over 11 years of strategy consulting experience in financial services for, both, globally leading institutions and developing players, as well as central banks and regulators, in several established (Switzerland, UK, US, HK, Singapore, Germany, Canada) and also emerging markets (CEE, Middle East).

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Lea Wirth - Manager, Financial Services Transformation

Lea is a Manager in Deloitte’s Financial Services Transformation practice in Zurich, bringing 7+ years of experience in the banking industry. Prior to joining Deloitte, she was part of the risk control department of UBS for more than 4 years, where she worked in the 2nd line of defence functions and in the change organization. Lea’s main areas of expertise include credit risk with a focus on Lombard lending, change management and process optimization.

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Marco Ehrler - Assistant Manager, Financial Services Transformation

Marco is an Assistant Manager in the Financial Services Transformation team of Deloitte's Risk Advisory practice in Zurich. Marco's main areas of expertise include front-to-back credit processes for G-SIBs, private banks and asset managers with a focus on process optimisation, TOM design and digitisation of the customer journey for mainly Lombard products, while also having experience with other credit products such as Mortgages, Personal Loans and Credit Cards. Moreover, Marco has developed profound expertise in the insurance industry through his involvement in projects related to Operational Risk.

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