Follow-Up: Securities-Based Lending on Watch

Last month I did a story for Fortune about the explosion in securities-based lending and portfolio loans at the big four brokerage-banks. The feedback behind the scenes ranged from “Finally, this issue getting some attention” to “Josh, you’re making a big deal out of nothing.” One thing’s for certain, the massive volume of feedback tells me that this is a big topic on a lot of people’s minds in the industry.

The Wall Street Journal has an article this morning about how Finra has made securities-based lending at the brokerage firms one its top areas to keep an eye on in 2015.

Securities-backed lending hasn’t been much of a disciplinary issue, but Finra is concerned about the increase in loan volumes as consumer loans are harder to get following the financial crisis and as investors look at other assets to leverage, Mr. Ketchum said.

“What asset has grown considerably for the last six years? That would be equity securities,” he said. “But equity securities and portfolios can fluctuate a great deal, and with that can come the risk.”

At the same time, many brokerages have increased incentives for its advisers to offer securities-based loans to clients. Bank of America Corp. ’s Merrill Lynch, one of the largest securities lenders according to data from SNL Financial, told its 14,000 advisers it would at least double the base payouts for new assets this year, including loans. Others, like UBS AG ’s Wealth Management Americas and Wells Fargo & Co.’s Wells Fargo Advisors, employ similar tactics around advisers’ compensation.

The efforts have paid off. The industry’s largest brokerage firms reported bigger client-loan asset totals for the third quarter, which includes debt products like securities-based loans and margin accounts.

Morgan Stanley , for example, reported $48 billion in client liabilities, up 33% from same period a year earlier. UBS said its U.S. unit saw a 4% year-over-year increase in securities-backed lending.

The premise of my Fortune post wasn’t that anyone was doing anything wrong – just that the rise of borrowing against brokerage assets is probably not a great idea for clients, even though it’s wonderful for their brokers. I understand that lending isn’t new – but the big incentive push is and to me it seems like a conflict. If you dangle the carrot of higher payouts for brokers who encourage their customers to take on more debt, guess who’s going to end up with more debt?


Finra to Examine Securities-Backed Lending Practices (Wall Street Journal)


Read the original story here:

The rise of rich man’s subprime (Fortune)


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  1. Permit me a few victory laps… commented on Jan 18

    […] Lastly, I warned about the potential for both personal and systemic risk in the new Non Purpose Lending boomlet happening at the wirehouses of Wall Street last month. In my story for Fortune, I called non purpose loans “Rich Man’s Subprime” owing to the similarities between these portfolio-based borrowings and the way in which debt money was doled out for real estate during the last decade. Apparently, this piqued the interest of the regulators, as just a few weeks later they added it to their list of risks to watch for in 2015. Here’s the Wall Street Journal: […]

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