DEFINITION of 'Securities-Based Lending'

The practice of making loans using securities as collateral. Securities-based lending (SBL) provides ready access to capital that can be used for almost any purpose such as buying real estate, purchasing personal property like jewelry or a sports car, or investing in a business. The only restrictions are other securities-based transactions like buying shares or repaying a margin loan. Also known as securities-based borrowing, non purpose lending or securities lending, SBL is separate and distinct from "securities lending." Securities-based lending became increasingly popular with U.S. broker-dealers and banks from 2011 onwards as an additional revenue stream, facilitated by the steady rise in equities and record-low interest rates.

BREAKING DOWN 'Securities-Based Lending'

Securities-based lending has a number of benefits for the borrower. It precludes the need to sell securities, thereby avoiding a taxable event for the investor and ensuring continuation of the investment strategy. SBL offers access to cash within a couple of days and at lower rates of interest than a home equity line of credit or second mortgage, and also has a great deal of repayment flexibility. These advantages are offset by the inherent volatility of stocks that makes them a less than ideal choice for loan collateral, and the risk of forced liquidation if the market falls and collateral value plunges. Nevertheless, SBL works best when used for short periods of time in situations that demand a significant amount of cash quickly, such as an emergency or a bridge loan.

SBL also provides a number of benefits to the lender. It offers an additional and lucrative income stream without much added risk. The liquidity of securities used as collateral and the existing relationships with typically high net worth clients who use the SBL facility also mitigates much of the credit risk associated with traditional lending.

Although securities-based lending, under the right circumstances, can be a win-win for borrowers and lenders, its growing usage has led to concern because of its potential for systematic risk. In 2016, Morgan Stanley (which is one of very few to release SBL numbers) reported sales of security backed loans worth $36 billion — a 26% increase compared to the year before — and as the interest rate continue to increase, financial expert are becoming increasingly concerned that when the market turns, there will be considerable fire sales and forced liquidations.

Securities lending is not tracked by the SEC nor FINRA — though both have warned investors of the risks — and ​can be considered to be a shadow banking activity. In April, 2017, Morgan Stanley settled a case in which Massachusetts' top securities regulator accused the bank of encouraging brokers to push SBL in cases where it wasn't needed, and with that ignoring the risks involved.

Since the financial crisis in 2007-2008, this has been an area of strong growth for investments banks, and it is partially offsetting declining fees. Some are seeking to offer these loans to millions of Americans with accounts managed by broker-dealers – hence making its way to Main Street (SBL is currently reserved for "ultra-wealthy" clients).

RELATED TERMS
  1. Collateral

    Property or other assets that a borrower offers a lender to secure ...
  2. Bond for Bond Lending

    A lending structure used in the Federal Reserve's security lending ...
  3. Lending Facility

    A mechanism that central banks use when lending funds to primary ...
  4. Cross Collateralization

    The act of using an asset that is currently being used as collateral ...
  5. Excess Loans

    A loan made by a state chartered or national bank to an individual ...
  6. Marginal Lender

    1. A business that will only provide funds to a borrower in exchange ...
Related Articles
  1. Investing

    Securities Lending: Cause Of The Next Financial Crisis?

    Securities lending can pose risks to investor's portfolios and the entire financial system.
  2. Insights

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  3. Tech

    What Goldman Sachs’s Online Lending Means For Banking

    Recently Goldman Sachs has announced its entry into the online lending space. Most commonly known as an investment bank, Goldman’s newest venture may provide insight into the future of online ...
  4. Investing

    Cash Flow Lending Vs. Asset-Based Lending

    When companies need financing, they rely on two primary forms of lending: cash flow-based and asset-based lending. We look at the pros and cons of each.
  5. Investing

    Eyeing a Loan? Consider Skipping the Banks

    Peer-to-peer lending platforms, such as Lending Tree, Lending Club and Prosper, offer borrowers newfound leverage. Here's a look.
  6. Personal Finance

    What Is Collateral?

    Collateral is property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup ...
  7. Investing

    What are the Five C's of Credit?

    The five C’s of credit are what banks and other lenders evaluate about a potential borrower when making a lending decision. The five C’s are Character, Capacity, Capital, Collateral and Conditions. ...
  8. Investing

    Forces Behind Interest Rates

    Interest is a cost for one party, and income for another. Regardless of the perspective, interest rates are always changing.
  9. Financial Advisor

    The 7 Best Peer-To-Peer Lending Websites (LC)

    A look at some of the most well-known and reputable peer-to-peer lending websites, their business models and successes to date.
  10. Personal Finance

    Can't Get A Bank Loan? Turn To Your Neighbor

    Peer-to-peer lending can be an inexpensive way to gain access to credit when banks are restricting lending -- but you need to understand the entire deal first before jumping in.
RELATED FAQS
  1. When did people first start using collateral to secure loans?

    Read about the history of lending and collateral, including a time when an entire nation was pledged as collateral for all ... Read Answer >>
  2. What is the difference between asset-based lending and asset financing?

    In the most common usage, the terms "asset-based lending" and "asset financing" refer to the same thing. Asset-based lending ... Read Answer >>
  3. Who do hedge funds lend money to?

    Discover the various entities that hedge funds are lending to, and the reasons why these hedge funds have been providing ... Read Answer >>
Hot Definitions
  1. Net Profit Margin

    Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage ...
  2. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  3. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
  4. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  5. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  6. Risk Averse

    A description of an investor who, when faced with two investments with a similar expected return (but different risks), will ...
Trading Center