CPB Credit & Lending Solutions for Private Clients 1 ā Questions and Answers
Question 1: What is a Lombard loan in private banking?
- A loan secured by real estate collateral only
- A loan secured by a portfolio of financial securities (Correct answer)
- An unsecured personal loan for high-net-worth clients
- A government-backed mortgage product
Correct answer: A loan secured by a portfolio of financial securities
A Lombard loan is a collateralized credit facility secured by a portfolio of financial assets such as stocks, bonds, or mutual funds, commonly used in private banking.
Question 2: Which metric is most commonly used to determine the maximum loan amount in securities-backed lending?
- Debt-to-income ratio
- Loan-to-value (LTV) ratio (Correct answer)
- Credit utilization rate
- Net interest margin
Correct answer: Loan-to-value (LTV) ratio
The LTV ratio compares the loan amount to the market value of the pledged securities, setting the ceiling for how much can be borrowed against the portfolio.
Question 3: What typically triggers a margin call in a pledged securities credit facility?
- The client's credit score drops below 700
- The portfolio value falls, pushing the LTV ratio above the agreed maximum (Correct answer)
- The client requests an increase in the credit line
- Interest rates rise by more than 200 basis points
Correct answer: The portfolio value falls, pushing the LTV ratio above the agreed maximum
A margin call occurs when the pledged portfolio's market value declines enough that the LTV ratio breaches the contractual maximum, requiring the client to add collateral or repay part of the loan.
Question 4: What is concentration risk in the context of securities-backed lending collateral?
- The risk that a borrower holds loans at too many different banks
- The risk that collateral is heavily weighted in a single security or sector (Correct answer)
- The risk that interest rates change materially during the loan term
- The risk that the client exits the banking relationship unexpectedly
Correct answer: The risk that collateral is heavily weighted in a single security or sector
Concentration risk in collateral arises when pledged assets are dominated by a single issuer, sector, or asset class, making the portfolio value highly vulnerable to adverse moves in that area.
Question 5: Which type of private banking credit facility provides ongoing, revolving access to funds without a fixed repayment schedule?
- Term loan
- Bullet loan
- Line of credit (Correct answer)
- Amortizing mortgage
Correct answer: Line of credit
A line of credit gives the borrower flexible, revolving access to funds up to a predetermined limit, allowing draws and repayments as needed without a rigid schedule.
Question 6: What is a pledged asset mortgage (PAM)?
- A mortgage where the property is pledged to a third-party guarantor
- A home loan where investment assets are pledged as additional collateral to improve terms or eliminate PMI (Correct answer)
- A commercial real estate loan secured by government bonds
- A reverse mortgage product for clients aged 65 and older
Correct answer: A home loan where investment assets are pledged as additional collateral to improve terms or eliminate PMI
A pledged asset mortgage allows clients to pledge investment portfolios as supplemental collateral, potentially eliminating private mortgage insurance and securing more favorable loan terms.
Question 7: In private banking, what distinguishes 'relationship pricing' for credit products?
- Credit is priced solely based on the prevailing prime rate
- Pricing is set uniformly across all clients regardless of assets held
- Loan pricing reflects the overall profitability of the client's full relationship, including deposits and investments (Correct answer)
- Rates are determined exclusively by the client's credit bureau score
Correct answer: Loan pricing reflects the overall profitability of the client's full relationship, including deposits and investments
Relationship pricing considers the full breadth of a client's business with the bankādeposits, AUM, and other servicesāresulting in preferential credit terms for high-value, multi-product clients.
CPB Credit & Lending Solutions for Private Clients 1
What is a Lombard loan in private banking?