THE FIRST QUESTION · THE LOAN · PROTECTION
A term sheet offers three protections: a negative pledge, a quarterly leverage covenant, and monthly management accounts.
// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON
Lending Value: a Worked Example
The price tells you what it is worth. The bank asks what it fetches.
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
Lending value answers the question a borrower asks first: how much will the bank lend against what I own? The bank takes each holding's market price and cuts it by a percentage that reflects how far and how fast that kind of asset can fall before the bank could sell it. Cash and high-grade bonds keep most of their value; a single company's shares keep less; unlisted shares may count for nothing. The total is a ceiling on the loan. It moves every day the prices move, and when the loan rises above it the borrower must find new money or sell.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
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Issue 03 — Kauri Dairy Holdings. The patriarch is retiring. The bank hears about the succession plan from the accountant first. Your call first, then the senior banker's.
// 01 — WHY A BANK LENDS LESS THAN THE PRICE
A loan against securities is repaid, if things go wrong, by selling them. The bank's risk sits in the gap between two moments: when it sees the loan is no longer covered, and when it has sold enough to repay it. Prices can keep falling in between, the client may be given time to respond, and a large or thinly traded holding takes longer to sell without moving the price. The lending value leaves room for that gap. The difference between market value and lending value is the haircut, and the larger the possible fall, the larger the haircut.
Four things set the percentage. Volatility: how far the asset's price has moved in a short period, in ordinary markets and in bad ones. Liquidity: how quickly the bank could sell it at close to the quoted price. Concentration: one company's shares, or the client's own company, carry the risk of a single event. Currency: a loan in one currency secured by assets priced in another can be uncovered by the exchange rate alone. The same idea runs through commercial lending, where a property, a fleet or a debtor book is counted at a lending value set by the bank's policy, and those values add up to the loan to security ratio.
// 02 — HOW LENDING VALUES ARE ADDED UP
Lending value of a holding = market value × lending ratio
Portfolio lending value = sum of the holdings' lending values
Headroom = portfolio lending value − loan
Margin call = loan − portfolio lending value, when the loan is larger
The lending ratios come from the lender's list of acceptable securities, and they are the lender's, not a market standard. Lenders differ on how they treat a portfolio that leans on one holding: some cut that holding's ratio, some cap how much of the lending value any one name can supply. Lenders also differ on when they call. Some act as soon as the loan exceeds the lending value; others allow a stated buffer above it first, and then ask for the loan to be brought back within the lending value. The agreement says which, and how long the client has to respond.
// 03 — THE EXAMPLE
A client of a private bank, constructed for this page like every figure in it, holds a portfolio worth US$3.0m and borrows US$1.45m against it to buy a holiday property. The lending ratios are the example's, not a market norm or any lender's list.
Cash deposit 0.20 × 90% = 0.180
Government bonds 0.50 × 80% = 0.400
Global equity fund 1.20 × 65% = 0.780
One listed company's shares 0.60 × 40% = 0.240
Unlisted shares 0.50 × 0% = 0
Portfolio lending value = 1.600
Headroom: 1.600 − 1.450 = 0.150
The portfolio lends at about 53% of its market value overall, and the loan uses most of that. Markets then fall: the equity fund loses 25% and the single company's shares 40%. The bonds and the cash do not move.
Equity fund 0.90 × 65% = 0.585
Listed shares 0.36 × 40% = 0.144
New lending value: 0.180 + 0.400 + 0.585 + 0.144 = 1.309
Margin call: 1.450 − 1.309 = 0.141
The client must restore US$141,000 of cover, and the three ways of doing it cost different amounts.
Pay in cash: 0.141
Pledge more bonds at 80%: 0.141 ÷ 0.80 = 0.176 of bonds
Sell the fund to repay: 0.141 ÷ (1 − 0.65) = 0.403 of the fund
Sell the listed shares: 0.141 ÷ (1 − 0.40) = 0.235 of the shares
Selling is the expensive route, because each dollar sold also removes the lending value it was providing. A sale of the fund must be nearly three times the call, made after a 25% fall. The holding with the lowest ratio frees the most cover per dollar sold, which is why the agreement's choice of which assets the bank may sell, if the client does not act, matters to both sides.
// 04 — HOW IT DIFFERS FROM A HAIRCUT AND AN LVR
A haircut is the same idea seen from the other side: a 35% haircut is a 65% lending ratio. The word also has a regulatory use. Under the comprehensive approach in the Basel Committee's standard on credit risk mitigation, a bank applies supervisory haircuts to financial collateral to work out how much capital the collateral saves it, assuming the collateral is revalued and topped up daily. Those figures answer a capital question, not the lending question, and a lender's own ratios for a client's portfolio are set separately.
A loan to value ratio is the result, not the ceiling: the loan divided by what the security is worth now. In the example, the LVR on the portfolio was 1.45 ÷ 3.0, or 48%, on the day of the loan, and 1.45 ÷ 2.46, or 59%, after the fall. The lending value says whether that LVR is still inside what this particular mix of assets supports.
DEFINED IN ONE PARAGRAPH → · LOAN TO SECURITY RATIO → · THE QUESTION ON IT →
// 05 — WHERE IT DECIDES A FILE
In a private bank the lending value caps the loan, but the credit decision sits around it. How close to the ceiling the client borrows decides how large a fall sets off a call. What the money is for decides whether the client could meet one: a client borrowing against shares to support the company those shares depend on has one risk, not two. And the call timetable in the agreement decides whether the client meets a call with new money or the bank meets it with a sale.
In Australia, retail investors meet the same mechanism as a margin loan, a regulated financial product whose lenders publish a lending ratio for each approved security. Private banks in the UK and New Zealand offer it as portfolio or Lombard lending. In commercial files, lending values decide the borrowing base on a debtor book and the security cover on a term loan, and a new valuation moves them as surely as a market price does.
THE MARGIN CALL THAT FOLLOWS → · ADVANCE RATE → · FORCED-SALE VALUE →
// SOURCES
The documents the statements on this page rest on. Each was opened and checked when cited.
- Basel Committee on Banking Supervision, Basel Framework, CRE22 Standardised approach: credit risk mitigation (in force 1 January 2023) — CRE22.40 and CRE22.49 — Banks apply supervisory haircuts to financial collateral to take account of possible future price changes, set by collateral type and calibrated to daily revaluation and remargining — section 04.
// QUESTIONS PEOPLE ASK
- How much can I borrow against my investment portfolio?
- Up to the sum of each holding's lending value, which depends on the mix. A portfolio mostly in cash and high-grade bonds supports a larger loan than one of the same size in a few company shares, and unlisted or thinly traded holdings may support nothing. Each lender publishes or agrees its own ratios. Borrowing the full amount leaves no room for prices to fall, so the useful question is how much to borrow, not how much is available.
- What is the difference between market value and lending value?
- Market value is what a holding would sell for today at the quoted price. Lending value is the part of that value a lender will advance against, after cutting it for how far and how fast the price could fall before the lender could sell, how easily it could be sold, and whether the portfolio leans on one name. The gap between the two is the haircut, and it protects the lender, not the borrower.
- What happens if my loan rises above my portfolio's lending value?
- The loan is in margin call, either at once or after any buffer the agreement allows. The borrower must restore the cover within the time the agreement sets, by paying down the loan, pledging more acceptable assets, or selling holdings to repay. If the borrower does not act in time, the agreement usually lets the lender sell the pledged assets itself, at whatever the market then pays.
- Why do different shares get different lending values?
- Because they carry different risks of a fall the lender cannot get out of in time. Shares in a large, widely traded company or a diversified fund usually receive a higher ratio than shares in a small or thinly traded company, which can fall faster and take longer to sell. A lender may also cut the ratio when one holding dominates the portfolio, or exclude securities it cannot price daily.
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