There is no question that lending is a crucial Private Banking (PB) service, whether or not customers choose to make use of it. In the financial sector in Monaco, the figures are significant, with total lending of more than twenty billion euros in 2014, a considerable proportion of which was accounted for by property loans and cash facilities.
Typically, loans do not constitute a separate activity but rather a support function for banks' core business, which is private banking. Loans may be issued in vary varied forms and for very different reasons, but it is possible to make a traditional distinction between overdraft credit lines (which are most common) and commitments by signature. The latter involve issuing bonds or bank guarantees for various purposes; bonds are set up to guarantee the proper performance of residential leases or in the context of transactions with government agencies (e.g. customs guarantees) or in construction (guarantees for deposit repayment or retention money guarantees).
Bank guarantees (usually on-demand) are generally issued to cover other financial institutions which lend to third parties who are often customers of both the bank that issues the guarantee and the beneficiary bank, or are issued in the context of international transactions (e.g. bid bonds or other performance bonds) for corporate clients. Issued at the request of property developers, they may also benefit people who buy apartments for off-plan sales. Institutions mainly offer overdraft credit lines (resulting in an account debit) with various uses; in private banking, the standard credit is the "Lombard" loan (a term derived from the Italian pawnbrokers who offered them in the Middle Ages), since the guarantee takes the form of pledged securities (in the Principality, the practice is governed by law no.1224 (amended) dated 28 December1999).
Such a loan may involve a leveraged credit, which is aimed at sophisticated customers because they will need to access credit to buy securities, carry out exchange market transactions and derivatives trades (options, futures, etc.) in order to optimise the management of their financial assets. This loan is secured by the assets the customer owns at the time the loan is granted and all those he goes on to acquire with the credit line. More conventionally and in the form of a simple cash facility, it is mainly used to satisfy a customer's need for liquidity, for various purposes. It is an essential tool for private banks without which, for want of an alternative, customers may end up realising some or all of their assets deposited with the bank to satisfy their cash needs. This type of credit is often used when a customer suffers unrealised losses on her securities portfolio or, on the contrary, the customer believes the expected performance of the securities portfolio will cover the cost of the credit.
When the customer's financial assets are insufficient to secure the loan, the customer may also look to release equity on a property she owns. This technique is usually approached with caution because while customers who have over-invested in fixed assets may well find this credit offers a source of liquidity, the bank will generally check that the sale of the property is not the only repayment option and that the temporarily "tied up" customer will on maturity have revenue streams that enable her to repay the debt.
This type of financing ties in with the property acquisition loan, another asset management tool that banks offer their customers. The growth in the number of transactions and the "sales" achieved in 2014 in the Principality of Monaco demonstrates buyers' interest and confidence in Monegasque property, and banks backed them with repayment or bullet loans secured by a mortgage security on the financed asset. Home improvement loans are also frequently secured by a second mortgage on the property. Finally, and to a lesser degree, some private banks in the Principality also support property developments or expansions by companies established in Monaco.
