Module XII·Article II·~3 min read
LTV and Haircuts
Leverage, Collateral, and Lombard Loans
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LTV and Haircuts: assessing collateral quality
LTV (Loan-to-Value) and Haircut are key concepts for understanding how much liquidity can be obtained against various collateral assets.
Definitions
LTV = Loan Amount / Collateral Value
Haircut = 1 - LTV = (Collateral Value - Loan Amount) / Collateral Value
Example
A portfolio worth $1,000,000.
The bank offers LTV of 60%:
Maximum loan = $1,000,000 × 60% = $600,000
Haircut = 40% (the bank requires a $400,000 “safety cushion”)
LTV by Asset Classes
| Asset Class | LTV Range | Haircut | Rationale |
|---|---|---|---|
| Cash (USD) | 100% | 0% | No market risk |
| US Treasuries | 95–98% | 2–5% | Minimal credit risk, low vol |
| IG Corporate Bonds | 80–90% | 10–20% | Credit risk, moderate vol |
| HY Bonds | 60–75% | 25–40% | High credit risk, vol |
| DM Large Cap Equities | 60–70% | 30–40% | Market risk, liquid |
| EM Equities | 40–55% | 45–60% | Added EM premium |
| Single Stock | 30–50% | 50–70% | Concentration risk |
| Private Equity | 20–40% | 60–80% | Illiquidity, valuation uncertainty |
| Real Estate | 50–70% | 30–50% | Illiquid, appraisal-based |
| Gold (physical) | 80–90% | 10–20% | Liquid, low vol |
| Bitcoin | 40–50% | 50–60% | Extreme volatility |
| Art/Collectibles | 30–50% | 50–70% | Illiquid, subjective value |
Factors Influencing LTV
| Factor | Influence on LTV | Example |
|---|---|---|
| Volatility | ↑ Vol = ↓ LTV | Crypto vs Treasuries |
| Liquidity | ↑ Liquidity = ↑ LTV | Apple vs micro-cap |
| Credit Quality | ↑ Rating = ↑ LTV | AAA vs BB bonds |
| Concentration | Single position = ↓ LTV | 100% one stock |
| Currency | FX mismatch = ↓ LTV | USD loan vs TRY assets |
| Client Relationship | Long-term client = ↑ LTV | Private bank dynamics |
Advance Rates vs Stressed Values
Banks calculate LTV based on stressed collateral value:
Stressed Value = Current Value × (1 - Expected Max Drawdown)
| Asset | Current Value | Stress (-30%) | Loan at 80% stressed | Effective LTV |
|---|---|---|---|---|
| S&P 500 ETF | $1,000,000 | $700,000 | $560,000 | 56% |
| US Treasuries | $1,000,000 | $950,000 | $760,000 | 76% |
| Bitcoin | $1,000,000 | $400,000 | $320,000 | 32% |
Portfolio-Level LTV
For a diversified portfolio, LTV is calculated taking correlations into account:
Portfolio LTV = Σ(w_i × LTV_i) + Diversification Benefit
Diversification can add 5–10% to LTV owing to reduced portfolio volatility.
Margin Calculation Example
| Position | Value | LTV | Borrowing Power |
|---|---|---|---|
| US Equity ETF | $500,000 | 65% | $325,000 |
| IG Bonds | $300,000 | 85% | $255,000 |
| EM Equity | $200,000 | 50% | $100,000 |
| Total | $1,000,000 | $680,000 |
Blended LTV: 68%
CIO Recommendations
- Build high-quality collateral base — Treasuries and IG bonds provide the best LTV
- Avoid concentrated positions — single stocks receive the worst LTV
- Understand bank methodology — different banks have different approaches
- Maintain headroom — do not use 100% of borrowing capacity
- Monitor daily — mark-to-market can quickly change LTV
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