Wall Street doubles the provision of “cheap money” to the rich

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Bank of America Update

The lending business of major U.S. banks is doubling down on providing funds to wealthy customers, while wealthy Americans are borrowing money to buy second homes, invest in the stock market and potentially reduce their tax bills.

The total loans of wealth management departments such as JPMorgan Chase, Bank of America, Citigroup and Morgan Stanley exceeded US$600 billion in the second quarter, a year-on-year increase of 17.5%. This accounted for 22.5% of the bank’s total loan book, up from 16.3% in mid-2017.

Banks are happy to provide these loans because they have a very low loss record, but they are not without risks.The market turmoil at the beginning of the Covid-19 pandemic last year prompted wealth managers to demand clients ensure Additional collateral.

Peter Atwater, president of Financial Insyghts, said: “I’m worried that you have a lot of credit in the context that the rich will never go bad,” he said of the bank’s allowances to their wealth portfolio. “negligible”.

This type of borrowing has been increasing for more than a decade, but since the Federal Reserve cut interest rates in response to the pandemic, the rate of such borrowing has accelerated. Bankers and consultants said that wealth management clients expect to pay about 1.4% for two-year loans for liquid investments such as stocks.

“The interest rate is so low that they treat it as cheap money,” said Christopher Boyett, co-chair of the private wealth practice of Holland & Knight law firm.

The comparison with bank consumer and corporate loan books is surprising. The wealth management loans of JP Morgan, Bank of America, Citi and Morgan Stanley have grown by 50% in the past four years, while their overall loan books have grown by only 9%.

JPMorgan Chase and Citigroup now provide more loans to a few ultra-high-net-worth customers than to millions of credit card customers. Ten years ago, JP Morgan Chase provided loans to credit card customers five times as much as loans provided to private customers.

The Swiss bank UBS, the world’s largest wealth management institution, has important operations in the United States, and said this week aim Loan more in the United States.

Loans provided to wealthy borrowers are usually used for financial investments, as well as the purchase of second homes and luxury goods. Investors also use loans to invest in their own companies, bypassing the bank’s corporate lending department, and obtain loans in a cheaper and faster way.

Scott Millison, head of US loan solutions at JP Morgan Private Bank, said: “As people rethink where they want to live, lifestyle changes have taken place.” “They need money to buy a new home or to renovate a home. They need to spend money. Buy furniture and art.”

Controversially, borrowing can also help lower taxes. High-net-worth clients do not raise cash by selling assets—and face the capital gains tax bill—but obtain funds by borrowing at the value of their investment.

“Another way these families can obtain liquidity from these assets is to sell them, which of course has tax consequences, and these consequences are not good,” said Sabrena Silver, a partner at the White & Case law firm.

The line chart of consolidated loans of JPMorgan Chase, Bank of America, Citigroup and Morgan Stanley Wealth Management Department exceeded US$600 billion in the second quarter, showing the image of wealth

Silver said that for the bank’s wealthy customers, the tax issue is “relevant, but not a major consideration,” but critics disagree with this approach.

Frank Clement, executive director of the freedom advocacy organization American Tax Equity, said that wealthy borrowers engage in “legal tax avoidance.”

Clement said: “The rich operate under a completely different tax system. Unless they sell, all this accumulated wealth is tax-free – and they are very rich and don’t need to sell.”

Emanuel Seth and Gabriel ZuckermanEconomists at the University of California, Berkeley estimated earlier this year that the collective wealth of American billionaires was US$4.25 trillion, of which US$2.7 trillion was untaxed income.

The tax bill proposed by the Biden administration would increase the capital gains tax from 20% to 39.6%, and plug the so-called “step-based” loophole, allowing wealthy families to transfer capital gains income tax-free between generations.

This increase in capital gains tax may drive higher loans to the wealthy. However, the consultants said that the future pace of lending by the bank’s wealth management department may be more dependent on interest rates, rather than taxation policies determined by Washington.

“I don’t think it is motivated by taxation as much as investment motivation,” Boyt said. “If interest rates rise, the attraction will disappear.”

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