A Unified Risk-Neutral Stochastic Simulation Framework for Securities-Backed (Lombard) Lending Business Context, Structural Wrong-Way Risk, and Endogenous Loss Modeling

Author(s)	Arghya Ghosh, Dr. Ramesh Bhavisetti
Country	India
Abstract	Securities-Backed Lending (SBL), also known as Lombard lending, is widely used in private banking and wealth management to provide liquidity against pledged equities or liquid portfolios. While such loans are over-collateralised and frequently margined, they exhibit strong market-credit interaction: equity drawdowns increase loan-to-value ratios, trigger margin calls and liquidation, and materially elevate default risk. This paper develops a unified risk-neutral stochastic simulation framework for SBL that jointly models interest rates, equity collateral dynamics, and equity-driven default through an intensity (Cox) construction where default intensity depends on the loan-to-value ratio. Recovery and loss-given-default are endogenously determined by collateral value and liquidation haircuts. A fully reproducible Monte Carlo study on simulated market-consistent data is provided, including figures and tables suitable for publication.
Keywords	Securities-Backed Lending, Lombard loans, collateralised lending, wrong-way risk, Monte Carlo simulation, Cox process, endogenous LGD.
Published In	Volume 8, Issue 1, January-February 2026
Published On	2026-02-09

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