(Bloomberg) — A wealthy Bank of America Corp. client lent his art collection to borrow enough money to buy a sports license. Another client lent his stockpile of 19th-century American landscapes to renovate his estate.
This is the emerging world of art lending, which uses artworks as collateral for loans, allowing wealthy owners to cash in on their collections without having to part with prized possessions. Art sales have fallen, forcing many to reassess their options. New York’s big auction season in May lost around 23 percent in value compared to last year, while the world’s richest people are still waiting to see if they can buy anything.
“If you are an owner and need liquidity now, you hesitate to sell and instead take out loans on your artworks while you wait for better market conditions,” says Adriano Picinati di Torcello, global art and finance coordinator at Deloitte. This is contributing to the growth of the art credit market, he says.
As the market grows, Wall Street’s largest firms are stepping up their efforts by hiring additional staff and marketing the service to new and existing clients. While the exact size of the market is not known, Deloitte estimates that the number of outstanding art loans could exceed $36 billion in 2024. Last year, it was $29 billion to $34 billion. By comparison, five years ago, it was $20.3 billion to $23.6 billion.
The largest U.S. banks are seeking to expand their reach into the art market to attract some of the world’s wealthiest individuals and families. Catering to the wealthy often means competing with rivals offering more diverse products, while facing the constant threat that clients will move their money elsewhere.
Art lending offers particular advantages to wealthy owners who evaluate their investments against a backdrop of volatility in the broader financial markets. Unlike stocks, art is not subject to daily fluctuations and is valued annually.
“It’s not every day that we ask how much your Andy Warhol is worth,” said Katy Lingle, U.S. head of credit solutions at JPMorgan Chase & Co. Private Bank.
The global art market has cooled off following record valuations in the wake of the pandemic. Even though sales have plummeted and values have declined, demand for art loans remains.
Bank of America has seen a more than 14 percent increase in art-backed credit lines from a year ago, according to Drew Watson, head of art services. Its art loan portfolio recently reached its highest level ever. In JPMorgan’s wealth management business, art loans are up 1 percent year over year, in line with other loans in the business, a spokesperson said.
“Even in a higher interest rate environment, people are taking advantage of current opportunities,” says Watson, borrowing against their artwork rather than selling it at a discount or as inventory.
Bank of America has achieved a market share of over 30 percent since launching its art services group in 2017, according to a spokesperson. The team the bank continues to invest in includes 12 art market specialists in lending, wealth planning and philanthropy. The bank’s clients who already have loans are keeping them, while utilization has remained at around 70 percent this year, according to Watson.
“The retention and strong utilization is reflected in the outstanding balances, which remain high,” he said.
Bank of America structures these loans with a variable interest rate, so the cost of capital could fall over time if rates fall. The rate is based on the rate for secured overnight financing plus a markup, Watson said, so if rates fall, it’s more likely that such loans will become even more expensive.
Citigroup, which estimates its market share at 10 to 15 percent, has a solid client base in the art loan space because interest rates on art loans are still favorable compared to other types of loans, says Fotini Xydas, head of art finance at Citi Private Bank.
“Even though interest rates are higher, art is a very stable asset over the long term in terms of its volatility compared to other assets,” she said.
Art loans work like lines of credit that clients draw on and pay back when they can. Because of the nature of the collateral, they are only available to the wealthy. The larger the collection, the more flexibility borrowers have.
To qualify for Bank of America and Citigroup, a collection typically needs to be worth at least $10 million, which secures a loan of $5 million or more. Bank of America typically offers a loan of 50% of value, with each piece worth at least $100,000. Terms are about one to three years, with an option to extend, and clients can continue to keep their pieces protected at home as long as they are within the U.S. Citigroup requires a minimum value of $200,000 per piece.
JPMorgan bases the size of the loans on the value of the collection and the borrower’s creditworthiness. The bank looks at the diversity of the pieces and makes sure they are “museum quality,” Lingle said. It also conducts a financial analysis of borrowers to make sure they can service the debt.
A Citigroup client who had collected several paintings by Pablo Picasso and Claude Monet used them to secure a line of credit to pay taxes related to estate planning—another common use of this product.
Another private equity owner needed a line of credit to finance a capital requirement. Bank of America provided a $10 million loan to a borrower concerned about market volatility, using its collection of postwar and contemporary art as collateral.
“There are margin calls, deaths, divorces and bankruptcies, so we have endless loan interest,” says Philip Hoffman, founder of The Fine Art Group, an art consulting and finance specialist that competes with banks.
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