Re: Lombard Loans

["ÁÎ×Ó¹â Henry C.K.Liu ¹ù¤l¥ú" <hliu@xxxxxxxxxxxxxx>]

Generally a Lombard Loan is a type of loan forwarded by the central bank
which is secured by collateral such as stock and bonds.
For example, a lombard loan is a secured loan the Bundesbank makes,
based on the pledge of high grade securities, intended for emergencies,
with limited availability.

During the late middle ages the germanic House of Lombard in
Europe(members of the Lombard League of Northern Italy which broke away
from the rule of Emperor Frederick I) had a group of pawn shops. The
sign of the House of Lombard was the three golden balls and this sign
was associated for years with the pawn industry.
Borrowers were likely to pay usurious rates of interest on loans for
short periods of time.
The English precursor to Wall Street, London's Lombard Street is the
original district of finance and the birthplace of the money market,
probably named after the Lombard bankers. Fast-paced and highly-charged,
it is a hotbed of financial activity whose impact is felt not just
nationally, but globally.
 Lombard loan are made by European banks in international currencies,
often at escalating rate over tiem, i.e. 8% first month 9% second month
etc. 25% interest is not uncommon for lombard rates.
Many Swiss banks make advances on securities, precious metals or on
trust deposits in all currencies (Lombard loan) in the shape of a credit
line as current account with variable rate of interest or as term loan
with fixed rate of interest (usually up to 12 months).
Private banks often make secured loans based on Lombard rates plus 1.5%.
  Hedge funds are frequent lombard loan borrowers.

Here is an example from a Polish Bank
                  LOMBARD LOAN

                  The lombard loan may be granted to legal and natural
persons with full ability to perform legal acts. The major advantage of
this loan is the possibility of its immediate disbursement. We offer
loans secured by pledge of :
bank securities of Kredyt Bank S.A. or other bank accepted by our Bank,
blockade of funds on bank accounts in Polish Zlotys and foreign
currencies.
                  To be granted the loan the Client has to sign an
agreement with the Bank and place the required pledge.
                  Usually, the loan is granted for a period up to 13
weeks, however, when the loan is collateralized by the blockade of funds
on a bank account, the credit period may be extended up to 26 weeks. The
minimum amount of a loan is PLN 500.The interest is taken from the loan
amount in advance, while the repayment of the loan (the whole amount at
a time) follows on the agreed date.
                  Interest rates for lombard loan - from 25.0% p.a..

A Russian example:
As an official dealer of the Central Bank of Russia in the market of
government credit bonds and treasuries (GCB), until August 1998
Metcombank actively dealt with short-dated government papers (GKO) and
federal loan bonds (OFZ) at the Moscow Interbank Currency Exchange with
the purpose of controlling liquidity and allocation of temporary surplus
funds. A task was put before the Bank's traders to take the raised
financial resources out of the market upon the termination of the
repayment period.
After the Government had frozen its GCB obligations Metcombank deposited
a part of its government credit bonds as a pledge to the Central Bank of
Russia with the purpose of receiving a lombard loan. Afterwards the
pledged securities were transferred to the Central bank to settle the
debt.

June 13 1997 - The Central Bank of Russia today lowered its refinancing
rate to 24% annually from 36%, a bank official told Interfax. Interest
rates on Lombard loans were lowered as well to 18% from 24% for loans of
three to seven calendar days, to 21% from 30% for eight to 14-day loans,
and to 24% from 36% for loans of 15 to 30 days. The refinancing and
Lombard loans were lowered because real yield on Treasury bills and
federal loan bonds for commercial banks is about 24% annually.

A Croatian example:
At the Wednesday meeting, members of the Council decided that the
interest rate of 5.9 percent is to be calculated on total banks and
savings banks? mandatory reserves, that is, not only on the amount
deposited obligatory with the central bank, but also on the amount kept
in giro-accounts. Taking into consideration movements of interest rates
on the money market and
in commercial banks and the role of the central bank as "the lender of
last resort", the Council of the CNB decided to increase the Lombard
rate from 11 percent to 12 percent. However, if the granted Lombard loan
is paid back by the end of the day on which it was granted, the interest
charged will be only 7 percent. By introducing this measure, the CNB
wants to enhance more careful liquidity management in banks and the use
of secondary sources of liquidity primarily for real short-term and
temporary disturbances in liquidity. In addition, the Council decided to
grant to financial institutions another possibility for short-term
borrowing from the central bank:
Lombard loans will be granted not only up to 50 percent of the nominal
value of NBC bills denominated in kuna and in foreign currency, but also
up to 50 percent of the nominal value of Treasury bills (so far they
were granted only up to 25 percent of Treasury bills) and bills of
exchange of the Finance Ministry that have been pledged for this purpose
(a new instrument).
By introducing this instrument, the CNB aims at enhancing the adjustment
of banks to liquidity oscillations, which will consequently diminish
negative effects of these oscillations on interest rate movements and
prevent exaggerated reactions of depositors on the smallest indication
of, be it only a temporary, disturbance in liquidity of a certain bank.

A Belorussia example:
Belorussia is about to raise the refinancing rate from 38% to 48% since
December 1. The decision has been made at an ordinary session of Board
of National Bank conducted by the President, P. Prokovich. Besides, the
fixed lombard loan rates for 14 days shall constitute 52%, and for 15 to
30 days - 54%. According to a statement of information department of
National bank, the rates would be raised in opposition to the inflation
tendencies in the economy, to provide stabilization of the currency
sphere and more favorable conditions of attracting private means on
deposits and their protection from inflation.

A Latvia example:
The Bank of Latvia Executive Board has established the following Lombard
rates as of October 19, 1998: 7% annually for the first 10 days of
credit use, 8% annually starting with the 11th day of credit use, and 9%
annually starting with the 21st day of credit use.
Like other central banks, the Bank of Latvia issues Lombard credits to
banks acting as the lender of last resort, and these credits are the
most expensive refinancing instruments available to the banks. In
October the increasing bank demand for lats contributed to a relatively
rapid rise in interbank loan interest rates and the Bank of Latvia?s
repo auction interest rate averages. In order to improve the structure
of the interest rates for loans granted by the Bank of Latvia, the Bank
has increased the Lombard rates by 1%.

I hope this helps.

Henry C.K. Liu

phillp2@xxxxxxxxxxxxxxx wrote:

> Can anyone on PKT tell me precisely what a lombard loan is?
>
> Paul Phillips,
> Economics,
> University of Manitoba