Re: Lombard Loans

[Basil Moore <bmoore@xxxxxxxxxxxxxxxxx>]

Henry
If Lombard loans are fully secured by high grade securities, why are the
lending rates so high?
Basil Moore


At 12:19 AM 4/7/00 -0400, you wrote:
>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
>