Re: Lombard Loans

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

I suspect it is because they are predatory by nature.  They were originally
designed for last resort emergency purposes. Many states in the US have usury
laws that prohibit Lombard loans.  East European central banks now use them
mostly as a bailout for trouble bankss while using high rates and harsh
conditions as a discouragement for repeated use. A painful cure, so to speak,
to prevent moral hazard. The theory being that no matter how unruly bankers
as a group behave, the government cannot put them all in jail or in
bankruptcy.  Financially, because the undelying collateral faces sudden
volatility even though they are supposed to be high grade in normal times,
that fact justifies the high rates during a crisis.  The morality issue is
answered by the claim that borrowers do not have to accept Lombard loans,
which is not always true in a collpasing economy.  In practice, Lombard loans
tend to drive legitimate businesses under, while they are abused by shady
operations.  Much Russian money laundry came from Lombard loan proceeds, with
the loans in default two months after closing and the central banks holding
worthless Russian securities that the CB could not officially deny, for
political reasons, were of solid value at the time of the loan closing.

Hedge funds borrow Lombard loans becuase their anticipated earning are
frequently way above Lombard rates.

Henry C.K. Liu

Basil Moore wrote:

> 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
> >