Re: Lombard Loans

["J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>]

Henry,
      Is it not the case that in Germany the equivalent of
the federal funds rate is called the "Lombard rate"?
Barkley Rosser
-----Original Message-----
From: ÁÎ×Ó¹â Henry C.K.Liu ¹ù¤l¥ú <hliu@xxxxxxxxxxxxxx>
To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
Date: Saturday, April 08, 2000 6:45 PM
Subject: Re: Lombard Loans


>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
>> >
>
>