Lombard Rate

What Is the Lombard Rate?

The Lombard rate is the interest rate charged by central banks while stretching out short-term loans to commercial banks. Generally, it alludes to loans that are backed by specific collateral. The term starts from the Lombardy region of Italy, which has a rich history of banking houses dating back to the Middle Ages. Today, it is mostly associated with the Bundesbank, the central bank of Germany.

How the Lombard Rate Works

By and large, the Lombard rate was associated with the banking houses of Italy's Lombardy region, who were renowned for their pledged collateral loans. A few sources tie the term's history to the Bardi banking family, what began in Lombardy and fabricated the Compagnia dei Bardi banking house. This family likewise operated a Paris office known as the Maison de Lombard, which had practical experience in pledged collateral loans. These loans became well known all through Europe, causing the Lombard rate to turn into a common term among the mainland's banking community.

In Germany, the Lombard rate came to be known as the "lombardsatz," and was considered a key financial market indicator. As Germany's economic significance in Europe developed, the Lombard rate became one of the key financial metrics of Europe.

In recent times, references to the Lombard rate have become more uncommon, supplanted by the interest rates distributed by the European Central Bank (ECB). Nonetheless, the old terminology is as yet utilized by a few European countries. For example, Poland keeps on referring to the Lombard banking custom in various ways, with terms, for example, "Lombard loans," "Lombard rate," and "Lombard office" staying in common utilization.

Today, the Lombard rate applies fundamentally to European banks, where it possesses a comparable job as the discount rate utilized by the Federal Reserve in the U.S. In Europe, the Lombard Rate is commonly set to around 0.50% over the Bundesbank's discount rate.

Prior to the formation of the euro, Germany had the authority to control its own monetary policy, raising or bringing down the Lombard rate at its tact. This is not true anymore as the ECB holds the authority for setting interest rates and directing monetary policy.

Illustration of the Lombard Rate

The term Lombard rate was formerly used to allude specifically to the interest rates on loans that the German Bundesbank, Germany's central bank, made to its credit customers. Like the Italian banking houses of the Middle Ages, banks were required to pledge securities in collateral to receive a Lombard loan.

In 1999, notwithstanding, the ECB assumed control over the task of setting the Lombard rate for European Union (EU) banks. The term Lombard rate was dropped for "interest rate on fundamental refinancing activities" (MRO). In any case, a few countries kept on utilizing the term Lombard rate to allude to their central bank's short-term lending rate to commercial banks, both inside and outside of the EU.

Features

• It starts in the Middle Ages from the activities of Italian banking houses.
• Today, the term is more uncommon, however it is still every so often utilized in European and international banking settings.
• The Lombard rate is the central bank interest rate utilized for short-term collateralized loans to central banks.