What is the Lombard Rate
The Lombard rate is the interest rate set by a central bank for short-term liquidity loans to commercial banks. The term Lombard rate was formerly used to refer specifically to the interest rates on loans that the German Bundesbank, Germany’s central bank, made to its credit customers. In order to receive a Lombard loan, the banks were required to pledge securities as collateral on the loans. In 1999, however, the European Central Bank (ECB) took over the task of setting the Lombard rate for European Union (EU) banks. The term Lombard rate was dropped and it is now referred to as the interest rate on main refinancing operations (MRO). However, some countries outside of the EU have continued to use the term Lombard rate to refer to their central bank’s short-term lending rate to commercial banks.
BREAKING DOWN Lombard Rate
Lombard rate mainly applies to international equities, and less so to United States equities or equities from other countries. This rate is similar to the discount rate used by the Federal Reserve Bank in the United States. The rate was usually 0.5% above the Bundesbank discount rate. Prior to the Euro, Germany had the authority to control its own monetary policy and raise or lower the Lombard rate, but this is no longer the case. Now the ECB has the primary responsibility for calculating the bank lending rate and generally guiding fiscal policy. Of course, Germany is still a strong voice within the ECB.
The History Behind the Lombard Rate
The name for the Lombard rate is believed to date back to the middle ages, referring to a banking style practiced by Italian bankers from the Lombardy region. These bankers offered consumer loans on pledged collateral. Some sources tie the term's history to the Bardi banking family, which started in northern Italy (Lombardy region) and built the Compagnia dei Bardi, which operated a Paris office called Maison de Lombard that specialized in pledged collateral loans. The concept of a Lombard rate spread across Europe with the growing financial network created by the private banks.
In Germany, this rate was called the lombardsatz and it was considered a financial market indicator in that country. As Germany grew in financial importance, the Lombard rate became one of the key financial indicators for Europe. Now it has been replaced by the key interest rates published by the ECB. Poland is one of the European nations that continues to use the term Lombard rate as well as referring to its lender of last resort as the Lombard facility, which, of course, issues Lombard loans. Some nations have dropped the term Lombard rate, but still apply the Lombard name to the loans or the facility. In Europe, even finance carries a deep history with it.