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 Now it has been replaced by the key interest rates published by the ECB.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.

RELATED TERMS
  1. Loan

    A loan is money, property or other material goods that is given ...
  2. Key Rate

    The key rate is the specific interest rate that determines bank ...
  3. Central Bank

    The entity responsible for overseeing the monetary system for ...
  4. Commercial Loan

    A commercial loan is a debt-based funding arrangement that a ...
  5. ECB Announcement

    The ECB Announcement is a publication by the European Central ...
  6. Senior Bank Loan

    A senior bank loan is a loan issued to a company or individual ...
Related Articles
  1. Investing

    IPO Stinkers: The Biggest IPO FAILS of 2014

    Despite a booming market, some IPOs crashed and burned. Sure, going public brings a flood of capital, but it can also expose a company to unpredictable market forces.
  2. Investing

    Analyzing a bank's financial statements

    In this article, you'll get an overview of how to analyze a bank's financial statements and the key areas of focus for investors who are looking to invest in bank stocks.
  3. Personal Finance

    How To Apply For a Personal Loan

    Learn about different avenues for applying for a personal loan, and learn valuable tips to help you get your personal loan application approved.
  4. Personal Finance

    How Interest Rates Can Go Negative

    Central banks from Europe to Japan have implemented a negative interest rate policy (NIRP) in order to stimulate economic growth.
  5. Insights

    How Negative Interest Rates Work

    Policymakers in Europe go for the unconventional: negative interest. What could happen?
  6. Insights

    Central Bank

    They print money, they control inflation, they are known as the "lender of last resort". Check out the role of Central Bank nd how its role evolved overtime.
  7. Investing

    Bank of America's 3 Key Financial Ratios (BAC)

    Discover some of the key financial ratios that show the quality of Bank of America's loan portfolio and how profitable the bank has been.
  8. Managing Wealth

    Unsecured Personal Loans: 8 Sneaky Traps

    If you are seeking a personal loan, be aware of these pitfalls before you proceed.
  9. Insights

    The Impact of a Fed Interest Rate Hike

    The Federal Reserve raised benchmark interest rates. With so much attention on the Fed's policy, here's what happens when the Fed hikes rates.
RELATED FAQS
  1. What's the difference between the prime rate and the discount rate?

    Learn more about the prime rate and the discount rate and how the Federal Reserve uses these rates in the U.S. economy. Explore ... Read Answer >>
  2. How do interest rate changes affect the profitability of the banking sector?

    Learn how interest rates affect the banking sector. When interest rates rise, the profitability of the banking sector increases. Read Answer >>
  3. How do central banks impact interest rates in the economy?

    Learn how central banks such as the Federal Reserve influence monetary policy in the economy by increasing or decreasing ... Read Answer >>
Trading Center