Lombard Rate - Explained
What is the Lombard Rate?
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Table of ContentsWhat is the Lombard Rate?How Does the Lombard Rate Work?
What is the Lombard Rate?
The term Lombard rate has been used globally by people in various sectors to refer to the interest rate used by the central bank - Bundesbank. Moreover, the term Lombard credit refers to the credit given to other banks by the Bundesbank against the pledges presented. These pledges are mostly life insurance policies or securities. In this type of transaction, the security item must be readily marketable to guarantee the security interest. Following the introduction of the Euro currency, the ECB has used the term marginal lending rate to mean the same thing.
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How Does the Lombard Rate Work?
The term Lombard originated from the individuals who conquered and settled in the northern part of Italy known as Lombardy. The term is also used in the Europe for the bank rates by the central bank when giving out loans to other banks. Lombard loans simply mean a secured loan whereby a deposit secures the whole loan amount. These deposits include the money in the bank accounts, insurance policies, bonds or any other asset that can be used as security a loan. The loan is based on varying terms from one country to another. for example, in Switzerland, the Lombard loan is even possible without a fixed loan term. This gives the borrower an opportunity to decide the time they would like to pay back their loans. The Switzerland banks have set a minimum loan security requirement that ranges from 25, 000 to 100, 000 francs. The maximum Lombard loan that the borrower can get varies depending on the profile of the borrower to the bank. This loan is widely in Switzerland in the investments and security trading. History of the Lombard loans. The origin of term Lombard can be traced to the middle ages and mostly the banking system that was used by the merchants from the Italy especially from the Lombard region. Due to economic expansion and increased trading of the west especially around the 12th century, these merchants are the first people to introduce the loans to the customers the act that was later adopted by the banks as a profession. The Lombard loan provides that the assets must remain invested. However, the borrower retains all the rights and benefits related to the invested asset such as dividends for equity holdings and voting rights. In this regard, the borrower does not need to reduce their potential returns or capital to secure the loan. Nonetheless, there was accost that was charged on the borrower when they seek to obtain loans from the bank. The cost of the loan depends on the amount of money borrowed from the banks, the length of the time to repay the loan, and the quality of the collateral used to secure the loan.