Lombard loan

Lombard loan
See also
Barter agreement Staged payments Sales agent Advance funding Ijarah Freight carrier Depository bond Capital mortgage Collecting bank

A lombard loan is granted to business units secured against movables, mainly including securities, commodities and precious metals.

Lombard loan of the central bank - a loan secured against securities granted to commercial banks by the central bank.

Lombard loan of a commercial bank - granted to natural or legal persons. For the duration of the loan agreement, the bank takes over the pledged movable property, and if the customer fails to repay, it acquires the possibility of selling the pledge.

The lombard loan in a commercial bank is intended to collate securities, products, receivables and valuables, e.g. insurance items. The loan is a short-term loan and its main feature is the possession of the object of pledge by this bank. It is granted not to its full value most often against securities. The lombard loan, which is granted against pledge, imposes the valuation of the subject of the pledge, which is performed at the expense of the client. The specialists appointed by the bank are designated for the valuation. Usually the loan amount ranges from 20% to 80%

Lombard rate

The lombard loan rate is the main interest rate of the Central Bank and it usually performs the function of the maximum rate. This means that it defines the marginal cost of acquiring money on the international market.

The Lombard rate sets the price at which the Central Bank is able to grant Commercial Bank loans under the pledge of securities. The Lombard loan amount can not be greater than the equivalent of 80% of the securities that are pledged. Setting the Lombard loan rate is one of the main tasks of the Monetary Policy Council.

Lombard loans and Lombard credit protection

Lombard loans are granted for a period of not less than 7 days and not longer than 3 months. The interest rate offered by the bank is competitive with the pawnshops. Pawnshops are not banks and therefore have the possibility to grant loans of a consumer nature.

The lombard loan may be secured by various savings books of banks, vouchers or blocking of cash on the accounts. The Bank may also accept other forms of security such as jewelry, gold or goods.

Characteristics

• A characteristic feature of this loan is the bank's possession of the pledge. Therefore, it is most often provided against securities, the actual storage of which does not cause difficulties for banks. Although banks usually do not have storage facilities for storing goods, they can grant lombard loans under their pledge, represented by a warrant, which is a special component proof. In many shopping centers, where freight stocks accumulate (especially in port cities), there are special warehouses that provide services in the form of storing goods.
• Some of them are authorized to issue the so-called warrants stating the fact of storing certain goods and enabling the transfer of ownership of these goods by way of endorsing the warrant. A warrant may be the subject of a pledge. The bank accepting freight in this form must take into account the risk associated with the goods, e.g. in the form of a drop in the price of the good, reduction in its quality, etc. Therefore, the amount of lombard loan granted is usually lower than the value of the pledge.

Conditions for obtaining a lombard loan

• a lombard loan may be paid on a one-off basis or in tranches to the account specified by the bank
• the lombard loan may be paid on the same day
• having current and forecasted credit repayment capacity but also paying interest
• agreeing on the collateral required and signing the credit agreement

Loan size

The maximum loan size results from the accepted limit of the loan to the value of the pledge, which for securities is usually 50-75% of their market value.

References

• Radulescu M. (2007) The Impact of the National Bank of Romania Monetary Policy on Balance of Payments, Romanian Journal of Economic Forecasting nr 2, str. 26-43
• Bindseil, U., & Jablecki, J. (2011). The optimal width of the central bank standing facilities corridor and banks' day-to-day liquidity management.