
Lombard Rate
The Lombard rate is the interest rate charged by central banks when extending short-term loans to commercial banks. The Lombard rate is the interest rate charged by central banks when extending short-term loans to commercial banks. The Lombard rate is the central bank interest rate used for short-term collateralized loans to central banks. Nevertheless, some countries continued to use the term Lombard rate to refer to their central bank's short-term lending rate to commercial banks, both inside and outside of the EU. 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.

What Is the Lombard Rate?
The Lombard rate is the interest rate charged by central banks when extending short-term loans to commercial banks. Traditionally, it refers to loans that are backed by specific collateral. The term originates from the Lombardy region of Italy, which has a rich history of banking houses dating back to the Middle Ages. Today, it is mainly associated with the Bundesbank, the central bank of Germany.



How the Lombard Rate Works
Historically, the Lombard rate was associated with the banking houses of Italy's Lombardy region, who were famous for their pledged collateral loans. Some sources tie the term's history to the Bardi banking family, which started in Lombardy and built the Compagnia dei Bardi banking house. This family also operated a Paris office known as the Maison de Lombard, which specialized in pledged collateral loans. These loans became popular throughout Europe, causing the Lombard rate to become a common term among the continent'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 importance in Europe grew, the Lombard rate became one of the key financial metrics of Europe.
In recent times, references to the Lombard rate have become less common, replaced by the interest rates published by the European Central Bank (ECB). However, the old terminology is still used by some European countries. For instance, Poland continues to reference the Lombard banking tradition in a variety of ways, with terms such as "Lombard loans," "Lombard rate," and "Lombard facility" remaining in common usage.
Today, the Lombard rate applies mainly to European banks, where it occupies a similar role as the discount rate used by the Federal Reserve in the U.S. In Europe, the Lombard Rate is typically set to about 0.50% above the Bundesbank's discount rate.
Prior to the formation of the euro, Germany had the authority to control its own monetary policy, raising or lowering the Lombard rate at its discretion. This is no longer the case as the ECB holds the authority for setting interest rates and guiding monetary policy.
Example of the Lombard Rate
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. Similar to the Italian banking houses of the Middle Ages, banks were required to pledge securities in collateral in order to receive a Lombard loan.
In 1999, however, the ECB took over the task of setting the Lombard rate for European Union (EU) banks. The term Lombard rate was dropped in favor of "interest rate on main refinancing operations" (MRO). Nevertheless, some countries continued to use the term Lombard rate to refer to their central bank's short-term lending rate to commercial banks, both inside and outside of the EU.
Related terms:
Adjustment Credit
Adjustment credit is a short-term loan, which a Federal Reserve Bank extends to a smaller commercial bank. read more
Bank Rate
A bank rate is the interest rate at which a nation's central bank lends money to domestic banks, affecting domestic banks' monetary policy and loans. read more
Bundesbank
The Bundesbank is the central bank of Germany. Like the Federal Reserve in the United States, it oversees the nation's banking system and monetary policy. read more
Central Bank
A central bank conducts a nation's monetary policy and oversees its money supply. read more
Checking Account
A checking account is a deposit account held at a financial institution that allows deposits and withdrawals. Checking accounts are very liquid and can be accessed using checks, automated teller machines, and electronic debits, among other methods. read more
Collateral , Types, & Examples
Collateral is an asset that a lender accepts as security for extending a loan. If the borrower defaults, then the lender may seize the collateral. read more
Commercial Bank & Examples
A commercial bank is a financial institution that accepts deposits, offers checking and savings account services, and makes loans. read more
Discount Rate
"Discount rate" has two distinct definitions. I can refer to the interest rate that the Federal Reserve charges banks for short-term loans, but it's also used in future cash flow analysis. read more
Discount Window
Discount window is a central bank lending facility meant to help banks manage short-term liquidity needs. read more
European Central Bank (ECB)
The European Central Bank (ECB) is the consolidated central bank of the EU, coordinating the regions monetary policy efforts. read more