What is a Lombard Loan?
The name ‘Lombard’ comes from a region in northern Italy. The Italian banking houses in the Lombardy Region had a rich history dating back to the Middle Ages. They are famous for first developing and popularizing the concept loaning money backed up by liquid assets.
In RTGS context a Lombard loan is a kind of loan that is backed by liquid assets from a bank’s portfolio. Bank’s assets (government securities, stock exchange securities, cash deposits, gold deposits etc.) are used as collateral against the loan, protecting the creditor (the National Bank or RTGS administrator) from risk. If a bank fails to repay the loan, National Bank or RTGS administrator may initiate the sell the assets to get the money back.
In context of RTGS systems Lombard loans are usually used to ensure that a defaulting bank can close its positions at the end of the RTGS business day.
The request of a Lombard can be automatically triggered by RTGS when a bank is in default nearing the end of the business day or can be initiated from a 3rd party system where the liquid assets that will back the Lombard are hold.