Lombard banking

Lombard banking was a mount of piety style of pawn shop in the Middle Ages, a type of banking that originated in prosperous Northern Italy, in a region called Lombardy during the Middle Ages. The term was sometimes used in a derogatory sense, and some Lombardy bankers were accused of usury.

History

A Catholic prohibition on profit from money without working made banking sinful. Though Pope Leo the Great forbade charging interest on loans by canon law, it was not forbidden to take collateral on loans. Pawn shops thus operate on the basis of a contract that fixes in advance the "fine" for not respecting the nominal term of the "interest free" loan, or alternatively, may structure a sale-repurchase by the "borrower", where the interest is implicit in the repurchase price. Similar conventions exist in modern Islamic banking. Various ways around the prohibition were devised, so that the lowly pawnshop contractors could bundle their risk and investment for larger undertakings. Christianity, Judaism, and Islam generally ban usury, but allow usury towards those outside their faith. Thus Christians could lend to Jews and vice versa.

The necessity of credit for functioning European economies was such that the Church's ban on usury was routinely undermined, "Despite the ban on usury, no medieval European government - municipal, territorial, or national - was able to function without borrowing...But such loans were usually for short terms, often at punitive rates of interest".

It comes as no surprise that the pawn shops of Rome were the most prosperous of all, especially in the 16th century under Popes Pius IV and Sixtus V. This Italian "Lombard" pawn shop method became famous. The use of the term "Lombard" for pawn shop grew slowly from city to city and became prevalent in Cahors, southern France, from where the Christian ''Cahorsins'' moved as far north as London and Amsterdam in the 13th century; at the latter, they were called ''Cahorsijnen'', ''Cawarsini'' or ''Coarsini''.Historical Archive
De Groene Amsterdammer, 1877.

15th and 16th centuries

In France, the Lombards became synonymous with the Cahorsins. Most European cities still have a street named Lombard Street after the pawn shop that once resided there. In Dutch, the name for a pawn shop is still ''lommerd'', and the same etymology persists in the names of various banks (unless named after some family). In Ukrainian, Polish and Russian, a pawn shop is called simply ''lombard''.

17th and 18th centuries

The near-monopoly position of the Lombards in finance became less prominent as various Protestant factions joined after the Reformation. In the 18th century many bankers and shipping agents were Quakers. Though the pawnshops were no longer manned by Jews and/or Jesuits, they were more and more often called Lombard houses, and most major port cities still have a " Lombard Street" or "Lombard Alley" today. American examples are San Francisco, New Orleans, Boston, Baltimore, and Philadelphia. The term "Lombard" for pawnshop (or pawnshop owner) was in use well into the late 18th century, thus many of these streets were named with the establishment of shipping agents in those towns.

Modern day

The practice of Lombard credit is still commonly used in central banking, where central banks lend against marketable securities, such as government bonds. Modern repo (repurchase-sale transactions) are also forms of Lombard lending: one bank sells marketable securities to another (at a discount), with an agreement to repurchase the securities (typically at par) in a fixed period of time. Although the legal documentation of the transaction is that of a sale and subsequent repurchase, the substance of the transaction is a secured loan (and under most accounting standards, will be treated as a loan). Pawn shops in many countries and languages are often still referred to as Lombards.

See also

*Islamic banking
* Lombard Bank
*Lombard Street, London

References

{{DEFAULTSORT:Lombard Banking
Banking in Italy
History of banking
Medieval banking
Pawn shops