Russia: Lombard and Overnight Loans, 1998

On August 17, 1998, following a wave of speculative attacks on domestic ruble assets, the Russian government announced a default on its ruble debt maturing before the end of 1999, and the Central Bank of Russia (CBR) declared a devaluation of the ruble by widening the fixed exchange rate band. The announcements left Russian banks without their main source of collateral--government treasuries--to obtain funds from the CBR's liquidity facilities. Russia's payment system and interbank market froze as banks hoarded liquidity and, in some cases, restricted withdrawals in response to depositor runs. To restore liquidity to commercial banks and unfreeze the payment system, the CBR relied on four major lending programs: (1) its standing lending facility, the Lombard facility; (2) overnight/intraday (O/I) lending, which it had introduced in June 1998; (3) repurchase agreements (repos); and (4) rehabilitation loans, cheap credit to systemically important banks collateralized by bank equity. This case focuses on the Lombard facility and the O/I loans. Following the default and devaluation in August 1998, the CBR lowered interest rates and allowed banks to roll over unredeemed overnight loans, effectively extending the maturity of the liquidity it offered. While the CBR's liquidity relief and other measures--such as the easing of banks' reserve requirements--succeeded in unfreezing the payment system, the overall lack of transparency and oversight of banks receiving assistance continued to undermine trust in Russian banks.