Money markets

Reporting

3.2.2 The interbank market loans

What is interbank market loans?

- It is a market through which banks lend each other. Or interbank which banks extend
loans to one another for a specified term.
- Loans extended from one bank to another with which it has no affiliations.
- a market which involves bank borrowing and lending of any funds in reserve accounts
at the
central bank.
Why do banks do interbank loans?
- Banks may borrow money from one another to ensure that they have enough liquidity
for the immediate needs, or lend money when they have excess cash on hand. It is
also a short-term loan.
Banks may lend greater sums in their institutions in their own country. Overnight loans are
short-term unsecured loans from one bank to another. They may be used to help the
borrowing bank finance loans to customers, but often the borrowing bank adds the money to
its reserves in order to meet regulatory requirements and to balance assets and liabilities.
Commercial banks must maintain deposits with the central bank as reserves. Banks that have
additional reserves on hand may lend these sums to other banks. This has historically served
as the foundation for interbank market activities. Nevertheless, at the moment, these
operations involve lending any money from reserve accounts held by a central bank.

Interest rates
Interest rates on the traditional market are linked to interbank interest rates.
Banks that lack sufficient liquidity will reduce their lending to both markets, which will raise
interest rates. When the central bank provides funds to the discount market, banks present
less appealing conditions. As a result, they might decide to invest in other markets, which
would lead to a decrease in interest rates.
Interest rates on the interbank market are often a little higher and more unpredictable. The
needs of banks who lack the capital to meet the requirements of the central bank during times
of severe liquidity constraint dramatically increase overnight rates. The interbank market
strives to reduce transfer costs and increase transfer speed. Transfers are unprotected against
the borrowing bank's default since they are unsecured, or not backed by any collateral.
3.2.6. International money market securities

Eurocurrency Instrument
- is any instrument denominated in a currency which differs from that of the country in
which it is traded.

Eurocurrency Market
- These are markets in which the borrowing and lending denominated in a currency of
some other country takes place. In general, eurocurrency market instruments are the
same as other money market instruments.

When such instruments are denominated in some other currency, they are dentified as ‘euro-’,
though it can be any currency (e.g. US dollars, or Japanese yen). The trading can also take
place anywhere (in European countries or in New York or Tokyo or Hong Kong).

Eurocurrency
- Is a currency that is deposited at a foreign bank outside of its home country.

The capacity of eurobanks to offer their services at more affordable prices than local
institutions was a factor in the long-term growth of the eurocurrency industry. "Eurobanks"
are banks that focus exclusively on eurocurrency transactions. They transfer money between
surplus and deficit units, creating assets and liabilities that are more desirable to end users
than they would be if they transacted with each other directly aid in putting money to use that
could otherwise go unused.

Banks distribute the deposited funds to other businesses who require Eurodollar loans in the
Eurodollar market. The deposit and lending transactions have high dollar amounts, such as
more than $1 million USD. Consequently, only the largest governments Corporations can
engage in market activity.

The market growth was influenced greatly by Eurocurrency liabilities of financial

institutions are the following:

 Euro Certificates of deposits 
 Interbank placements 
 Time deposits
 Call money

Euro certificates of deposits (Euro CDs) are negotiable deposits with a fixed time to
maturity.

Time deposits are non negotiable deposits with a fixed time to maturity. Due to illiquidity
their yields tend to be higher than the yields on equivalent maturity of negotiable Euro
certificates of deposits.

Interbank placements are short-term, often overnight, interbank loans of Eurocurrency

time deposits.

Call money are non negotiable deposits with a fixed maturity that can be withdrawn at any
time.

Eurocurrency assets of financial institutions are the following:


 Euro Commercial Papers (Euro CPs)
 Syndicated Euroloans 
 Euronotes

Euro Commercial Papers (Euro CPs) are securitized short-term bearer notes issued by a
large well-known corporation. They are issued only by private corporations in short
maturities with the aim to provide short-term investments with a broad currency choice for
international investors.
Syndicated Euroloans are related to bank lending of Eurocurrency deposits to non
financial companies with the need for funds. Since they are non-negotiable, banks used to
hold the syndicated loans in their portfolios until they mature. Due to their illiquidity, the
loans are often made jointly by a group of lending banks, which is called a syndicate. The
role of syndication is to share loan risks among the banks that members of the syndicate.

Euronotes are unsecuritized debt instruments, substitutes for non-negotiable Euroloans.

They are short –term, most often up to one year. Floating rate notes (FRNs) offer a
variable interest rate that is reset periodically, usually seminannually or quarterly,
according to some predetermined market interest rate (e.g. LIBOR). For a high rated issuer
the interest rate can be set lower than LIBOR.