The Inter-Bank

Markets
Lesson 3
 • Describe the Interbank Market
• Illustrate the Interbank Lending Market
• Explain how to Supply Money in the Interbank Market

Learning Outcomes
BANK A

BANK B

BANK C

BANK RESERVES
 BAN
KA

BAN CENTRAL BAN

KD BANK KB

BAN
KC
 • Bank Lends Bank Reserves to one another
typically for a week or less, but mostly
overnight.

The Interbank Lending Market

 • Theinterbank rate is determined by the
demand and supply for bank reserves.

Interbank Rate
BANK A

BANK B

BANK C

BANK RESERVES
BANK A

BANK B

INTERBANK RATE
BANK C

BANK RESERVES
BANK A

BANK B

INTERBANK RATE
BANK C

BANK RESERVES
 • LIBOR is the average interest rate at which
major global banks borrow from one another.

LIBOR (London Interbank Offered rate)

LIBOR is administered by the Intercontinental Exchange, which asks major
global banks how much they would charge other banks for short-term loans.
 PRIME LENDING RATE LIBOR
• set below the inflation rate • average derived from the rates at
which major banks lend to each
other
• fixed rate • floating rate
• Used by consumers • Used by banks

COMPARISON
 BAN
KA

BAN CENTRAL BAN

KD BANK KB

BAN
KC
 BAN
KA

BAN CENTRAL BAN

KD BANK KB

BAN
KC
 Stable conditions in the financial system are accomplished when

there is a high degree of confidence that the

financial intermediaries and markets are stable, i.e. are able to
meet obligations without disruption. This does not mean that
individual financial institutions cannot be allowed to fail. The
financial system is unstable only when systemic failure is highly
probable

Stable conditions in the financial system

confidence
 BAN
KA

BAN CENTRAL BAN

KD BANK KB

BAN
KC
 • In
order to keep the interbank rate stable, the
CB often supplies money in the interbank
market

Central Bank’s role

 BAN
KA

BAN CENTRAL BAN

KD BANK KB

BAN
KC
 • Buy Assets
• Non-recourse loan
• Recourse loan
• Lending money without collateral

How to supply Money

 Borrowers Keep the Lenders Keep the
Collateral Collateral
Non-recourse loan Amount of Loan – 90 Amount of Loan – 95
Repayment - 110 Repayment - 110
Recourse loan Amount of Loan – 100 Amount of Loan – 105
Repayment - 110 Repayment - 110
 – Bank-to-central bank interbank market
– Central bank-to-bank interbank market
– Bank-to-bank interbank market

The Interbank Markets

BANK A

BANK RESERVES
BANK A

BANK LOANS
 COMPANY - A

DE
W

PO
RA

SI
HD

T
IT
W

BANK A BANK B
• The IBMs are where the settlement of interbank claims take place
and where monetary policy begins.

• https://www.youtube.com/watch?v=KNrcCuivgNc