Interbank Deposit

4 Key excerpts on "Interbank Deposit"

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  eBook - ePub

  Bank Liquidity and the Global Financial Crisis

  The Causes and Implications of Regulatory Reform

  • Laura Chiaramonte(Author)
  • 2018(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Therefore, in this context, the authorities are involved, in various ways, with the stability of the whole financial system, the containment of systemic risks and the efficient functioning of the interbank market. The latter is one of the most important and delicate segments of the money market with operators, including principally banks, engaged in negotiating financial resources to manage daily liquidity shortages arising in carrying out banking activity. 3 Under a microeconomic profile, the proper functioning of the interbank market is indispensable for orderly bank liquidity and treasury management. Moreover, an efficient interbank market, with depths, trade balances and adequate levels of transparency, is one of the essential requirements for the effective implementation of the monetary policy action of central banks. 4 Lastly, the significance of the Interbank Deposit market can be seen in the systemic implications that could arise from its malfunction, as almost all banks are interconnected by bilateral credit and debt relations originating in this market. Before the outbreak of the subprime crisis, it was considered a safe and efficient market, due to the availability of numerous counterparties with whom contracts could be concluded at fairly homogeneous economic conditions. Therefore, the main issues regarding this market have not significantly interested scholars over the years

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  Money and Banking

  Made Simple

  • Ken Hoyle(Author)
  • 2014(Publication Date)
  • Made Simple

    (Publisher)

  In other cases it may lend for longer periods. (b) To maintain adequate reserve assets so that it cannot be faulted with regard to the reserve ratio requirements (see Chapter 12). (c) To raise the money market funds it needs to carry on the volume of business it is currently pursuing. (d) To achieve its target balance with the central bank. The Bank of Eng-land requires cash deposits of i per cent of their eligible liabilities from the whole monetary sector and also extra funds from the clearing banks for clear-ing purposes. Just how a bank's financial position is affected by the various retail and wholesale activities it is necessarily engaged in is shown in Fig. 5.1. The notes below the caption explain the diagram. The secondary markets may be listed as follows: (a) The interbank market. (b) The local authority market. (c) The Eurocurrency market. (d) The market in certificates of deposit. The work of the secondary markets has grown up over the last two decades, and the institutions which deal on them do so because there is a need to make a market where buyers and sellers of money can be in touch with one another either directly or through agents. They are essentially markets where uses can be found for spare funds and where funds can be found for all sorts of purposes. (a) The Interbank Market. The interbank market is a market in short-term Money Markets and Rates of Interest 77 money, unsecured except by the reputation of those who are dealing. A good deal of money is 'overnight' money, borrowed by banks seeking to balance their books overnight and meet their target balances at the Bank of England. Originally started by a group of brokers who quoted rates for money from Overnight' up to a year in duration, acting as agents on a commission basis, the system has now overlapped with the primary money market in that the discount houses are active.

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  Modern Monetary Theory and European Macroeconomics

  • Dirk H. Ehnts(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  What if bank A extends more credit than bank B? Customers of bank A will consequently transfer more deposits to customers of bank B than vice versa when they spend their deposits, and as a result bank A will have some additional demand for reserves. The following balance sheets illustrate this: bank A bank B loan 1,000 deposits 750 loan 100 deposits 350 loan (IB) 250 loan (IB) 250 A bank with a loan portfolio that grows markedly stronger than that of the competition will over time accumulate a deficit in reserves, which will have to be offset by loans from other banks or from the central bank. An interbank market loan is marked loan (IB). One bank has a claim on another; accordingly, the loan is a liability for the debtor bank. As long as the portfolio of loans granted by a bank to households and firms is eligible as collateral at the central bank, refinancing can be secured, albeit at the price of paying higher interest rates than other banks. Furthermore, the bank is at the mercy of the central bank’s decisions regarding hikes in interest rates. Refi- nancing on the interbank market instead would lower costs, but the transfer of interest improves the financial results of the other banks. The bigger loan portfolio held by a bank that’s a relatively more active lender will give that bank more interest rate income, but its risk will rise correspond- ingly. The other banks receive interest on the interbank market, which is lower. Admittedly their risk is also lower when they make interbank loans rather than loans to non-bank clients. For a bank that extends much more credit than other banks, a rise in interest rates can put it into a position in which it loses money and the other banks don’t. Other banks might not have to borrow reserves at all since they are net suppliers, but a bank that has had huge outflows of reserves is a net borrower.

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  Monetary Economics

  Theories, Evidence and Policy

  • David G. Pierce, Peter J. Tysome(Authors)
  • 2014(Publication Date)
  • Butterworth-Heinemann

    (Publisher)

  In the case of bank deposits, Pesek and Saving argue that there is a clear theoretical difference between the role of banks as producers of demand deposits transferable by cheque and their role as financial intermediaries borrowing funds (e.g. time deposits) at one rate of interest and lending at another. Demand deposits are regarded as a product of the banking industry, sold by the banks for currency, or for financial claims (e.g. government securities), or sold for credit (e.g. bank advances). Bank money, like fiat currency, is seen as being resource-cheap in the sense that the real resources used to produce a unit of bank money are extremely small; in other words, bank money has low costs of production. Because of this bank money cannot be produced under conditions of free entry into the industry. Production is restricted to a limited number of producers so that the price per unit of bank money is kept appreciably above the cost per unit of producing it. Bank money also has certain advantages over fiat currency. Bank deposits are, for example, of variable denomination so that a user of bank deposits may write a 14 The functions, advantages and definitions of money cheque for exactly the amount he or she wishes; there is also less risk of losing bank deposits in the sense of misplacing them. The general acceptability of bank deposits as a substitute for state-issued fiat currency is enhanced by the bank's wilUngness to exchange deposits for fiat currency at fixed exchange rates. This situation Pesek and Saving call the instant repurchase clause. They argue that bank demand deposits are produced and sold by the banks for cash, credit or certain financial claims, but subject to a guarantee that they (the banks) will purchase the deposits in return for fiat currency. According to Pesek and Saving, the fact that banks do produce and sell demand deposits is quite clear because no interest is given on them.

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