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1 基本概念
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2 PPT
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3 视频小课堂
Chapter 5 The Eurocurrency Market
ⅠWhat is Eurocurrency market?
A. Definitions
1. Eurocurrency market – a market in which international credit,deposits, and loans are exchanged, in a currency other than the domesticcurrency.
2. Eurobanks – banks that accepts these deposits and makeloans.
3. Eurocurrency
Funds deposited in a bank when those fundsare denominated in a currency differing from the bank's own domestic currency.
Thus, if a Japanese company deposits yen in aCanadian bank, the yen will be considered Eurocurrency
B. History of Eurocurrency Market
Market originated in the 1950s, whencommunist governments (mainly the Soviet Union) needed dollars forinternational trade and concerned about a potential freeze of their dollaraccounts in US banks, shifted their deposits to London.
Due to political tension and economicboundaries, many people around the globe were looking for ways to avoidregulatory costs and restrictions set by the government.
In the 1960s and 1970s, US banks establishedoffshore branches to escape US regulations and to make eurocurrency loans.
Specifically, these restrictions involved:special charges and taxes on domestic banking; requirements to lend money tocertain borrowers at concessionary rates; interest rate ceilings; rules thatprevented competition among banks; and reserve requirements.
C. The major offshore financial center
Offshore Financial Center – countries that contain financialinstitutions that deal primarily with nonresidents and/or in foreign currency.
The host country usually grants completefreedom from host-country governmental banking regulations.
They are usually characterized by a low (orzero) tax environment and specializingin providing corporate and commercial services to non-resident entities on aconfidential basis.
ⅡReasons for offshore banking
To avoid high costs of banking from domesticregulations.
Ⅲ Interest rate spreads and risk
A. Definition: Spread
Spread – thedifference between the deposit and loan interest rates.
The Eurobanks can offer narrower spread than their counterparts.
B. Reasons for narrower spread
Without these differences, Citibank in Aruba would not exist.
Your dollar deposits in Aruba is considered riskier than dollar deposits in NY, because the Aruba branch does not have Federal deposit insurance and government supervision. Thus, to attract peopleto deposit at the Aruba branch, Citibank has to offer higher deposit rate thanin the U.S. branch.
In terms of interest rate on loans, if Citibank in Aruba offers identical interest rate on a loan as in the NY branch,you would be less likely to take out a loan from the Aruba branch.
To attract borrowers, Citibank in Aruba willhave to offer lower interest rate on a loan than in the NY branch.
C. More Reasons for Offshore Banking
To avoid interest rate controls andgovernment-mandated credit allocations.
To avoid capital controls, such as quotas onforeign lending and deposits, and taxes on capital flows.
To avoid a threat to private property right(Ex: if the government threatens to confiscate foreign deposits).
To access more competitive banking. There isno restriction on entry of new banks in the external markets.
Ⅳ LIBOR
A. What is LIBOR?
LIBOR = London Interbank Offered Rate
LIBOR = interest rate that a group of largeLondon banks can borrow from each other each morning.
LIBOR is the most important interest rate inthe world.
LIBOR is important because it is used bybanks to scale loan rates (i.e., as a benchmark rate) to clients.
B. How is LIBOR set?
Each morning a panel of banks submit theirLIBOR data to the British Bankers’Association (BBA).
BBA averages that data and sets a value ofLIBOR each day at 11 a.m. of London time for each major currency.
10 currencies
15 maturities: overnight to 12 months.
Recently, there has been some questions aboutwhether banks have tried to fix the LIBOR.
Since the number of participants are small,banks may have colluded in setting the LIBOR
