Interbank deposit

banking

An interbank deposit is any deposit in which a bank lends to another bank.

A bank deposit is a contract by which a client invests an amount of money in a financial institution for it to safeguard in exchange for receiving an interest rate, in this case, the client is also a bank. The possibility of making this deposit at a specific term (expiration date), is called a fixed-term deposit.

Financial entities use the money received during the specified term in the fixed-term deposit to obtain a higher return than the one they are going to pay to that client, (the main business of a bank). Access to wholesale markets, including the interbank deposit market, is what makes it possible to obtain benefits by raising funds through interbank deposit.

The interbank market

The interbank deposit market is the basis for most banking operations and also for the formation of the EURIBOR, EONIA and LIBOR. These are the interest rates at which banks are willing to take or lend funds in different terms.

In the quotation of an interbank deposit we start from the premise that in any quotation there must be two parts or sides (lender and borrower).

Example

- We quote an interbank deposit:

6-month deposit: 3.25-3.30%.

We are indicating that at the 3.25% interest rate we are willing to take funds and at 3.30% loans. This makes sense, since we always want to get profitability from our operations by taking cheap funds (paying little interest) and lending expensive money (charging a lot of interest).

- We quote an interbank deposit:

3-month deposit: 5.50-5.55%.

To operate with this entity that is quoting this deposit to us, if we want to take funds we must do so at an interest rate of 5.55% (paying high interest). That is to say, financing us expensive. On the other hand, if we want to lend funds we must do so at the 5.50% interest rate, since in this way we are investing our money on the side where the bank is willing to pay us lower interest.

Tags:  Commerce banking economic-analysis 

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