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There are two sorts of banking transaction, those carried out in the native currency
and Euro ones. The dollar is the native currency in the USA, the pound in the UK
and so on and traditionally nearly all banking transactions were executed in the
respective native currency of the bank accepting a deposit.
In recent years, however, more and more banking transactions have been Euro ones,
that is involving banks in accepting deposits or making loans in a currency which is
not native to them. A typical Eurocurrency transaction would involve an Arab
depositing dollars with a London bank or an Italian borrowing Deutschmarks from a
The Eurodollar market is the largest of the Euromarkets but there are Euromarkets in
virtually all the European currencies. Many of the Euro banks and dealing centers
are located in Asia and currency never changes hands, so the name is potentially
Definition of 'Eurocurrency„
Currency deposited by national governments or
corporations in banks outside their home market.
This applies to any currency and to banks in any
country. For example, South Korean won
deposited at a bank in South Africa, is considered
Also known as "euro money."
The money market in which Eurocurrency, currency held
in banks outside of the country where it is legal tender, is
borrowed and lent by banks in Europe. The Eurocurrency
market is utilized by large firms and extremely wealthy
individuals who wish to circumvent regulatory
requirements, tax laws and interest rate caps that are often
present in domestic banking, particularly in the United
Eurocurrency Market—is the deposit and loan
market for foreign currencies.
Banks that accept deposits and make loans in the
Eurocurrency market are called Euro banks.
The term Eurocurrency or Euro bank is a
misnomer since it refers to offshore banking and is
not limited to Europe.
Interest Rate Spreads in
Domestic and Eurocurrency
Drawbacks of Eurocurrency Market
To a very large extent the growth of the Eurocurrency market has
integrated the world‟s money and credit markets.
The impact of this unregulated Eurocurrency markets has been
to increase competition in banking throughout the world.
Regulation maintains the liquidity of the banking system. In an
unregulated system such as the Eurocurrency market, the
probability of a bank failure that would cause depositors to lose
their money is greater.
Borrowing funds internationally can expose a company to
foreign exchange risk.
Eurodollars are time deposits denominated in U.S.
dollars at banks outside the United States, and thus are not under
the jurisdiction of the Federal Reserve. Consequently, such
deposits are subject to much less regulation than similar deposits
within the U.S., allowing for higher margins. The term was
originally coined for U.S. dollars in European banks, but it
expanded over the years.
Definition :US currency or funds held in banks outside the US in
Europe or anywhere else. Eurodollars are used commonly
for settling international transactions.
Origins of Offshore Banking
The Eurodollar market started in the late 1950s
when European banks began accepting deposits in
Why and how did this market get started?
The reserve-currency status of the dollar was an important
Some communist countries were the earliest source of
dollar deposits held in Europe.
Euro banks developed as a result of
Offshore banking has grown rapidly over the past decades
because Euro banks are essentially unregulated.
Euro banks can offer narrower spreads than U.S. banks (the
“spread” is the difference between the deposit and loan interest
Drawbacks of Eurodollar Market
Eurodollars are not spendable money, but are money
substitutes such as time deposits in a bank.
In countries without efficient money markets, access to a
competitive Eurodollar market may reduce the demand for
domestic money as residents shift funds to the offshore
market and earn profit.
If the Eurodollar market encourages more international
capital flows, then central banks need to engage in more
sterilization operations to achieve their domestic monetary
THE EUROCURRENCY MARKETS
-the most important international
financial markets today.
A. The Eurocurrency Market
Composed of euro banks who
accept/maintain deposits of
Dominant currency: US$
B. Growth of Eurodollar Market
caused by restrictive US government
1. Reserve requirements on deposits
2. Special charges and taxes
3. Required concessionary loan rates
4. Interest rate ceilings
5. Rules which restrict bank
C. Eurodollar Creation involves :1.
A chain of deposits
Changing control/usage of deposit.
Use London Interbank Offer
Rate: LIBOR as basic rate
Six month rollovers
Risk indicator: size of
margin between cost and