What is interbank market?
The interbank market is one of the segments of the money market in which the banks are the parties and the short-term financial instruments and interbank deposits are settled in national and foreign currencies. This market is considered to be the most important part of the money market.
This is the market where banks have the ability to lend their cash to one another. It is also a closed market as the transactions in financial instruments can only be carried out by the commercial banks and the central bank. The brokers act as intermediaries in this market and receive commissions for it. The advantages that commercial banks receive through the interbank market are:
- Increasing the degree of independence from a refinancing loan from the central bank
- Possibility of speculating in the financial instruments of this market, as an additional source of income
An interbank deposit is a transaction that involves the receipt or grant by one bank to another bank of a certain amount of cash with a predetermined date and interest rate. There are two types of interbank deposits:
Short term - these are deposits with a term of one day to one month (overnight (O) / tomorrow next (T) / spot next (S))
Long term - The term of these deposits ranges from one month to one year.
The price of an interbank deposit is the interest rate determined by the following factors:
- Interest rates set by the central bank (base rate)
- The money supply and demand
- Reliability of the counterpart in the interbank market (measured by credit risk)
The most popular are LIBOR (London Interbank Offered Rate) and LIBID (London Interbank Bid Rate). In the international financial markets, these prices serve as a reference for setting prices for various financial instruments.
The types of interbank markets
There are two types of interbank markets:
- Interbank market with transactions in pounds sterling
- Interbank market for foreign exchange transactions