The international interbank market: a descriptive study

Summary

Section I of this paper provides a brief introduction to how the international interbank market functions. It outlines the form interbank activity takes and how interbank deals are arranged, and discusses the international nature of the market. It also looks at the extent to which the interbank market can be regarded as separate from other markets.

Section II considers more closely why banks use the market. The principal reason is that it provides a ready source of and outlet for funds, enabling banks to operate without the need to match customer loans to customer deposits; in this way, banks have more flexibility in the size and timing of their operations, and can manage their interest rate and exchange rate risks and liquidity more easily. Interbank trading may also be a source of profit (or loss) in its own right. This section also looks at the wide variations in banks' use of the market, and at the extent to which banks channel funds between their different offices.

Section III looks at the volume and pattern of business that results from banks' use of the market. The market may appear to be unexpectedly large hut, put in its proper perspective, its size is perhaps not so striking after all; in particular, a substantial portion of recorded interbank activity is between offices of the same hank in different countries. Over the longer run, the ratio of interbank to total business has been fairly stable, although there are significant variations, including seasonal ones, which make this less true in the short run. The pattern of business is analysed by currency and location (that is, where the business is booked) and some new data are presented broken down by the nationality of ownership of banks in the market.

Section IV considers the various risks that banks face when using the market and how they cope with them. It looks at how banks analyse the creditworthiness of those they lend to in the market and the differences in the ways hanks relate their credit limits for individual banks to their country risk limits. This section also looks at maturity transformation and liquidity in the market, and discusses the variations different banks have chosen in the balance between interbank and other business. Variations in the way interbank business impinges on the capital of banks are also considered.

Section V turns to the effect the interbank market has on the volume and pattern of lending to non-banks and the difficulty there is in quantifying this effect; in doing so it considers the distinction to be drawn between the decisions banks make about their lending to non-banks, and their decisions about how to fund that lending. Finally, a Postscript looks briefly at how the market has adjusted to changed circumstances in the past, and how it has reacted to the recent period of difficulty.