speaking. The central banks came to own very large Eurodollar claims by this circular
process, but these large claims were not on the United States but rather (indirectly) on the
speculators.
EXPLANATION FOR THE GROWTH OF THE EUROMARKETS
The Euromarkets are not a bogeyman but an unregulated financial intermediary.
They bring together borrowers and lenders, frequently from the same country. They deal
only in the currencies of individual countries and are thus a substitute for the domestic
banking system. The incredibly rapid growth of the Euromarkets shows that they were a
strongly preferred substitute. But why? The question has an obvious answer. An
offshore credit market will not exist unless.
- depositors receive better terms than they can receive onshore, and
- borrowers can borrow more, possibly at lower rates, than they can
The rapid emergence in the 1960s of a world-wide Eurocurrency market that co-
exists and competes with traditional foreign exchange banking resulted from the
peculiarly stringent and detailed official regulations governing residents operating with
their own national currencies. These regulations contrast sharply with the relatively great
freedom of non-residents to make deposits or borrow foreign currencies from these same
constrained national banking systems. On an international scale, offshore unregulated
financial markets compete with onshore regulated ones. The differences in national
regulatory regimes and the internationsation of finance brought the birth of the Eurodollar
markets.
EURODOLLAR MARKETS
Eurodollars are bank deposit liabilities denominated in U.S.dollars but not subject
to U.s. banking regulations. For the most part, banks offering Eurodollar deposits are
located outside the United States. However since late 1981 non-U.S. residents have been
able to conduct business free of U.S. banking regulations at International Banking
Facilities (IBFs) in the United States. Eurodollar deposits may owned by individuals,
corporations, or governments from anywhere in the world, with the exception that only
non-U.S. residents can hold deposits at IBFs.
Originally, dollar-denominated deposits not subject to U.S. banking regulations
were held almost exclusively in Europe; hence, the name Eurodollars. Most such
deposits are still held in Europe, but they also are held at U.S. IBFs and in such places as
the Bahamas, Bahrain, Canada, and Cayman Islands, Hong Kong, Japan the Netherlands
Antilles, Panama, and Singapore. Regardless of where they are held, such deposits are
referred to as Eurodollars.