OPERATION OF THE EUROMARKETS
There are two levels of offshore currency transactions.
- A highly competitive wholesale market centered in London which determines the
basic deposit rates on placements by large non-bank firms and by commercial banks.
These banks sell their funds to each other as need arises, at a basic interest rate called
LIBOR (London Interbank Offered Rate). All transactions are undertaken by telephone
or telegraph, telex, dealing screen via brokers, so the bank cannot be sure which other
banks they are negotiating with until after a deal is consummated. The use of such quick
means of communications means that a person’s word must validate transactions in huge
sums of money. Thus only the best “name” banks can transact on this wholesale market.
Certain very large and well known nonblank borrowers have access to the wholesale
market, but most do not. - A retail business on loans: Smaller banks, nonblank borrowers, governments of
developing countries can acquire loans only after credit investigation. The first to borrow
Eurodollars were corporations whose name, size and good standing enabled banks to
make loans to them with a little more than a cursory analysis of credit standing. In recent
years, the range of corporate and governmental borrowers has spread considerable. Even
domestic firms with no international activities are relying on Euro loans when local credit
conditions become tight.
In order to explore the lending practices of the Eurocurrency system, it is useful to
refer to the hypothetical balance sheet of a Euro bank, presented in Table -1.
TABLE -1.
Typical Eurobank Balance Sheet Components.Sl.
No.Liabilities Sl.
No.Assets- Interbank deposits 1. Reserve balances
- Nonbank time deposits 2. Liquid assets
- London dollar and other currencies CDs 3. Interbank loans
- Notes and bonds 4. Other loans
- Loans from other branches
- Loans from parent bank
- Equity capital held by parent bank.
An important financial obligation now shown on financial statements of a
Eurobond is the loan commitments held with the bank by other financial or nonblank
institutions. These involve a commitment by the bank to lend funds at some future date,
and therefore can involve a substantial financial liability at a time of tight credit.
Conversely, the asset side of the balance sheet does not show the lines of credit that the
Eurobank might have contracted for some future date with other Eurobank and domestic