Inter-Bank Agreements

Banks are turnkey players in several segments of the money market. In order to meet the requirements and meet the daily liquidity needs, banks purchase and sell short-term unsecured loans on the federal fund market. Longer-term loans allow banks to tap into the Eurodollar market. Eurodollars are dollar-denominated deposits of banks established outside the United States (or international banking facilities in the United States). U.S. banks can obtain funds on the Eurodollar market through their foreign subsidiaries and subsidiaries. A second option is to issue large tradable certificates of deposit (CDs). These are quotas issued by banks, which stipulate that a certain amount of money has been deposited for a specified period and is cashed with interest at maturity. Pension (rest) operations are another source of funding.

Rest and Reverse Rest are transactions in which a borrower agrees to sell securities to a lender and repurchase identical or similar securities at a specified price after a specified date, including interest at an agreed interest rate. Deposits are secured or guaranteed loans as opposed to unsecured federal funds. In many inter-credit agreements, it is often common for the chief lender to dictate the terms of the pledge. However, in cases where a junior lender is not trading hard, the senior lender may disadvantage a junior lender. In some cases, a junior lender may face artificial delays on the part of the primary lender to seek authorization to enter into an agreement or right. Such an approach can thwart the process and force the junior lender to capitulate. Most cash transactions are billed two business days after execution; the biggest exception is the U.S. dollar against the Canadian dollar, which emerges the next day. This means that banks must have lines of credit with their counterparties in order to also be able to act on the spot. In order to reduce the risk of settlement, most banks have clearing agreements that require clearing transactions in the same currency pair that, on the same date, stand out with the same counterpart. This greatly reduces the change of currency and, therefore, the risk it entails. Another possible explanation for the seizure of interbank loans is that banks have made cash reserves in anticipation of future bottlenecks.

Two modern characteristics of the financial industry indicate that this assumption is not credible. First, banks are now much less dependent on deposits than on monetary sources and more on short-term wholesale financing (brokerage CDS, asset-backed commercial paper (ABCP), interbank buyback contracts, etc. Many of these markets were put under pressure at the beginning of the crisis, particularly the ABCP market. This meant that banks had fewer sources of financing to which they could turn, although an increase in individual deposits during that period resulted in some compensation. In the past, controllable deposits were the main source of money for U.S. banks; In 1960, controllable deposits accounted for more than 60% of total bank liabilities. However, the composition of banks` balance sheets has changed considerably over time. Instead of customer deposits, banks have increasingly turned to short-term debt such as commercial paper (CP), certificates of deposit (CD), pension transactions (rest), swap currency liabilities and traded deposits.

Interbank credit is important for an efficient and efficient banking system. Because banks are subject to reserve requirements, they may face liquidity constraints at the end of the day. The interbank market allows banks to flatten and reduce the „risk of liquidity financing“ by such temporary liquidity constraints. The advent of the variable rate system coincided with the emergence of low-cost computer systems, which allowed for faster and faster trading on a global basis.