2. Introduction There are two sorts of banking transaction,
those carried out in the native currency and Euro ones. The dollar
is the native currency in the USA, the pound in the UK and so on
and traditionally nearly all banking transactions were executed in
the respective native currency of the bank accepting a deposit. In
recent years, however, more and more banking transactions have been
Euro ones, that is involving banks in accepting deposits or making
loans in a currency which is not native to them. A typical
Eurocurrency transaction would involve an Arab depositing dollars
with a London bank or an Italian borrowing Deutschmarks from a
French bank. The Eurodollar market is the largest of the
Euromarkets but there are Euromarkets in virtually all the European
currencies. Many of the Euro banks and dealing centers are located
in Asia and currency never changes hands, so the name is
potentially misleading. 2
3. Euro Currency Definition of 'Eurocurrency Currency deposited
by national governments or corporations in banks outside their home
market. This applies to any currency and to banks in any country.
For example, South Korean won deposited at a bank in South Africa,
is considered Eurocurrency. Also known as "euro money." 3
4. Eurocurrency Market 'Eurocurrency Market' The money market
in which Eurocurrency, currency held in banks outside of the
country where it is legal tender, is borrowed and lent by banks in
Europe. The Eurocurrency market is utilized by large firms and
extremely wealthy individuals who wish to circumvent regulatory
requirements, tax laws and interest rate caps that are often
present in domestic banking, particularly in the United States.
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5. Eurocurrency Market Eurocurrency Marketis the deposit and
loan market for foreign currencies. Banks that accept deposits and
make loans in the Eurocurrency market are called Euro banks. The
term Eurocurrency or Euro bank is a misnomer since it refers to
offshore banking and is not limited to Europe. 5
6. Interest Rate Spreads in Domestic and Eurocurrency Markets.
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7. Drawbacks of Eurocurrency Market To a very large extent the
growth of the Eurocurrency market has integrated the worlds money
and credit markets. The impact of this unregulated Eurocurrency
markets has been to increase competition in banking throughout the
world. Regulation maintains the liquidity of the banking system. In
an unregulated system such as the Eurocurrency market, the
probability of a bank failure that would cause depositors to lose
their money is greater. Borrowing funds internationally can expose
a company to foreign exchange risk. 7
8. Euro-Dollar Eurodollars are time deposits denominated in
U.S. dollars at banks outside the United States, and thus are not
under the jurisdiction of the Federal Reserve. Consequently, such
deposits are subject to much less regulation than similar deposits
within the U.S., allowing for higher margins. The term was
originally coined for U.S. dollars in European banks, but it
expanded over the years. Definition :US currency or funds held in
banks outside the US in Europe or anywhere else. Eurodollars are
used commonly for settling international transactions. 8
9. Origins of Offshore Banking The Eurodollar market started in
the late 1950s when European banks began accepting deposits in U.S.
dollars. Why and how did this market get started? The
reserve-currency status of the dollar was an important factor. Some
communist countries were the earliest source of dollar deposits
held in Europe. Euro banks developed as a result of profit
considerations. 9
10. Offshore banking has grown rapidly over the past decades
because Euro banks are essentially unregulated. Euro banks can
offer narrower spreads than U.S. banks (the spread is the
difference between the deposit and loan interest rates). 10
11. Drawbacks of Eurodollar Market Eurodollars are not
spendable money, but are money substitutes such as time deposits in
a bank. In countries without efficient money markets, access to a
competitive Eurodollar market may reduce the demand for domestic
money as residents shift funds to the offshore market and earn
profit. If the Eurodollar market encourages more international
capital flows, then central banks need to engage in more
sterilization operations to achieve their domestic monetary policy.
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12. THE EUROCURRENCY MARKETS THE EUROMARKETS -the most
important international financial markets today. A. The
Eurocurrency Market 1. Composed of euro banks who accept/maintain
deposits of foreign currency 2. Dominant currency: US$ 12
13. B. Growth of Eurodollar Market caused by restrictive US
government policies, especially 1. Reserve requirements on deposits
2. Special charges and taxes 3. Required concessionary loan rates
4. Interest rate ceilings 5. Rules which restrict bank competition.
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14. C. Eurodollar Creation involves :1. 2. A chain of deposits
Changing control/usage of deposit. 14
15. Eurocurrency loans a. Use London Interbank Offer Rate:
LIBOR as basic rate b. Six month rollovers c. Risk indicator: size
of margin between cost and rate charged. 15