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An introduction to interbank markets

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An introduction to interbank markets Powered By Docstoc
					**BUK**RG

Interbank trading entails the worldwide trading in financial instruments carried out between
banks. It is done on the interbank market involving money, securities, foreign exchange,
varieties, precious metals or derivatives at interbank prices.

For money lending internationally recognized reference rates such as EURIBOR, LIBOR or the
EONIA interest rate calculation are used. EURIBOR (Euro Interbank Offered Rate) is an
internationally representative rate of the euro money market interest rate paid by banks on
unsecured euro-deposits with a maturity of twelve months.

LIBOR (an abbreviation for London Inter Bank Offered Rate) was introduced for the first time in
January 1986, as the reference rate for short-term loans (overnight to 12 months). It is
determined daily under the auspices of the British Bankers' Association (BBA) for unsecured
deposits in other currencies.

EONIA (Euro Overnight Index Average) is an average rate of unsecured overnight deposits in
the interbank market, employed since April 1999, it is aso calculated on on a basis in relation to
actual sales.

The banks participate in the interbank market for two reasons, either to take on open positions
that were previously developed in the retail trade, own or operate proprietary trading before
closing out. And to make the interbank market as an allocation mechanism with the objective of
efficient allocation of bank risks.

All transactions on the interbank market are subject to the provisions of the solvency regulations
and other laws. And are monitored for supervisory purposes, because open positions are
supported with equity.

Inter-bank foreign exchange market constitutes exchange intermediation services by banks on
behalf of their clients. This is an international market and foreign banks can participate;
applicable exchange rates are employed.

On a full inter-bank market, all financial institutions interact with each other without
discrimination, whereas an incomplete interbank market is characterized by the fact that some
banks are ignored as market participants. This has a contagion effect as it can translate to
theoretically incomplete interbank markets.

The interbank market is not without risk. By abstracting typical commercial risks (market risk)
that can be minimized by offsetting transactions or even eliminated. There remains in all the
transactions in the interbank market counterparty or default risk. The underlying factor in this
risk is that a transaction partner may not fulfill its obligations, because it has become insolvent.

Inter-bank relations are forged as financial institutions interact in the context of two-way
payment and securities settlement transactions. However, threats to such mutual activities is
borne out of the possibility of disturbances in cases of far-reaching systemic or financial crises.

				
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Description: Interbank trading entails the worldwide trading in financial instruments carried out between banks. It is done on the interbank market involving money, securities, foreign exchange, varieties, precious metals or derivatives at interbank prices.