Interbank Market



Interbank Market

"The European Central Bank described the interbank market as “an informal market where banks borrow from and lend to each other with established internal limits based on an institution’s risk appetite”. Before the global financial crisis, the market for interbank deposits was a key component of the functioning of financial markets. But higher capital requirements and the conduct of monetary policy since the crisis have effectively eliminated the need for it. A 2018 US Federal Reserve paper noted that before the crisis the US interbank market was estimated to be about US$100bn daily. When the paper was published, it was worth US$5bn daily. Libor, the London Interbank Offered Rate, the widely used pricing benchmark, was based on interbank lending rates. The collapse in importance of the interbank market has rendered this benchmark unfit for purpose and the market is now shifting to risk-free rates."


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