Interbank Segment of The Money Market
The interbank lending market refers to the subset of bank-to-bank transactions that take place in the money market.
The money market is a subsection of the financial market in which funds are lent and borrowed for periods of one year or less. Funds are transferred through the purchase and sale of money market instruments—highly liquid short-term debt securities. These instruments are considered cash equivalents since they can be sold in the market easily and at low cost. They are commonly issued in units of at least one million and tend to have maturities of three months or less. Since active secondary markets exist for almost all money market instruments, investors can sell their holdings prior to maturity. The money market is an over-the-counter (OTC) market.
Banks are key players in several segments of the money market. To meet reserve requirements and manage day-to-day liquidity needs, banks buy and sell short-term uncollateralized loans in the federal funds market. For longer maturity loans, banks can tap the Eurodollar market. Eurodollars are dollar-denominated deposit liabilities of banks located outside the United States (or of International Banking Facilities in the United States). US banks can raise funds in the Eurodollar market through their overseas branches and subsidiaries. A second option is to issue large negotiable certificates of deposit (CDs). These are certificates issued by banks which state that a specified amount of money has been deposited for a period of time and will be redeemed with interest at maturity. Repurchase agreements (repos) are yet another source of funding. Repos and reverse repos are transactions in which a borrower agrees to sell securities to a lender and then to repurchase the same or similar securities after a specified time, at a given price, and including interest at an agreed-upon rate. Repos are collateralized or secured loans in contrast to federal funds loans which are unsecured.
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