Interbank Market (6) Flashcards
What is the INTERBANK MARKET?
It is a large-scale market, where the players are credit institutions, and where very ST highly liquid instruments are traded. It allows us to obtain the P of many via de loans. It is an organised market that settles its operations via the TARGET2
What are the functions of the INTERBANK MARKET?
- allow financial bodies to manage treasury surplus
- allow financial bodies to cover possible liquidity shortfalls
- allow financial leveraging (obtaining financing for active operations)
- they are an important indictor of the monetary and financial climate
Which sectors can we differentiate?
DEPOSIT MARKET
market where banks adjust their euro liquidity needs with other banks
FRA MARKET
the “forward rate agreement” is a contract that involves an agreement on a future loan (agreed IR, pre-determined quantity and pre-defined time period)
REPO MARKET
blocked/spanish repos and ordinary repos are sales of instruments with agreement to buy them back, similar to principle deposits.
all repos involve loans secured with government bonds/high-quality instrument.
SWAPS MARKET
contract in which 2 parties make a commitment to exchange a series of amounts of money on date in the future.
EONIA
EURO OVER NIGHT INDEX AVERAGE
Effective (corresponding to real transactions) overnight IR calculated as a weighted average of all unsecured overnight lending operations on the Interbank Market.
REPLACEMENT by €STR
motive: decrease in activity and participants in Interbank market. €STR is a risk-free index, vehicle for MP, which will reflect the IR at which banks take funds in the wholesale market (ST, overnight).
- based on individual transactions (50 entities, money market)
EONIA (lending rate) > €STR (taking rate)
transition will be gradual, until 2021 EONIA will be calculated by adding a fixed spread to €STR
as EONIA (only banks) and €STR (non-baking entities as well), €STR has been lower for the past two years
EURIBOR
EURO INTERBANK OFFERED RATE
an interest rate that indicates the supply of deposits between the lending entities of the Eurozone. Panel of banks declare at what rate they are willing to lend.
- used to serve as benchmark for financial operations
- average of interest rates removing 15% higher and lower, and rounded up 3 decimals
- code of conduct
REPOS MARKET
REPO MARKET
blocked/spanish repos and ordinary repos are sales of instruments with agreement to buy them back, similar to principle deposits. all repos involve loans secured with government bonds/high-quality instrument.
- < 1 year
- repurchase P is agreed implicitly in the interest rate of the operation
- ECB/NCB only intervene as collateral
“Ordinary repos” the two operations refer to the same instrument and for the same nominal value of securities. In addition the buyer has absolute freedom to sell the instruments acquired before the repurchase date.
FRA MARKET
FRA MARKET
the “forward rate agreement” is a contract that involves an agreement on a future loan (agreed IR, pre-determined quantity and pre-defined time period)
- 3 dates: deal date, settlement date and termination date
- defined notational amount and guaranteed IR
- FRA doesn’t involve actual loans being produced, as with some derivatives, parties settle the difference
fixed FRA - standardised maturity and volume
variable FRA - maturity is set by the parties
SWAPS MARKET
SWAPS MARKET
contract in which 2 parties make a commitment to exchange a series of amounts of money on date in the future. (a swap is seen as a derivative instrument)
normally future exchanges of money are referenced to interest rates and called Interest rate Swaps.
- fixed
- variable
“credit default swap” (CDS) a swap designed to transfer risk exposure of fixed income products between parties.
DEPOSIT MARKET
DEPOSIT MARKET
market where banks adjust their euro liquidity needs with other banks
- € = increased volume, participants and opportunities
- maturities from 1 day to 1 year, most 1 day
- depo rates are used as reference (EONIA, EURIBOR)
