Lecture 6 - Eurocurrency and Eurobonds Flashcards
What is eurocurrency?
Short term borrowing/lending (< 1 year) outside of the legal jurisdiction of the authorities of the currency that is used.
What is the dominant currency in the eurocurrency world?
USD.
What are eurobanks?
Banks that accept deposits in currencies outside of the legal jurisdiction of that currency. They also make loans in the same currency.
For example, a bank in Cyprus that accepts dollar deposits is referred to as a eurobank. The dollar deposit is a euro currency deposit and in particular, a euro dollar.
What is a eurodollar?
It is simply a deposit in dollars outside the legal jurisdiction of the US dollar.
What are eurobonds?
Bonds that are sold in countries other than the country represented by the currency denominating them (i.e. a dollar bonds sold in London). They are long term.
About 70% of the Eurobonds are denominated in the…
USD.
What are offshore financial centres?
Countries that contain financial institutions that deal primarily with non residents an/or in foreign currency.
What are the advantages of offshore financial centres?
Normally they are more free with respect to the host country governmental banking regulation. Offshore financial centres typically have less banking regulation.
Typically, the tax environment associated with offshore deposits is quite low (in some cases, even zero). Also, there is an element of specialisation. Typically, offshore banks are specialised in corporate services to non residents and also have a particular degree of confidentiality.
What are the reasons for offshore banking?
- To avoid high costs of banking which arises from the existence of domestic regulations.
- Eurobanks can hold much smaller reserves than their counterparts. Reserves are not regulated as traditional domestic banks are regulated. Hence, there is a competitive advantage.
This allows offshore banks to offer higher interest on deposits and lower interest on loans. - Typically, countries have two sets of banking rules.
- Stricter rules on banking operated in the domestic currency.
- Unregulated/less stringent for deposits denominated in foreign currencies for offshore deposits for euro deposits.
- Reserve regulations.
- Government guarantee on deposits. There is no government guarantee on offshore depostis. They do not enter into this regulation. Government guarantee in Europe for up to 100,000 and in the UK it is 85,000. In case of bank failure, people are refunded by the government within 20 working days.
- Capital adequacy requirements. This does not apply to offshore banking.
What is the spread?
The difference between the deposit and loan interest rates.
International banking facilities (IBFs) allow…
Depository institutions in the United States to offer services to foreign residents and institutions free of some Federal Reserve requirements and some state and local income taxes.
What is the purpose of IBFs?
They enable U.S. institutions to compete more effectively for foreign-source deposits and loan business.
Banks may conduct their IBF activities in their existing quarters, but they must maintain separate IBF books.
What is the LIBOR?
An interest rate at which a group of major banks can borrow from each other. This interest rate is set every morning.
