Eurocurrency Markets

Dr. Pravin Kumar Agrawal

Assistant Professor
Department of Business Management
CSJMU
 Eurocurrency Markets

• Eurocurrency markets are markets for both

deposits and loans in a currency, or
currencies, other than that of the country in
which they are located.
 Eurocurrency
• Any freely convertible currency deposited in a bank outside its
country of origin. Pounds which are deposited in US become
eurosterling, dollars deposited in London become Eurodollars.

• These deposits can be placed in a foreign bank or in a foreign

branch of a domestic US bank. Any convertible currency can
exist in “Euro” e.g. we can have Eurosterlings, Euroyen,
Eurodollars and so on.

• Contrary to its name, the term does not refer to euros that are
deposited outside of Europe.
 Eurocurrency
• For example, if you deposit Japanese yen at a
bank in the United States, it is considered to
be Eurocurrency.
• Euro is a currency and Eurocurrency is
deposits and loans in various currencies,
including Euro?
• They all share the Euro-dollar characteristic
and are national currencies deposited outside
their own border. In addition to Europe,
financial institutions in the Bahamas, Cayman
Islands, Panama (tax heaven), Canada, HK,
Japan, Singapore and US IBFs (International
Banking Facilities-off shore banking) deal in
Eurocurrencies.
 Eurocurrency Markets

• The Eurocurrency market consists of those

banks which accept deposits and make loans
in foreign currencies.

• The Eurocurrency market allows for more

convenient and flexible borrowing which
improves the international flow of capital for
the purpose of trade between countries and
companies.
 Example
A company in UK borrowing US dollars from a
bank in France is using the eurocurrency
market.
Banks in which Eurocurrencies are deposited
are called Eurobanks.
Thus Eurobanks are major world banks that
conduct a Eurocurrency business in addition
to all other banking functions.
 Eurocurrency Markets
• The dominant Eurocurrency is the US dollar as
the US dollar is widely used by many foreign
countries as a medium for international trade
However, the importance of the Eurodollar
has decreased over a period of time.
 Eurocurrency Markets

• Thus a Eurocurrecny market serves two

important purposes. First, it is a convenient
and efficient money market device for holding
excess corporate liquidity and Second, it is a
major source of short-term bank loans to
finance corporate working capital.
 Characteristics of the Eurocurrency Market

• It is a large international money market relatively free

from government regulation and interference, i.e., the
market is essentially unregulated.

• Transaction, in this market are generally very large with

government, public sector organisations tending to
borrow most of the funds. This makes the market a
wholesale rather than a retail market. Also, approximately
80% of the Eurodollar market is interbank, which means
that the transactions take place between banks.
 Eurocurrency
• The Eurocurrency market is mainly a Eurodollar market.
Generally, the Eurocurrency borrowing rate depends on the
creditworthiness of the customer and is large enough to
cover various costs as also build reserves against possible
losses. Traditionally, loans are made at a certain percentage
above the London InterBank Offered Rate (LIBOR), which is
the interest rate banks charge one another on loans of
Eurocurrencies. Most loans are made on variable rate terms
and the rate fixing period could be one month, three
months or six months. Because of the variable nature of the
interest rates, the maturities can extend into the future.
 Eurocurrency
• The Eurocurrency market has both short-term and medium-
term characteristics. Short-term Eurocurrency borrowings
have a maturity of less than one year. Borrowing at maturities
exceeding one year is also feasible and is known as Euro
credit. A Euro credit consists of loans that mature in one to
five years. These Euro credits may be in the form of loans,
lines of credit or medium and long-term credit including
syndication. Syndication occurs when several banks pool their
resources to extend a large loan to a borrower so as to spread
the risk.
 Eurocurrency

• Another special feature of the Eurocurrency

market is the difference in interest rates as
compared with domestic markets.
Eurocurrency loans generally carry a lower
rate of interest than the rates in the domestic
markets.
 Characteristics of Euro Currency Market

• Unregulated market: It is a cross border market hence

no government has full control over the transactions. As
a result there is minimal government interference.
Essentially it is an unregulated market.

• Short term deposits and long term loans: deposits in

Euro Currency markets are primarily for short term.
Eurocurrency loans, however, are for longer period of
time. This leads to asset-liability mismatch problems for
the banks.
 Characteristics of Euro Currency Market

• Largely wholesale market: Transactions in EuroCurrency

markets are very large. They are mostly among banks, and
Governments, Public Sector Organizations and large MNCs.
This feature makes it a wholesale rather than a retail market.

• Time deposits: This market exists for savings and time

deposits, fixed deposits and recurring deposits.

• Eurodollar and LIBOR based market. Euro Currency interest

rates are tied to a variable rate base such as London Interbank
Offer Rate. This reduces interest rate risks.
 Significance
(1) Eurocurrency market is a major source of short-term
bank loans to help meet the corporate’s working
capital requirements including the financing of
imports and exports;

(2) Eurocurrency deposits are an efficient and

convenient money market device for holding excess
corporate liquidity.
 Significance

• The main advantage of Euro

currency markets is that they are more
competitive. At the same time, they will give
borrowers lower interest rates and higher
interest rates for lenders. That is mostly due to
less regulated Eurocurrency markets.
 Eurobank
• A Eurobank (or offshore bank) is a financial
intermediary that simultaneously bids for time
deposits and makes loans in a currency , or
currencies, other than that of the country in
which it is located
 Eurobanks
• A Eurobank is a financial institution that allows the deposits and loans of
foreign currency. In other words, a Eurobank is a bank that accepts the use
of Eurocurrency as a financial instrument. A Eurobank can be located
anywhere in the world – it does not need to be located in Europe only. For
example, a bank located in Canada that holds South Korean won is
considered to be a Eurobank.

• Eurobanks enjoy restrictions and regulations that are more relaxed in

comparison to typical banks, which allows them to reduce their operating
costs. In turn, they are able to offer clients a lower cost of banking. For
example, Eurobanks are able to offer foreign currency at low interest rates
to the borrower and high interest rates to the lender. They can do so
because the Eurocurrency market does not have restrictions for interest
rate ceilings.
 Eurobanks

• Eurobanks often make transactions with foreign

currency in large amounts, as $1 million is often
considered to be one unit. It is because the clients
are usually businesses or large corporations that use
Eurocurrencies to reduce financial risks.
Factors Contributing Towards Growth of Euro Currency
(offshore) Market.

• Regulation : The regulation of the Federal Reserve

Act imposed a ceiling on interest rates that could be
paid on deposits by banks in the US. This enabled
European banks to attract US dollar deposits by
offering better interest rates.
The regulation of the Federal Reserve
Act stipulated reserves to be maintained against
deposits accepted by banks in US, this increased the
cost on deposits for banks in US. It was exploited by
European banks as they were not subject to reserve
Factors Contributing Towards Growth of Euro Currency
(offshore) Market.

• Insure Deposits: There was mandatory regulation on all

banks in the US to insure deposits accepted by them from
public, on the other hand European markets were
unregulated. With no burden of insurance costs, deposits
in Euro currency markets were encouraged.

• Interest Equalization Tax: This tax was introduced by US

monetary authority in 1963 increasing the cost of
borrowing there for non-resident entities. They
approached offshore markets, where no such burden was
there for their funding needs.
Factors Contributing Towards Growth of Euro Currency
(offshore) Market.

• International Borrowing: The Voluntary Restraint

Programm was introduced in the US in 1965 in terms
of which, borrowing in US dollars for financing
international projects was restricted and US banks
were reluctant to provide loans to International
borrowers.

• This ensured that US multinationals would also look

upon for borrowing funds from the Euro currency
market.
 References
• https://www.wallstreetmojo.com/eurocurrency/
• https://www.investopedia.com/terms/e/eurocurrencymarket.
asp
• International Financial Management by bekaert and robert
hodrick
• International Financial Management by Jeff Madura 9th
Edition
• What is Eurocurrency Market? What factors
have contributed to its Growth?

• Define Eurocurrency Market . Enumerate its

features.