1. Euro-Currency And Euro-Dollar Market. 1

2. Introduction There are two sorts of banking transaction, those carried out in the native currency and Euro ones. The dollar is the native currency in the USA, the pound in the UK and so on and traditionally nearly all banking transactions were executed in the respective native currency of the bank accepting a deposit. In recent years, however, more and more banking transactions have been Euro ones, that is involving banks in accepting deposits or making loans in a currency which is not native to them. A typical Eurocurrency transaction would involve an Arab depositing dollars with a London bank or an Italian borrowing Deutschmarks from a French bank. The Eurodollar market is the largest of the Euromarkets but there are Euromarkets in virtually all the European currencies. Many of the Euro banks and dealing centers are located in Asia and currency never changes hands, so the name is potentially misleading. 2

3. Euro Currency Definition of 'Eurocurrency Currency deposited by national governments or corporations in banks outside their home market. This applies to any currency and to banks in any country. For example, South Korean won deposited at a bank in South Africa, is considered Eurocurrency. Also known as "euro money." 3

4. Eurocurrency Market 'Eurocurrency Market' The money market in which Eurocurrency, currency held in banks outside of the country where it is legal tender, is borrowed and lent by banks in Europe. The Eurocurrency market is utilized by large firms and extremely wealthy individuals who wish to circumvent regulatory requirements, tax laws and interest rate caps that are often present in domestic banking, particularly in the United States. 4

5. Eurocurrency Market Eurocurrency Marketis the deposit and loan market for foreign currencies. Banks that accept deposits and make loans in the Eurocurrency market are called Euro banks. The term Eurocurrency or Euro bank is a misnomer since it refers to offshore banking and is not limited to Europe. 5

6. Interest Rate Spreads in Domestic and Eurocurrency Markets. 6

7. Drawbacks of Eurocurrency Market To a very large extent the growth of the Eurocurrency market has integrated the worlds money and credit markets. The impact of this unregulated Eurocurrency markets has been to increase competition in banking throughout the world. Regulation maintains the liquidity of the banking system. In an unregulated system such as the Eurocurrency market, the probability of a bank failure that would cause depositors to lose their money is greater. Borrowing funds internationally can expose a company to foreign exchange risk. 7

8. Euro-Dollar Eurodollars are time deposits denominated in U.S. dollars at banks outside the United States, and thus are not under the jurisdiction of the Federal Reserve. Consequently, such deposits are subject to much less regulation than similar deposits within the U.S., allowing for higher margins. The term was originally coined for U.S. dollars in European banks, but it expanded over the years. Definition :US currency or funds held in banks outside the US in Europe or anywhere else. Eurodollars are used commonly for settling international transactions. 8

9. Origins of Offshore Banking The Eurodollar market started in the late 1950s when European banks began accepting deposits in U.S. dollars. Why and how did this market get started? The reserve-currency status of the dollar was an important factor. Some communist countries were the earliest source of dollar deposits held in Europe. Euro banks developed as a result of profit considerations. 9

10. Offshore banking has grown rapidly over the past decades because Euro banks are essentially unregulated. Euro banks can offer narrower spreads than U.S. banks (the spread is the difference between the deposit and loan interest rates). 10

11. Drawbacks of Eurodollar Market Eurodollars are not spendable money, but are money substitutes such as time deposits in a bank. In countries without efficient money markets, access to a competitive Eurodollar market may reduce the demand for domestic money as residents shift funds to the offshore market and earn profit. If the Eurodollar market encourages more international capital flows, then central banks need to engage in more sterilization operations to achieve their domestic monetary policy. 11

12. THE EUROCURRENCY MARKETS THE EUROMARKETS -the most important international financial markets today. A. The Eurocurrency Market 1. Composed of euro banks who accept/maintain deposits of foreign currency 2. Dominant currency: US$ 12

13. B. Growth of Eurodollar Market caused by restrictive US government policies, especially 1. Reserve requirements on deposits 2. Special charges and taxes 3. Required concessionary loan rates 4. Interest rate ceilings 5. Rules which restrict bank competition. 13

14. C. Eurodollar Creation involves :1. 2. A chain of deposits Changing control/usage of deposit. 14

15. Eurocurrency loans a. Use London Interbank Offer Rate: LIBOR as basic rate b. Six month rollovers c. Risk indicator: size of margin between cost and rate charged. 15

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