Interbank Rate

What is the 'Interbank Rate'

The interbank rate is the rate of interest charged on short-term loans made between banks. Banks borrow and lend money in the interbank market in order to manage liquidity and meet the requirements placed on them. The interest rate charged depends on the availability of money in the market, on prevailing rates and on the specific terms of the contract, such as term length.

BREAKING DOWN 'Interbank Rate'

Banks are required to hold an adequate amount of liquid assets, such as cash, to manage any potential withdrawals from clients. If a bank can't meet these liquidity requirements, it will need to borrow money in the interbank market to cover the shortfall. Some banks, on the other hand, have excess liquid assets above and beyond the liquidity requirements. These banks will lend money in the interbank market, receiving interest on the assets.

There is a wide range of published interbank rates, including the LIBOR, which is set daily based on the average rates on loans made within the London interbank market.

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RELATED FAQS
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    Both LIBID and LIBOR are rates primarily used by banks in the London interbank market. The London interbank market is a wholesale ... Read Answer >>
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    LIBOR, LIBID and LIMEAN are all reference rates used to benchmark short-term interest rates. The London Interbank Offered ... Read Answer >>
  3. What is a liquidity squeeze?

    A liquidity squeeze occurs when a financial event sparks concerns among financial institutions (such as banks) regarding ... Read Answer >>
  4. What are the differences between the Federal Funds Rate and LIBOR?

    Learn the key differences between the federal funds rate and the London Interbank Offered Rate, including currency denomination ... Read Answer >>
  5. How does LIBOR compare to the Federal Reserve rate as an accurate indicator?

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