What Is a Eurobank?
A eurobank is a financial institution that accepts deposits and makes loans in foreign currencies. It is not necessary for a eurobank to be located in Europe; it can in fact be located anywhere in the world. For example, an American bank located in New York which holds deposits and issues loans in Japanese yen (JPY) would be considered a eurobank.
Eurobanks may operate in their own country, such as the American bank in the example above, or they may operate in a country outside their home.
- Eurobanks are financial institutions that accept foreign currencies for deposits and loans.
- Because they handle multiple currencies transactions, these institutions play a key role in facilitating global trade.
- Eurobanks cater mainly to governmental and institutional clients, and will often form syndicates to facilitate especially large transactions.
How Eurobanks Work
Eurobanks play an important role in the global economy because they facilitate international trade. Following World War II, this model of banking became popular due to demand from communist countries which wished to remove their holdings from U.S. banks in order to hedge against political risks stemming from the then-nascent Cold War.
Since then, the emergence of eurobanks has done much to facilitate trade and investment between countries. In the past, cross-border trade was hampered by a lack of international intermediaries capable of accommodating transactions involving multiple foreign currencies. The substantial growth in international trade which we have witnessed since the 1980s is due in part to the proliferation of eurobanks throughout the world.
This growth was further propelled by the development of large and dynamic economies such as those of China, India, and other emerging economies. As these nations have pursued policies of economic development and industrialization through export-led growth, the demand for eurobanking has grown accordingly. This is especially true because, despite the growing importance of these economies, some of the currencies of these nations are still not widely traded on global currency markets. As such, emerging economies often find it necessary to conduct international trade using foreign currencies.
Real World Example of a Eurobank
The currencies held and lent by eurobanks are known as eurocurrencies, although it is important to note that the term “eurocurrency” is used even if the currency in question is not the euro. Today, the most widely used eurocurrencies are the U.S. dollar (USD), JPY, British pound (GBP), and the euro (EUR).
When eurobanks issue loans denominated in eurocurrencies, these are referred to as eurocredits. More specifically, a eurocredit is any loan given by a eurobank which is not denominated in that eurobank’s domestic currency. Typically, eurocredits are issued to sovereign governments, corporations, international organizations, and commercial banks. In this respect, eurobanks are mainly oriented toward facilitating commerce at the international and institutional level.
If an especially large loan is required, eurobanks will typically work together in a syndicate, in order to spread their respective risks. The loans themselves often have short or medium-term durations, with the outstanding balances rolled over at the end of the term. As in many banking transactions, the interest rate used on eurocredits is typically based on the London Interbank Offered Rate (LIBOR).