What is a 'Eurobank'

A eurobank is a financial institution that accepts foreign currency denominated deposits and makes foreign currency loans. As such, a eurobank does not necessarily have to be located on the continent of Europe; it can be anywhere in the world. For example, a bank located in the United States that extends loans or holds deposits in Japanese yen is a eurobank. A eurobank may deal in foreign currencies while operating in its own country, such as a bank in the U.S. that holds deposits and makes loans in euros, or it may operate as a foreign branch in a country other than its own, dealing in that country’s currency.

BREAKING DOWN 'Eurobank'

Currencies held and lent by eurobanks are known as Eurocurrencies, even if they are denominated in currencies other than the euro. The euro, the British pound sterling, the U.S. dollar and the Japanese yen are the four most widely used Eurocurrencies.

Eurocredits

Eurocredits are loans made by eurobanks. Any loan denominated in a currency other than the lending bank’s national currency is a eurocredit. They are usually made by eurobanks to sovereign governments, corporations, international organizations and nonprime banks. Multiple eurobanks will typically consolidate into a banking syndicate for the purpose of making such a loan, in order to spread the risk across multiple institutions, and because such loans are often too large for a single bank to extend. Eurocredits are typically offered at a floating interest rate that both reflects the greater level of risk for the offering banking syndicate, and is tied to the London Interbank Offered Rate (LIBOR). Most eurocredits are considered short-term or medium-term loans, wherein in the entire loan is rolled over and the interest rate recalculated at the end of each loan term.

Eurobanks and the Global Economy

The first eurobanks emerged after World War II, when Communist countries wanted to remove their holdings in U.S. dollars from banks within the United States for safekeeping at the onset of the Cold War. The emergence of eurobanks has facilitated trade and investment between countries, which was difficult in the past for lack of intermediaries that would accept foreign currencies. The explosion in international trade since the 1980s has been largely facilitated by the emergence of eurobanks. The emergence of dynamic economies such as China, India and Brazil has contributed to exponential growth in eurobanks. This is because despite the size of these economies and their contribution to growth in international trade, the currencies of some of these nations are still not freely traded on global currency markets, making it necessary to conduct business in foreign currencies.

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