What is the 'Eurodollar'

The term eurodollar refers to U.S. dollar-denominated deposits at foreign banks or at the overseas branches of American banks. By being located outside the United States, eurodollars escape regulation by the Federal Reserve Board, including reserve requirements. Dollar-denominated deposits not subject to U.S. banking regulations were originally held almost exclusively in Europe, hence the name eurodollar. They are also widely held in branches located in the Bahamas and the Cayman Islands.

BREAKING DOWN 'Eurodollar'

The fact that the eurodollar market is relatively free of regulation means such deposits can pay somewhat higher interest. Their offshore location makes them subject to political and economic risk in the country of their domicile; however, most branches where the deposits are housed are in very stable locations.

Background

The eurodollar market dates back to the period after World War II. Much of Europe was devastated by the war, and the United States provided funds via the Marshall Plan to rebuild the continent. This led to wide circulation of dollars overseas, and the development of a separate, less regulated market for the deposit of those funds. Unlike domestic U.S. deposits, the funds are not subject to the Federal Reserve Bank's reserve requirement, and eliminating that cost allows banks to pay higher interest. They are also not covered by FDIC insurance.

Many American banks have offshore branches, usually in the Caribbean, through which they accept eurodollar deposits. European banks are also active in the market. The transactions for Caribbean branches of U.S. banks are generally executed by traders physically situated in U.S. dealing rooms, and the money is on loan to fund domestic and international operations.

Eurodollar Markets

The eurodollar market is one of the world's primary international capital markets. They require a steady supply of depositors putting their money into foreign banks. These eurodollar banks may have problems with their liquidity if the supply of deposits drops. 

Eurodollar Pricing and Size

Deposits from overnight out to a week are priced based on the fed funds rate. Prices for longer maturities are based on the corresponding London Interbank Offered Rate (LIBOR). Eurodollar deposits are quite large; they are made by professional counterparties for a minimum of $100,000 and generally for more than $5 million. It is not uncommon for a bank to accept a single deposit of $500 million or more in the overnight market. A 2014 study by the Federal Reserve Bank showed an average daily volume in the market of $140 billion.

Eurodollar Maturities

Most transactions in the eurodollar market are overnight, which means they mature on the next business day. With weekends and holidays, an overnight transaction can take as long as four days. The transactions usually start on the same day they are executed, with money paid between banks via the Fedwire and CHIPS systems. Eurodollar transactions with maturities greater than six months are usually done as certificates of deposit (CDs), for which there is also a limited secondary market.

RELATED TERMS
  1. Eurocurrency Market

    The eurocurrency market is the market, currency held in banks ...
  2. Foreign Deposits

    Foreign deposits are deposits made at, or money put into, domestic ...
  3. Term Deposit

    A term deposit is a deposit held at a financial institution that ...
  4. Core Deposits

    Core deposits are the deposits that form a stable source of funds ...
  5. Inward Arbitrage

    Inward arbitrage involves rearranging a bank's cash by borrowing ...
  6. International Banking Act of 1978

    The International Banking Act of 1978 put all American bank branches ...
Related Articles
  1. Investing

    The Money Market

    The money market provides a relatively stable place to park capital that may be needed within a short time horizon.
  2. Insights

    What Is The Relationship Between The Federal Funds, Prime And LIBOR Rates?

    The prime rate and LIBOR rate, two of the most prominent benchmark rates, tend to track the federal funds rate closely over time. However, during periods of economic turmoil, LIBOR appears more ...
  3. Investing

    Introduction To The Chinese Banking System

    As China steps into a greater role in the global economic system, their banking system continues to evolve.
  4. Personal Finance

    U.S. Banks Struggle To Reduce Branches (JPM)

    The efforts by U.S. banks to get lean by reduction in branch network are getting challenged by customers who won’t give up regular visits to the branch
  5. IPF - Banking

    Which Banks Pay the Highest Interest Rates on Savings Accounts?

    Online banks offer the best savings account interest rates. Not all banks offer the same features, so it pays to read the fine print.
  6. Investing

    Analyzing a bank's financial statements

    In this article, you'll get an overview of how to analyze a bank's financial statements and the key areas of focus for investors who are looking to invest in bank stocks.
  7. Insurance

    Insurance Companies Vs. Banks: Separate And Not Equal

    Insurance companies and banks are both financial intermediaries. However, they don't always face the same risks and are regulated by different authorities.
RELATED FAQS
  1. How must banks use the deposit multiplier when calculating their reserves?

    Explore the relationship between the deposit multiplier and the reserve requirement, and learn how this limits the extent ... Read Answer >>
  2. What is the difference between the deposit multiplier and the money multiplier?

    Explore the deposit multiplier and the money multiplier, two fundamental concepts of Keynesian economics, and learn how they ... Read Answer >>
  3. Why is my 401(k) not FDIC-Insured?

    Learn about the Federal Deposit Insurance Corporation (FDIC) and whether its protection extends to 401(k) accounts or just ... Read Answer >>
Hot Definitions
  1. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  2. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  3. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  4. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  5. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center