DEFINITION of 'Interbank Deposits'

In an interbank deposit, one bank holds funds on behalf of another bank. In most cases, the correspondent bank is the bank waiting for the deposit. An interbank deposit arrangement requires that both banks hold a "due to account" for the other.

BREAKING DOWN 'Interbank Deposits'

Special terms apply when the correspondent bank is a foreign bank. In this case, the "due to account" is a "nostro" account for the bank holding the deposit. Some will refer to the account as a "vostro" account for the foreign correspondent bank.

Interbank Deposits and the Interbank Market

Interbank deposits are part of the interbank market. The interbank market is a system of trading currencies among banks and financial institutions. This excludes retail investors and smaller trading parties. (Retail investors are individuals who buy and sell securities for their personal account instead of for another company or organization.)

While some interbank trading is done by banks on behalf of large customers, most interbank trading is proprietary, meaning that it occurs on behalf of the banks' own accounts. According to 2004 data from the Bank for International Settlements, approximately 50% of all foreign exchange (forex) transactions are strictly interbank trades.

As an illustration of scale: the minimum size for an interbank deal is $5 million; however, most transactions are greater than $1 billion. The biggest players include Citicorp and JP Morgan Chase in the United States; Deutsche Bank in Germany; and HSBC in Asia.

Interbank Deposits and the Interbank Rate

The interbank rate is the rate of interest banks charge each other on short-term loans. In the interbank market, banks will borrow and lend money in order to manage liquidity and meet the reserve requirements that regulators place on them. The interbank rate depends on maturity, market conditions and credit ratings of the institutions.

For example, the ICE LIBOR (or the Intercontinental Exchange London Interbank Offered Rate) is a benchmark rate, which some of the world’s leading banks charge one another for short-term loans. ICE LIBOR was previously known as the BBA LIBOR rate; however, after a rate-rigging scandal in 2015, ICE assumed responsibility for the daily survey that sets benchmark rates for five currencies (the U.S. dollar, Swiss franc, euro, British pound and Japanese yen) over seven maturities. LIBOR rates continue to be critical in many interest rate swaps and floating rate loan resets as well as with loans between banks.

RELATED TERMS
  1. Interbank Rate

    The interbank rate is the rate of interest charged on short-term ...
  2. Interbank Market

    The financial system and trading of currencies among banks and ...
  3. Hong Kong Interbank Offer Rate ...

    An interest rate stated in Hong Kong dollars on the lending and ...
  4. No Dealing Desk

    No dealing desk is the art of trading forex directly with the ...
  5. LIBOR Curve

    The LIBOR curve is a graphical representation of various maturities ...
  6. Reykjavik Interbank Offered Rate ...

    The formal interbank market rate for short term loans at Icelandic ...
Related Articles
  1. Investing

    The Foreign Exchange Interbank Market

    Can your forex broker offer you the most competitive pricing? Learn how the market's biggest players affect you.
  2. Insights

    What Is ICE LIBOR And What Is It Used For?

    In the case of ICE LIBOR, an innocent-sounding set of letters has a profound bearing on every loan you make.
  3. Trading

    Forex Trading: A Beginner's Guide

    Learn about the forex market and some trading strategies to get started.
  4. Investing

    What is the OIS LIBOR spread, and what is it for?

    When the LIBOR-OIS spread rises significantly, it represents the worry that banks might not be able to pay down even their short-term debt obligations.
  5. Personal Finance

    How Banks Set Interest Rates on Your Loans

    Are you planning on getting a loan from bank? Here is the information you need know on how banks set the interest rates to get the best possible deal.
  6. Personal Finance

    What is Fractional Reserve Banking?

    Fractional reserve banking is the banking system most countries use today.
  7. Personal Finance

    Retail Banking vs. Corporate Banking

    Retail banking is the visible face of banking to the general public. Corporate banking refers to the aspect of banking that deals with corporate customers. Check out more on the differences between ...
  8. Personal Finance

    How Negative Interest Rates Affect Mortgages

    Negative interest rates are wrecking havoc on conventional mortgage lending in Europe.
RELATED FAQS
  1. 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 >>
  2. How is Libor determined?

    The leading indicator used to price debt instruments, LIBOR is produced once a day by the Intercontinental Exchange (ICE) ... Read Answer >>
  3. Comparing deposits: demand versus term

    Understand the meaning of demand deposits and term deposits, and learn about the major differences between these regular ... Read Answer >>
  4. What role does a correspondent bank play in an international transaction?

    Understand what a correspondent bank is and how it operates to facilitate currency exchange and financial transactions between ... Read Answer >>
Trading Center