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.