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. Mumbai Interbank Bid Rate - MIBID

    The Mumbai Interbank Bid Rate is the interest rate a bank participating ...
  2. Euro LIBOR

    Euro LIBOR is the London Interbank Offer Rate denominated in ...
  3. Mumbai Interbank Forward Offer ...

    The Mumbai Interbank Forward Offer Rate is the rate that Indian ...
  4. Emirates Interbank Offered Rate ...

    The Emirates Interbank Offered Rate (EIBOR) is the benchmark ...
  5. Big Figure

    Big figure is the stem, or whole dollar price, of a price quote. ...
  6. Interest Rate Index

    An interest rate index is an index based on the interest rate ...
Related Articles
  1. Investing

    The Foreign Exchange Interbank Market

    Learn how the forex interbank market functions and effects individual investors.
  2. Small Business

    The LIBOR Scandal

    Barclays and other banks are alleged to have submitted artificially low LIBOR rates between 2007 and 2009.
  3. 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.
  4. Investing

    The Insiders Who Fix Rates for Gold, Currencies And Libor

    The system by which benchmark rates are fixed for interest rates, currencies and gold is archaic - and, many would argue, deeply flawed.
  5. Financial Advisor

    Why Banks Don't Need Your Money to Make Loans

    Contrary to the story told in most economics textbooks, banks don't need your money to make loans, but they do want it to make those loans more profitable.
  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.
  9. Personal Finance

    What Is The Difference Between A Nostro And A Vostro Account?

    Nostro and vostro are Italian terms that describe the same bank account. They’re used when one bank has another bank’s money on deposit.
RELATED FAQS
  1. The Difference Between Term Deposit and Demand Deposit

    Understand the meaning of demand deposits and term deposits, and learn about the major differences between the two. Read Answer >>
  2. What is the difference between an investment and a retail bank?

    Learn the primary differences between retail banks and investment banks by examining the business activities, type of clients ... Read Answer >>
  3. What are the 9 major financial institutions?

    There are nine major types of financial institutions. Understand the major types of financial institutions that exist and ... Read Answer >>
  4. How does investment banking differ from commercial banking?

    Discover how investment banking differs from commercial banking, the responsibilities of each and how the two can be combined ... Read Answer >>
Trading Center