What is the 'Interbank Rate'

The interbank rate is the rate of interest charged on short-term loans made between banks. Banks borrow and lend money between each other in the interbank market in order to manage liquidity and meet the reserve requirements placed on them by regulators; the rate depends on maturity, market conditions and credit ratings. The interbank rate can also refer to the price at which banks conduct wholesale foreign exchange transactions in both the spot and forward market; spreads are tighter than for smaller retail transactions.

BREAKING DOWN 'Interbank Rate'

Interbank rates in both the interest rate and foreign exchange markets are available only to the largest and most creditworthy financial institutions.

Interbank Interest Rates

Banks are required to hold an adequate amount of liquid assets to accommodate withdrawals from and payments by clients. Day-to-day liquidity needs are generally managed by borrowing to cover any shortfall and lending any excess liquid assets.

The Intercontinental Exchange London Interbank Offered Rate, known as ICE Libor, was previously known as the BBA Libor rate. Following a rate-rigging scandal in 2015, ICE assumed responsibility for the daily survey that sets benchmark rates for five currencies (U.S. dollar, Swiss franc, euro, British pound and Japanese yen) over seven maturities. Between 11 and 18 banks are surveyed for each rate setting. Libor rates are used for many interest rate swap and floating rate loan resets as well as loans between banks.

Interbank trading is especially active in the overnight eurodollar market, which is for U.S. dollars held in offshore branches. Transactions generally take place at or near the fed funds rate, which is the Federal Reserve Bank's target rate. Many of the banks' trading rooms are physically located in the United States, even though transactions are nominally booked offshore.

Interbank Foreign Exchange

The spot foreign exchange market is by far the largest in the world, with more than $5 trillion changing hands daily. The largest portion of the activity takes place in the interbank market, in which the largest trading rooms execute transactions that range from $25 million to over a billion dollars each. The most actively traded currency pairs are the euro vs. the U.S. dollar; the dollar vs. the Japanese yen; British pound vs. the dollar; and the Swiss franc vs. the dollar. The forward market, which includes any transaction with a maturity longer than spot, is most active in the same currency pairs.

Interbank trading is dominated by several large multinational banks, led by Citibank, Deutsche Bank, HSBC and JP Morgan Chase. Much of the business is done via electronic platforms such as Reuters 3000 and Bloomberg.

RELATED TERMS
  1. Interbank Market

    The financial system and trading of currencies among banks and ...
  2. Interbank Call Money Market

    A short-term money market, which allows for large financial institutions, ...
  3. London Interbank Mean Rate - LIMEAN

    The mid-market rate in the London Interbank market, which is ...
  4. Panel Bank

    The name given to the group of banks contributing to the Euro ...
  5. Euro Overnight Index Average - ...

    The weighted average of overnight Euro Interbank Offer Rates ...
  6. Inward Arbitrage

    A form of arbitrage involving rearranging a bank's cash by borrowing ...
Related Articles
  1. Insights

    London Interbank Offered Rate (LIBOR)

    Learn more about this rate which banks use to determine the amount of interest to charge other banks.
  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

    The Foreign Exchange Interbank Market

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

    The LIBOR Scandal

    Barclays and other banks are alleged to have submitted artificially low LIBOR rates between 2007 and 2009.
  6. Insights

    Two Alternatives for the U.S. LIBOR Benchmark Rate

    Working with the Fed, major Banks have identified two strong alternatives for U.S. credit market to replace LIBOR
  7. Investing

    Forces Behind Interest Rates

    Interest is a cost for one party, and income for another. Regardless of the perspective, interest rates are always changing.
  8. Insights

    Understanding the Bank Rate

    Bank rate is a term describing the interest rate a country’s central bank charges its domestic banks on loans it makes to them.
  9. Trading

    Forex Trading: A Beginner's Guide

    Learn about the forex market and some beginner trading strategies to get started.
RELATED FAQS
  1. What is the difference between LIBID and LIBOR?

    Both LIBID and LIBOR are rates primarily used by banks in the London interbank market. The London interbank market is a wholesale ... Read Answer >>
  2. How does LIBOR compare to the Federal Reserve rate as an accurate indicator?

    Explore a comparison of the predictive efficacy of the Federal Reserve's fed funds rate and the Intercontinental Exchange's ... Read Answer >>
  3. How did LIBOR come into use?

    Learn about the significance of the London Interbank Offered Rate, or LIBOR, and the history of how the daily LIBOR became ... Read Answer >>
  4. Who determines the LIBOR rate?

    Learn about what the LIBOR rate is, how it is determined and calculated, and who determines what the LIBOR rate on a daily ... Read Answer >>
  5. Where on the internet can I find LIBOR rate information?

    Learn what the LIBOR is, which website provides general LIBOR information and which website provides ICE LIBOR data going ... Read Answer >>
  6. How is the forex spot rate calculated?

    The forex spot rate is determined by supply and demand. Banks all over the world are buying and selling different currencies ... Read Answer >>
Hot Definitions
  1. Salvage Value

    The estimated value that an asset will realize upon its sale at the end of its useful life. The value is used in accounting ...
  2. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  3. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
  4. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  5. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  6. Absolute Advantage

    The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost ...
Trading Center