The interbank market
Originally, the interbank market was defined as the market where banks lend to each other, in both the domestic and international markets. This is a rather strict (old-fashioned) definition, and increasingly, as well as banks, this group of lenders includes large industrial and commercial companies, other financial institutions and international organisations.
Thus, the interbank market exists so that a bank or other large institution which has no immediate demand for its surplus cash can place the money in the interbank market and earn interest on it. In the opposite scenario, if a bank needs to supply a loan to a customer but does not have the necessary deposit to hand, it can (usually) borrow on the interbank market. A variety of interbank overnight lending rates is published daily in the FT - see Table 8.1. We live in very strange times, with negative interest rates in euros (the lender gets back less than it lent!)[18] and zero interest rates in Swiss francs.There is no secondary trading in the interbank market; the loans are non- negotiable - thus a lender for, say, three months cannot sell the right to receive interest and capital from the borrower to another organisation after, say, 15 days. The lender has to wait until the end of the agreed loan period to recover the money. If a bank needs funds, it simply ceases to deposit money with other banks or borrows in the market.
Table 8.1 Interbank overnight interest rates, annualised, 4 September 2014
| Interbank lender | Latest | Today's change |
| Budapest: BUBOR | 1.28% | -0.09 |
| 1.04% | 0 | |
| Euro: Libor | -0.03% | >-0.01 |
| GBP: Libor | 0.47% | >-0.01 |
| Oslo: OIBOR | 2.21% | -0.01 |
| Swiss: Libor | 0.00% | +0.01 |
| US$: Libor | 0.09% | the other banks) who had responsibility to submit daily Libor rates to change the submission slightly, they could make a fortune on the movements in derivatives. With the huge values involved in derivative trading, a difference of a few pips (one-hundredth of 1%) had the potential to make (or lose) huge amounts of money. From 2005 on (and perhaps earlier) rate submitters were regularly cajoled, bribed and leant on to do the derivative guys a favour - and some senior bankers encouraged this. It was an international game, with many interlocking personal relationships in the very small world of rate submitters and derivatives traders located in the major financial centres. Within this web, an alternative way of making money illegally using derivatives was for traders to receive advanced word on which direction rates would move. It wasn't just banks; some interdealer brokers, who facilitate derivative trades between banks, also came under investigation for coordinating manipulation. Second, following the financial crisis of 2007-2008, banks did not want to appear weak. A clear sign of weakness, and therefore seeming to be a higher risk, is for a bank to admit that it has to borrow from other banks at high interest rates. Thus, the rate submitters were leant on to ‘lowball' their submissions to make the banks appear healthier than they really were. Admittedly, there was so little confidence in banks generally at that time that actual tangible interbank lending became very thin, if not completely shut down, and so submitters frequently had to fall back on their judgement of what they might have to pay to borrow ‘were you to do so'. They were caught out by email records showing that, far from merely using good judgement about what rate the bank might have to pay, they were deliberately underestimating borrowing rates to fool outsiders - they falsified.
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