Interbank foreign exchange market

Interbank trading is called ( among other money, securities, foreign exchange) between banks, global trading of financial instruments. Not for interbank trading include the business of credit institutions having their central bank.

Content

In interbank trading money, securities, foreign exchange, varieties, precious metals or derivatives are exchanged at the interbank rates on the interbank market. Interbank market, in turn, is the economic town (ie not geographically limitable place ) meet on the interbank supply and demand together.

For lending money internationally recognized reference rates such as EURIBOR, LIBOR or EONIA shall be used in the calculation of interest.

• EURIBOR ( European Interbank Offered Rate ) is an international representative euro money market interest rate that is paid between banks for unsecured euro - deposits with a maturity of up to a maximum of 12 months.
• LIBOR (short for London Interbank Offered Rate ) is the first introduced in January 1986 the reference rate for short-term lending (overnight to a maximum of 12 months), under the aegis of the British Bankers' Association (BBA ) is for unsecured deposits found in other currencies daily.
• EONIA ( Euro Overnight Index Average ) is a sales-weighted average rate for unsecured overnight deposits in the interbank business, which is calculated since April 1999 by the ECB on the basis of actual sales daily.

Legal bases

All trade with banks is allocated to each of the three following categories:

• Trading in the name and for the account of third parties ( disclosed agency ) is a financial service within the meaning of § 1 Ia 2 No. 2 of the Banking Act (final placement )
• Of trade in its own name on behalf of others (covert agency) is banking business within the meaning of § 1 I 2 No. 4 of the Banking Act ( broking )
• Is trading in its own name for its own account (if it is to be understood as a service to others) financial services as defined in § 1 Ia 2 No. 4 of the German Banking Act ( proprietary trading ). When trading on behalf of a client as principal, the Institute enters its customers over not as a commission agent, but as a buyer or seller. Even if it is civil law this is a pure contract of sale, the business is service within the meaning of the EC Investment Services Directive.

Purpose

The banks participate in the interbank market for two reasons. Either they make on disposals of (open) positions that were previously built up in the banking or proprietary trading or operate proprietary trading. Thus, the interbank market works as an allocation mechanism with the goal of efficient distribution of banking risks.

Disposals,

All transactions in the interbank market subject to the provisions of the Solvency Regulation and other laws and banking regulations monitored because open positions must be backed by equity. Therefore, it may be useful in the customer acquired positions do not keep in stock, but congruent ( congruent ) to close out in the interbank market. The reverse is also true for existing positions that need to be sold due to customers and in the interbank market should be compensated. This can be reduced by closing out positions in the interbank market banking risks or even completely eliminated. On disposals are only if an open interbank position exactly opposite transaction is in progress ("closing transaction" ). But for an open position is neutralized and can no longer be backed by equity capital.

Proprietary trading

Credit institutions operate proprietary trading if their activities are not caused by customer business, but in his own name and be carried out on own account by a credit institution. Also in proprietary trading (open) positions can be established or closed. If no positions built up, creating additional banking risks, which are inferior in the context of credit schemes with equity. This shows that proprietary trading and customer business are not always clearly distinguishable from each other. Motives of proprietary trading are either arbitrage or speculation.

In normal times, the proprietary trading carries between 20 and 50 % at the bank income, however, has been significantly reduced during the financial crisis starting in 2007, in part because higher capital requirements are expected. In volatile markets, has increased the risk in proprietary trading, particularly in stocks and foreign exchange, so banks tend to be at least temporarily withdraw from proprietary trading.

Shape and structure

Mally interbank trading takes place by telephone or online with a subsequent written confirmation of the transaction.

On a complete interbank market all credit institutions interact with each other without discrimination, while an incomplete interbank market is characterized by the fact that some banks are ignored as a market participant. This has an effect on contagion effects (so-called Contagions ), as this diversification due theoretically be lower than on incomplete interbank markets with complete markets.

Risks

The interbank trading is not without risk. If one abstracts from the typical commercial risks ( market risk ), which can be minimized by closing transactions or even turned off, there remains the counterparty or default risk in all transactions in the interbank market. Underlying this is the risk that the other banking partner of the transaction (counterparty) in the worst case can no longer fulfill its obligations under the interbank market, because he has become insolvent.

This fulfillment or " settlement " risk is also more slip back into the public and bank- economic debate since the bankruptcy of Lehman Brothers on 15 September 2008. Lehman Brothers was due to bankruptcy, the commitments made in the interbank market no longer meet, so the other banking partners had at least wear -settlement losses, and possibly again had open positions that were actually dedicated as closed. The Lehman bankruptcy is the real reason for the current tentative attitude of banks on the interbank market. Statistically, it is proven that the banks tend to invest their money in their central banks and largely ignore the interbank market.

Scope

The interbank market is an important source for banks to manage liquidity and market and banking risks. Therefore, the inter-bank business takes up a considerable share of the euro market events. According to the Bundesbank, in normal times, the interbank market reached 30 % of total assets in universal banks, some specialized banks ( such as car or credit banks) are up to 90% on the interbank market dependent. Before the crisis, banks lent to each other every day up to 450 billion euros, as a result of the financial crisis in 2007, the interbank market is almost completely come to a standstill because banks did not trust one another was disturbed. Therefore, credit institutions shall tend to their excess liquidity with the ECB to lower interest rates than they would receive on the interbank market as a settlement risk at the ECB does not exist.

Interactions for lending to non-banks

Since interbank markets represent an important funding base for lending to non-banks in normal times, can be assumed with otherwise constant conditions, that when removal of this source also lending suffers from non-banks. Conversely, the BIS has been found in a study that a reduction of interbank positions can lead to higher lending to non-banks. Currently meet together both effects, because in spite of a reduction of interbank positions there is no increase in lending to non-banks. The reason is that the currently perceived credit crunch is also due to a non-functioning interbank market, as a main source of funding for loans to non-banks is largely eliminated.

Organization

MaRisk demand in Germany ( similar in most Western countries ) is first a strict separation between commercial (market side) and administration (back side). The trade itself is a distinction between "execution trading" ( execution of client business ), "Sales trading" ( advising institutional investors ) and " traders " who are responsible for their own trading. To limit the risks are institution-specific trading limits available, so transfer amount limitations in trading volume per trading day, per commercial product and per dealer.

Current Situation

Following the bankruptcy of Lehman Brothers, the interbank market is worldwide and come specially in Germany from October 2008 to a virtual standstill. For all transactions with typical creditor risks (such as unsecured interbank deposits ) has led to a noticeable wait- that banks lend to each other only to a minor extent money because insolvency of the counterparty could jeopardize repayment. Instead, put banks on excess liquidity from the central bank, they take on a large scale the deposit facility, so that the refinancing function of the interbank market is virtually eliminated. In October 2008, the ECB was in the context of the Financial Market Stabilisation Act of view, " that the granting of state guarantees should be avoided to cover interbank deposits". Meanwhile, a central clearing is discussed which is aimed at neutralizing the counterparty risk and increase confidence in the interbank trading again.

Contagion effects

Both through interbank relationships, other relationships of financial institutions with each other and by the compounds within the payment and securities settlement systems exist permanent interdependencies between credit institutions, which can lead to far-reaching systemic and financial crises in case of disturbances. The DIW Berlin sees in a weekly report a problem is that the banks are increasingly distrusted each other and lending has come in the interbank lending to a standstill, so that individual banks could run into liquidity difficulties. Despite major regulatory concerns had therefore - even with government assistance - support measures for such institutions be made, the decline would have a significant negative impact on the entire financial sector in Germany.

The interbank trade gives banks the world the opportunity to network with each other so strongly that they linked themselves as to be able to present to go down ( " too interconnected to fail" ). This may mean that governments would weigh fear of the consequences of contagion sure if they can go bankrupt, a highly cross-linked bank. This creates perverse incentives in the context of a moral hazard. After all, banks can even construct an implicit guarantee existence by entering into lower net but high gross positions particularly with derivatives, especially if they themselves are not large enough to be lost ( Too Big to Fail). In March 2008, for example, the small and rather insignificant investment bank Bear Stearns was saved because she was considered too interconnected. The more credit derivatives (especially credit default swaps) sold a bank, as guarantor, the higher is therefore the probability that the institution will be saved in an emergency by the state.