Interbank lending market

The interbank lending market is where banks lend money to each other. For example, the interbank overnight lending market is where depository institutions by or sell funds so they may meet reserve requirements. [http://stats.oecd.org/glossary/detail.asp?ID=1385] . Such loans are made at the interbank rate. Low transaction volume in the interbank lending market is a major contributing factor to the global financial crisis of September-October 2008.

Banks are required to hold an adequate amount of liquid assets, such as cash, to manage any potential withdrawals from clients. If a bank cannot meet these liquidity requirements, it will need to borrow money in the interbank market to cover the shortfall. Some banks, on the other hand, have excess liquid assets above and beyond the liquidity requirements. These banks will lend money in the interbank market, receiving interest on the assets.

The interbank rate is the rate of interest charged on short-term loans made between banks. Banks borrow and lend money in the interbank lending market in order to manage liquidity and meet the requirements placed on them. The interest rate charged depends on the availability of money in the market, on prevailing rates and on the specific terms of the contract, such as term length. There is a wide range of published interbank rates, including the LIBOR, which is set daily based on the average rates on loans made within the London interbank market.

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