This article consists of 10 pages and 3745 words.
In order to have full access to this article, email us at thedocumentco@hotmail.co.uk
Definition and Origin of Euro-currency
Evolution and Growth of Eurocurrency Markets, Although the words Eurocurrency or Eurodollar don’t make any sense in the literal perspective, a dive into the history solves this dilemma for us. Prior to 1950s, the English pounds (£) were used as the currency for the transaction of the international trade. The English banks used to lend the £ and accept the deposits. However, the Suez Canal crisis during 1956 put downward pressure on the £.
As a result the English banks were prohibited to lend £’s to the international borrowers. The reason for this strategy was simple. If the foreigners didn’t have any £’s, they will not be able to put pressure on the £’s by selling them. This made the banks unhappy because a very profitable business opportunity was taken away from them (MacKinnon, R. I. 1977, p. 6). The international trade however could not stop amid this crisis. The English banks hence started accepting the deposits in US$ to finance the trade. This was the inception of Eurocurrency market.
Eurocurrency is the word for the deposit of a currency in any country other than the country of its origin. For instance, Japanese Yen in a bank in US is Eurocurrency and US$ in a bank in Japan is also an example of Eurocurrency. It has nothing to do with the Euros (€). It is only due to the historic nature of the concept since the markets were initially located mainly in Europe. Besides the restriction from the Bank of England at the use of sterling as the currency for international transactions and lending to the foreigners, Evolution and Growth of Eurocurrency Markets the interest rate ceiling in United States also encouraged the depositors to move their funds to the banks offshore to facilitate from the better market interest rates.
Since the beginning of Eurocurrency in the 1950s, several regulations were introduced to shape the international financing the way we see it now. During the oil crisis of 1973, the international lending became very common and frequent by the oil importing countries (MacKinnon, R. I. 1977, p. 6). Although the Eurocurrency market has a huge share in the international financial markets and has a greater worth than the orthodox commercial banking. McKinnon, however believes that the Eurocurrency markets are unnecessary (1977, p. 1). The participants in this market today use it to hedge their foreign exchange risk and other risks associated with the international trade while it was originally created to finance the trade only. This is mainly due to the profit seeking greed which is a common by product of the banking system. According to McKinnon, R. I. the commercial banks can easily facilitate the traders for the payments where a bank in US will only accept the deposits in US$ and will lend in terms of US$.
The Eurobanks are those banks which provide the Eurocurrency for the transaction or are involved in other financial activities related to the Eurocurrency. These banks are able to offer lower rates to the borrowers and higher rates to the lenders than other domestic banks. The reason for this difference is mainly due to the relaxation in the regulations for the Eurobanks by the central bank. These banks mainly deal in huge amount, and generally consider US$ one million as one unit. The clients are also huge firms which automatically reduces the default risk. This not only allows the Eurobanks to get an exemption from the rigorous terms and conditions and reserve ratios from the central banks, but also allows to transfer this lower cost of banking on to its customers.
Financial Instruments related to Eurocurrency
The financial markets have been extremely adaptive in last few decades. The customization in the financial securities keeps happening and the market keeps adopting them instead of resenting such changes which not only complicate the daily transactions….
Recent Comments