Euro Currency Market

EURO CURRENCY MARKETS

ORIGIN OF EUROCURRENCY

During 1950’s Russians were earning dollars from sale of gold.

They never wanted to deposit this dollars in New York bank.

They deposited this dollars in Britain and France.

These deposits were in Europe so it is call

‘ EURO’.

WHAT IS EUROCURRENCY

MARKETS It is a market for borrowing and

lending of currency at the center outside the country.

Euro is a single currency which was launched on 1st Jan 1999.

Euro is an important international reserve currency.

Euro is administered by the European Central Bank.

This currency is used daily by some 327 million Europeans.

Eurodollar or Eurocurrency refers to bank time deposits in a foreign currency.

GROWTH OF OTHER EURO INSTRUMENTS

Euro Credits and Euro loans

Euro Bonds and Euro Commercial Papers

CHARACTERISTICS OF EUROCURRENCY MARKETS

Unregulated Market

Short Term Deposits and Long Term Loans

Largely Wholesale Market

Time Deposits

Euro dollar and LIBOR based market

Factors responsible for origination and growth of

Eurocurrency market Less willingness of countries to hold

dollars in USA-based banks

Regulation Q in the USA

Capital controls in USA

Restrictions in UK

Full capital account convertibility adopted by developed countries

Growth of offshore banking and tax heaven concept

Difference Between Euro Currency Market And Domestic Money Market

The Euro Currency market is purely wholesale market as compared to domestic market which is retail banking market.

The Euro Currency market has got relative freedom from regulations as compared to domestic markets.

There are number of problems in Euro Currency market as compared to domestic market such as jurisdiction, the acceptability of a freeze on deposits in one Country by another Country.

The Euro Currency market is almost exclusively concerned with matched deposit dealing. That is, each deposit of an international bank will tend to be matched by an asset of the same Currency and of similar maturity.

Euro Currency market loans are typically made for specific period and funded by a deposit of a similar period.

Functions of Eurocurrency Market

1) Cheap source of working capital: Since dealings are between banks

of good credit rating the cost are less.

2) Liquidity: It has an advantage in the form of

absence of tax withholding on interest.

3) Facilitate International trade:a. Lower interest rateb. Easy procedural formalities

Eurobanking

Definition:

“Euro banking involves transaction in foreign currencies including deposits and loans”.

Characteristics of Eurobanks

Eurobanks are just like domestic banks in terms of maximizing spreads and managing risk.

Deposits are for fixed terms ranging from days to years, mostly for less than six months.

Loans can range up to 10 years or more.

How it works?

Purpose of Eurobanking

Exchange and discuss ideas, techniques , experience and philosophy to bank management.

It is a Forum for promoting wider understanding amongst bank management and also includes some sessions.

Benefits

Depositor escape from tax net of their own country domicile.

Borrowers get liquid money for working capital as well as for capital investment.

Banks offers this service to non-resident.also.

Activities of Eurobanking

It holds an annual meeting which is limited in size.

Papers are presented over excellent track records for discussing new approaches to bank management.

E.g.• Mergers and acquisition• Risk management• Manpower planning etc.

Components of Eurocurrency market

1. Market participants :Commercial bank :

Commercial banks link the external with the domestic market, taking funds from one and placing them in other market.

Corporate :Corporations borrowing

Eurocurrencies are mainly those whose name, size and good standing enable banks to make loans to them with little more than a superficial analysis of creditworthiness.

Private individuals :Private individuals are minor

participants in the Eurodollar markets.

Governments and central banks:In the last decade the market

has also seen an expansion in government and government related borrowers. This is especially true of the medium term Euro credit market, which has become widely tapped for infrastructure projects and for financing balance of payments deficits.

2. Euro financial-Instruments: Euro deposits:

Most deposits in the Eurocurrency market are time deposits at fixed interest rates, usually of short maturity.

Euro loans:Many Eurodollar loans are direct,

bank-to-customer credits on the basis of formal lines of credit or customer relationships.

Eurobonds:Eurobonds are international

bonds denominated in a currency different from that of the country in which they were issued.

Other Instruments:Other Euro financial instruments

include Euro commercial papers, Euro certificates of deposits.

3. Transactional structure of Euro Markets:

The Euro currency market is entirely a wholesale market. All Euro-currency transaction are unsecured credits, hence the fact that lenders pay particular attention to borrowers status and name.

OFFSHORE BANKLNGDefinition:

Offshore bank is a bank that operates in a country other than depositor resides or

An offshore-bank is a bank located outside the country of residence of the depositor.

The term ‘offshore bank’ is used to refer to the banking institution that provide

such services regardless the place they are located.

Banks incorporated in other countries would also like to get advantages of liberal regulation in some countries.

For this purpose many big banks have established an offshore banking division in a country which provides such advantages.

Many of the small island countries and small countries near the shores have deliberately maintained easy regulation on banking and financial service industry.

OFFSHORE FINANCIAL CENTERS

Jurisdictions that have relatively large numbers of financial institution engaged primarily in business with non-resident.

Financial system with external assets and liabilities out of proportion to domestic intermediation designed to finance domestic economies.

Centers which provide some or all of the following service low or zero taxation moderate or light financial regulation banking secrecy and anonymity.

ADAVANTAGES

Strong privacy

less restrictive legal regulation

Low or no taxation

Easy access to deposits

Protection against local political or financial instability

Advantages of offshore banking

Access to stable jurisdiction to park funds

Better interest on deposits

Tax evasion

Non- conventional facilities

Other advantages to the bank

DISADVANTAGES OF OFFSHORE BANKING

Crime and illegal activities

Tax lost to the government

Capital outflow and volatility

Widens rich-poor gaps

THANK YOU

Euro Currency Market

Documents

Transcript of Euro Currency Market