Interbank Market

Interbank Market
The interbank market is an exclusive market where large financial institutions borrow and lend money for a specified term at the interbank rates. The loans are usually for a very short duration of time, lasting no longer than a week, and are often used to help banks meet cash reserve requirements. Banks are required by law to hold an adequate amount of liquid assets. If a bank cannot meet these liquidity requirements, it will borrow money in the interbank market to cover the shortfall. On the other hand, some banks have excess liquidity, above and beyond the requirements. These banks will lend money, receiving interest on the assets. The interest rates charged on short-term loans between banks depend on the availability of money in the market, and on the specific terms of the contract, such as the duration for which the loan is required. One of the major contributing factors to the financial crisis of 2007 was the low transaction volume in the interbank lending market.

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