Eurodollar Deposits And Loans

The most important distinction between the Eurodollar banking market and domestic banking is that Eurocurrency markets are not subject to domestic banking regulations. Eurobanks may obtain same profit levels as domestic banks even though they achieve lower spreads on lending depositors’ funds than their domestic counterparts. The absence of reserve requirements and regulations enables Eurobanks to offer slightly better terms to both borrowers and lenders.  Eurodollar deposit rates are higher, and effective lending rates a little lower, than they are in domestic money markets. The absence of regulations is the key to the success of the Eurocurrency markets. Deep Euromarkets exist only in those currencies, such as the US dollar, the German mark and the pound sterling, that are relatively freely convertible into other currencies.  The company’s surplus funds were held originally in a time deposit with a demand deposit in the local US bank. The company transfers ownership, by payment, of the demand deposit in the local US bank to the US bank in London, where a time deposit is made. This process creates a Eurodollar deposit, substituting for an equivalent domestic time deposit in a US bank. The London Bank now has a larger deposit in the U.S.A. The increase in the London bank’s deposits in the US bank is matched by the increase in dollar deposits for the world as a whole.  The volume of dollar deposits in the USA remains unchanged, while the volume in London increases.  Loans made in the Euromarkets are similar to those made domestically by UK and US banks and so on. More lending is done on a corporate reputation or name basis, as it is sometimes called, to well-known entities, with less credit investigation and documentation being involved than in domestic lending. Eurobanks also prefer to lend to large, well-known corporations, banks or governments. But the most important difference is that Euro deposits, because they are located in a different country, are in some respects subject to the jurisdiction of the country.