Eurocurrencies

Eurocurrencies are domestic currencies of one country on deposit in a second country.Eurodollar time deposit maturities range from call money and overnight funds to longer periods.Certificates of deposit are usually for three months or more and in million-dollar increments.A Eurodollar deposit is not a demand deposit; it is not created on the bank’s books by writing loans against required fractional reserves, and it cannot be transferred by a check drawn on the bank having the deposit.Eurodollar deposits are transferred by wire or cable transfer of an underlying balance held in a correspondent bank located within the United States.A domestic analogy in most countries would be the transfer of deposits held in nonbank savings associations.These are transferred by having the association write its own check on a commercial bank.

Any convertible currency can exist in “Euro-” form.(Note that this use of the expression “Euro-” should not be confused with the new common European currency called the euro.)The Eurocurrency market includes Eurosterling (British pounds deposited outside the United Kingdom), Euroeuros (euros on deposit outside the euro zone), and Euroyen (Japanese yen deposited outside Japan), as well as Eurodollars.

The exact size of the Eurocurrency market is difficult to measure because it varies with daily decisions by depositors on where to hold readily transferable liquid funds, and particularly on whether to deposit dollars within or outside the United States.

Eurocurrency markets serve two valuable purposes: (1)Eurocurrency deposits are an efficient and convenient money market device for holding excess corporate liquidity; and (2)the Eurocurrency market is a major source of short-term bank loans to finance corporate working capital needs, including the financing of imports and exports.

Banks in which Eurocurrencies are deposited are called Eurobanks.A Eurobank is a financial intermediary that simultaneously bids for time deposits and makes loans in a currency other than that of the currency in which it is located.Eurobanks are major world banks that conduct a Eurocurrency business in addition to all other banking functions.Thus, the Eurocurrency operation that qualifies a bank for the name “Eurobank” is in fact a department of a large commercial bank, and the name springs from the performance of this function.

The modern Eurocurrency market was born shortly after World War II.Eastern European holders of dollars, including the various state trading banks of the Soviet Union.Eastern European holders deposited their dollars in Western Europe, particularly with two Soviet banks: the Moscow Narodny Bank in London, and the Banque Commerciale pour l’Europe du Nord in Paris.These banks redeposited the funds in other Western banks, especially in London.Additional dollar deposits were received from various central banks in Western Europe, which elected to hold part of their dollar reserves in this form to obtain a higher yield.Commercial banks also placed their dollar balances in the market for the same reason, as well as because specific maturities could be negotiated in the Eurodollar market.Additional dollars came to the market from European insurance companies with a large volume of US business.Such companies found it financially advantageous to keep their dollar reserves in the higher-yielding Eurodollar market.Various holders of international refugee funds also supplied funds.

Although the basic causes of the growth of the Eurocurrency market are economic efficiencies, the following unique institutional events during the 1950s and 1960s helped its growth:

● In 1957, British monetary authorities responded to a weakening of the pound by imposing tight controls on UK bank lending in sterling to nonresidents of the United Kingdom.Encouraged by the Bank of England, UK banks turned to dollar lending as the only alternative that would allow them to maintain their leading position in world finance.For this they needed dollar deposits.

● Although New York was home base for the dollar and had a large domestic money and capital market, London became the center for international trading in the dollar because of that city’s expertise in international monetary matters and its proximity in time and distance to major customers.

● Additional support for a European-based dollar market came from the balance of payments difficulties that the United States experienced during the 1960s, which temporarily separated the US domestic capital market from that of the rest of the world.

Ultimately, however, the Eurocurrency market continues to thrive because it is a large international money market relatively free from governmental regulation and interference.