Note: although the deposit is held in the account of a London bank the money doesn’t actually leave Japan; rather it is held in the account of a London based bank in Japan and becomes an asset of that bank. The depositor’s (investor’s) claim is with the London bank.
Euro-deposits
The Euro market has its origins in time deposits - whereby cash was held in a banking system outside the country of that currency’s origin.
Historically there was a demand for dollars to be held in time deposits outside the US, specifically in Europe, thus they came to be called Eurodollars.
Dollars later came to be held in South-East Asia and the Middle Eastern banking systems, but they are still called Eurodollars. The market subsequently widened to include a range of currencies held in time deposits outside their country of origin - Eurodeutschmarks, Euroyen and so on.
Euro time deposits generally range from 7 days to 6 months. Banks receiving Eurocurrencies use them to make loans to international and supranational financial institutions, governments, companies and to each other. Bank borrowing in Eurocurrency markets is an alternative to borrowing in domestic interbank markets. A Europlacement is an alternative to selling reserves in the domestic interbank market.
With the exception of overnight funds, domestic and euro rates track each other closely. The euro rate tends to be slightly higher because of the higher risk attached to holding currency in a foreign country.
These risks include the possibility that the Central Authority where the euro deposit is held may interfere in the movement of interest or principal. Another risk is that the Central Bank may not act as “the lender of last resort” to bail out a Eurobank (the bank where the deposit is held) which gets into trouble.
The risks of holding euro-deposits are accentuated by the fact that, on average, euro-deposits tend to have shorter maturities than euro-loans.
Euro-deposits are free from reserve requirements and most other national regulations, and as their attractiveness for hedgers and speculators moves funds into the market, Central Bank control of financial intermediaries declines.
Euro securities
As well as euro deposits, money market securities can be euro securities. Such securities include:
Whatever the instrument used, the issuer’s aims are similar:
- to widen the investor base beyond its domestic market,
- and/or to avoid the regulatory restrictions of its domestic market.
For example, euro CDs can be used to fund international lending or to tap a wider investor pool on behalf of a Eurobank’s domestic lending operations. As well as widening the deposit market internationally, Euro CDs allow banks to substitute from domestic CDs when borrowing costs are lower in the Euro market and vice-versa.
Arbitrage opportunities may also arise between the domestic and Euro interbank and CD markets, which helps to create liquidity in the secondary market.
In addition to euro money market securities - as in the bond market (foreign bonds) - banks (CDs) and corporates (CP) can issue money market securities in a foreign country denominated in that country’s currency. For example, a non-US bank issuing Dollar denominated CDs in the US is issuing a Yankee CD.
