Interbank Market
The interbank market is a network where banks lend and borrow funds from one another on a short-term basis.
Meaning in Practice
Banks use the interbank market to manage daily liquidity needs and meet reserve requirements. Transactions are typically unsecured or secured with collateral. Interest rates in this market reflect short-term funding conditions.
Why It Matters
The interbank market is crucial for liquidity distribution within the banking system. Disruptions can signal systemic stress and impair monetary policy transmission. Stable interbank activity supports financial stability.
Market Impact
Tensions in the interbank market often lead to higher short-term rates and increased volatility. Central banks may intervene with liquidity operations to restore normal functioning. Persistent stress can tighten broader credit conditions.
Example
A bank facing temporary cash shortfalls borrows overnight funds from another bank to meet its payment obligations.