How the interbank market works

The banks, as institutions that lend money, not only have a market to businesses and families, but also have a market to other banks. This is the interbank market, where banks are responsible for leaving money to each other in case they need it. For you to understand how this type of market is managed, here we explain how the interbank market works.

How the interbank market works

The interbank market is one in which monetary regulation operations are carried out, between the banking entities of the European Union, and even between them and the Euro system.

The interbank market is considered a measure of monetary policy, where very liquid assets are ultimately traded in the very short term. In the short term, since these operations are carried out through the different central banks where deposits are received and transferred within the average period of one day.

As an example of some operation, we can collect the operations that those credit institutions with excess liquidity carry out to transfer this to others with a deficit of the same, in such a way that both reach equilibrium.

What are the functions of the interbank market?

The interbank market not only tries to balance the deposits and liquidity available to the different banks, but also has other functions derived from it:

  • It allows covering the mismatches in the cash ratio.
  • Regroups treasury excesses and deficits.
  • Finances asset operations.
  • It improves the control of the operations of the Bank of Spain.
  • It serves as the basis for creating the prices of other markets.
  • It receives the signals from the monetary authorities and transmits them to the financial system.

 

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