Definitions of Key Eurocurrency Terms

The Euromarkets are banking markets for deposits and loans. They are located outside the country of the currency in which the claims are denominated.

Eurobonds are bonds denominated in currencies other than that of the country in which the bonds are sold – for example, dollar-demoninated bonds in London or Deutschmark denominated bonds in Luxembourg.

Eurobanks are financial intermediaries that bid for time deposits and make loans in currencies other than of the country in which they are located.

LIBOR, the London inter-bank offered rate, is the interest rate at which London Euromarket banks offer funds for deposit in the inter-bank market. It is the most usually quoted base for Eurocurrency transactions. The interest cost to the borrower is set as a spread over the LIBOR rate. Spreads over LIBOR have ranged from around 0.25 per cent to 2 per cent. There is, of course, a separate LIBOR for each of the many currencies in which inter bank loans are made in London.

Domestic and foreign banks taking deposits and lending in the currency of the country in which they operate are, in most financially sophisticated countries, required to hold asset reserves equal to a specified percentage of their deposit liabilities. This situation contrasts with that relating to Eurocurrency deposits. Eurocurrency holdings are not subject to reserve asset requirements. Eurobanks are therefore able to lend at more competitive rates than their domestic counterparts, since part of their portfolio of assets is not tied up in low-interest-bearing reserve assets.

Eurocredit lending is the medium-term market for Eurocurrency loans provided by an organized group of financial institutions.