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EURO CURRENCY MARKETS
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ORIGIN OF EUROCURRENCY
During 1950’s Russians were earning dollars from sale of gold.
They never wanted to deposit this dollars in New York bank.
They deposited this dollars in Britain and France.
These deposits were in Europe so it is call
‘ EURO’.
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WHAT IS EUROCURRENCY
MARKETS It is a market for borrowing and
lending of currency at the center outside the country.
Euro is a single currency which was launched on 1st Jan 1999.
Euro is an important international reserve currency.
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Euro is administered by the European Central Bank.
This currency is used daily by some 327 million Europeans.
Eurodollar or Eurocurrency refers to bank time deposits in a foreign currency.
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GROWTH OF OTHER EURO INSTRUMENTS
Euro Credits and Euro loans
Euro Bonds and Euro Commercial Papers
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CHARACTERISTICS OF EUROCURRENCY MARKETS
Unregulated Market
Short Term Deposits and Long Term Loans
Largely Wholesale Market
Time Deposits
Euro dollar and LIBOR based market
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Factors responsible for origination and growth of
Eurocurrency market Less willingness of countries to hold
dollars in USA-based banks
Regulation Q in the USA
Capital controls in USA
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Restrictions in UK
Full capital account convertibility adopted by developed countries
Growth of offshore banking and tax heaven concept
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Difference Between Euro Currency Market And Domestic Money Market
The Euro Currency market is purely wholesale market as compared to domestic market which is retail banking market.
The Euro Currency market has got relative freedom from regulations as compared to domestic markets.
There are number of problems in Euro Currency market as compared to domestic market such as jurisdiction, the acceptability of a freeze on deposits in one Country by another Country.
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The Euro Currency market is almost exclusively concerned with matched deposit dealing. That is, each deposit of an international bank will tend to be matched by an asset of the same Currency and of similar maturity.
Euro Currency market loans are typically made for specific period and funded by a deposit of a similar period.
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Functions of Eurocurrency Market
1) Cheap source of working capital: Since dealings are between banks
of good credit rating the cost are less.
2) Liquidity: It has an advantage in the form of
absence of tax withholding on interest.
3) Facilitate International trade:a. Lower interest rateb. Easy procedural formalities
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Eurobanking
Definition:
“Euro banking involves transaction in foreign currencies including deposits and loans”.
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Characteristics of Eurobanks
Eurobanks are just like domestic banks in terms of maximizing spreads and managing risk.
Deposits are for fixed terms ranging from days to years, mostly for less than six months.
Loans can range up to 10 years or more.
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How it works?
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Purpose of Eurobanking
Exchange and discuss ideas, techniques , experience and philosophy to bank management.
It is a Forum for promoting wider understanding amongst bank management and also includes some sessions.
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Benefits
Depositor escape from tax net of their own country domicile.
Borrowers get liquid money for working capital as well as for capital investment.
Banks offers this service to non-resident.also.
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Activities of Eurobanking
It holds an annual meeting which is limited in size.
Papers are presented over excellent track records for discussing new approaches to bank management.
E.g.• Mergers and acquisition• Risk management• Manpower planning etc.
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Components of Eurocurrency market
1. Market participants :Commercial bank :
Commercial banks link the external with the domestic market, taking funds from one and placing them in other market.
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Corporate :Corporations borrowing
Eurocurrencies are mainly those whose name, size and good standing enable banks to make loans to them with little more than a superficial analysis of creditworthiness.
Private individuals :Private individuals are minor
participants in the Eurodollar markets.
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Governments and central banks:In the last decade the market
has also seen an expansion in government and government related borrowers. This is especially true of the medium term Euro credit market, which has become widely tapped for infrastructure projects and for financing balance of payments deficits.
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2. Euro financial-Instruments: Euro deposits:
Most deposits in the Eurocurrency market are time deposits at fixed interest rates, usually of short maturity.
Euro loans:Many Eurodollar loans are direct,
bank-to-customer credits on the basis of formal lines of credit or customer relationships.
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Eurobonds:Eurobonds are international
bonds denominated in a currency different from that of the country in which they were issued.
Other Instruments:Other Euro financial instruments
include Euro commercial papers, Euro certificates of deposits.
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3. Transactional structure of Euro Markets:
The Euro currency market is entirely a wholesale market. All Euro-currency transaction are unsecured credits, hence the fact that lenders pay particular attention to borrowers status and name.
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OFFSHORE BANKLNGDefinition:
Offshore bank is a bank that operates in a country other than depositor resides or
An offshore-bank is a bank located outside the country of residence of the depositor.
The term ‘offshore bank’ is used to refer to the banking institution that provide
such services regardless the place they are located.
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Banks incorporated in other countries would also like to get advantages of liberal regulation in some countries.
For this purpose many big banks have established an offshore banking division in a country which provides such advantages.
Many of the small island countries and small countries near the shores have deliberately maintained easy regulation on banking and financial service industry.
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OFFSHORE FINANCIAL CENTERS
Jurisdictions that have relatively large numbers of financial institution engaged primarily in business with non-resident.
Financial system with external assets and liabilities out of proportion to domestic intermediation designed to finance domestic economies.
Centers which provide some or all of the following service low or zero taxation moderate or light financial regulation banking secrecy and anonymity.
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ADAVANTAGES
Strong privacy
less restrictive legal regulation
Low or no taxation
Easy access to deposits
Protection against local political or financial instability
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Advantages of offshore banking
Access to stable jurisdiction to park funds
Better interest on deposits
Tax evasion
Non- conventional facilities
Other advantages to the bank
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DISADVANTAGES OF OFFSHORE BANKING
Crime and illegal activities
Tax lost to the government
Capital outflow and volatility
Widens rich-poor gaps
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