How the interbank market works

Banks, as entities that lend money, not only have a market to companies 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. To understand how this type of market is managed, in .com we explain how the interbank market works.

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How the interbank market works

The interbank market is one in which monetary regulation operations are carried out between the European Union's banking entities, and even between these and the Eurosystem.

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

As an example of some operation, we can pick up the operations that those credit institutions with excess liquidity carry out to transfer this to others with a deficit thereof, 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 banking entities, but also has other functions derived from it:

  • It allows to cover the imbalances of the box coefficient.
  • Regroup the excesses and the cash deficits.
  • Finances asset operations.
  • Improves the control of the operations of the Bank of Spain.
  • It serves as the basis to create the prices of other markets.
  • It receives signals from the monetary authorities and transmits them to the financial system.