Interbank market
The interbank market refers to a trading market where financial institutions conduct transactions with each other.
This article explains the definition, role, characteristics of the interbank market, and answers common questions about it.
What Is the Interbank Market?
Definition
The interbank market is a trading market between financial institutions. It is also known as the "interbank trading market" and is characterized by participants being exclusively financial institutions.
Below are further explanations about the interbank market:
- Mechanisms of the interbank market
- Participants in the interbank market
Mechanisms of the Interbank Market
Though called a "market," the interbank market is not a specific physical location. Instead, it is an abstract concept encompassing all transactions conducted within a specific framework.
Transactions in the interbank market are carried out through computer systems or telephone hotlines.
They can be conducted directly or through brokers, and the exchange rates formed here are known as interbank exchange rates, which are often reported in the news.
In contrast, transactions between financial institutions and corporate or individual clients occur in a market referred to as the client market (from the perspective of banks).
The interbank and client markets often mirror wholesale and retail relationships. Financial institutions "wholesale" foreign exchange in the interbank market and then "retail" it in the client market.
Participants in the Interbank Market
The interbank market is exclusively for financial institutions, excluding individuals and regular companies.
Participants include central banks, commercial banks, major securities companies, and intermediaries like short-term finance companies and forex brokers.
Characteristics of the Interbank Market
1. Liquidity and Scale
According to the Central Bank Survey of Foreign Exchange and Derivatives Market Activity published every three years by the Bank for International Settlements (BIS), as of April 2022, the global forex market's average daily turnover exceeded $7.5 trillion.
For context, as of April 2024, the combined market capitalization of the three largest companies globally—Microsoft ($3.1 trillion), Apple ($2.6 trillion), and NVIDIA ($2.5 trillion)—is traded daily in the forex market.
2. Exchange Rates
Exchange rates in the interbank market are determined by the balance of supply and demand between financial institutions.
The exchange rates used in client markets are derived from those determined in the interbank market.
3. Interest Rates
In addition to the forex market, the interbank market also exists within the short-term financial market, where financial institutions lend and borrow funds with maturities under one year.
Transactions may involve collateral such as government or municipal bonds, or they may be unsecured or conducted through bills of exchange. Interest rates in the interbank market are dictated by supply and demand.
Common Questions About the Interbank Market
Where Is the Interbank Market?
The interbank market is an abstract framework for financial institutions to transact, rather than a physical location or building.
What Other Financial Markets Exist Besides the Interbank Market?
The term "financial market" is broad. It typically refers to the short-term financial market, long-term financial market, forex market, and financial derivatives market. Broadly speaking, it also includes the deposit, loan, and insurance markets.
Below is an overview of various financial markets:
| Market Type | Trading Content |
|---|---|
| Short-Term Financial Market | Interbank Market: Overnight lending, bills of exchange |
| Open Market: Bonds, CPs, CDs, treasury bills | |
| Long-Term Financial Market | Stock Market: Shares |
| Bond Market: Government, municipal, corporate bonds | |
| Forex Market | Interbank Market: Interbank RMB/forex transactions |
| Financial Derivatives Market | Derivatives Market: Futures, swaps, options |
[Summary] What Is the Interbank Market?
The interbank market is a trading market where banks and other financial institutions transact.
It is an abstract concept representing the totality of transactions conducted within a specific framework, rather than a physical location or building.
In the interbank market, financial institutions trade via computer systems or telephone lines.
Exchange rates used in client markets are transmitted from those determined in the interbank market.
