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The Euro currency market refers to funds channeled via financial intermediaries from international lenders to international borrowers. The Euro-currency markets provide the short to medium term debt required by banks, corporate and government borrowers.
The Euro-currency market is the market for deposits placed under a regulatory regime different than the regulations applied to the deposits used to execute domestic transactions. It is simply a market for bank time deposits and loans denominated in a currency other than that of the country in which the bank is located. The international money market consists of the Euro-currency market and its linkages to the major domestic money markets.
The source of these funds is domestic bank deposits whose ownership is transferred to bank outside the controlled domestic monetary systems. The deposits are in large denominations, frequently $ 100,000 or more, and the banks use them to make Euro-currency loans to quality borrowers. The Euro-currency deposit rate is usually slightly higher than the rate paid by the domestic banks.
The Euro Currency loans in a particular currency are priced according to a ‘LIBOR (London Inter Bank Offering Rate) plus basis’ with the margin over LIBOR depending on market conditions and the credit quality standing or riskiness of the borrower. The banks generally arrange syndicated loans in this market. Thus the risks of a particular borrower are distributed across several banks.
The Euro currency market is not regulated by any government and therefore, is an international currency. The ‘Euro’ prefix refers to the high volume of these funds circulating in Europe, mainly through London. However, this market is worldwide, and sectors of the market exist in the Middle East and Far East (Asia dollar market).
