Interbank Deposits

Business, Legal & Accounting Glossary

Definition: Interbank Deposits


Interbank Deposits

Quick Summary of Interbank Deposits


A deposit that one bank holds for another bank. The correspondent bank is the one for which the deposit is held. Each bank holds a “due to” account under the name of the other. When dealing with a foreign bank, the owing bank account is “nostro” and other is “vostro.”




Full Definition of Interbank Deposits


Interbank deposit is a term that refers to an arrangement between two banks in which one bank retains funds in an account for the benefit of another. The interbank deposit arrangement stipulates that the holding bank establishes a due to account for the other party. This is a general ledger account that contains funds that are payable to a third party. The correspondent bank is the one that holds the deposit in the arrangement.

  • An interbank deposit is a transaction between two banks in which one maintains monies in an account for the benefit of another.
  • The agreement calls for the holding bank to open a due to account for the opposite party.
  • The majority of interbank trading on the market is proprietary—banks trade with and for one another.

Deposits between banks are a component of the interbank market. The interbank market is a currency trading system utilised by banks and other financial institutions. Retail investors—individuals who buy and sell shares for their own account rather than for the account of another firm or organization—and other, smaller trading parties are excluded from this system. The majority of interbank trading on the market is proprietary, meaning that banks trade with and for one another. However, there are times where this form of banking is conducted for large, institutional consumers.

Banks borrow and lend money to one another in the interbank market in order to manage liquidity and meet regulatory reserve requirements. A reserve requirement is the minimum amount of money that a bank must maintain in its vaults. Deposits and loans are just two of the numerous sorts of transactions that occur between banks to help them meet these standards. Additionally, these transactions add significant liquidity to the market.

When two banks enter into an interbank deposit agreement, the holding bank establishes a due to account for the matching bank—the institution making the deposit. The due to account is a temporary holding account, alternatively referred to as a payable account.

Banks charge a higher rate of interest on deposits and short-term loans. This is referred to as the interbank rate. The interbank rate is determined by the maturity of the instrument, market conditions, and the credit ratings of the parties involved. The Intercontinental Exchange London Interbank Offered Rate (ICE LIBOR) is a reference rate that some of the world’s largest banks use to determine the interest rates they charge one another on short-term loans.

Considerations

As indicated previously, the relevant bank is the one that holds the owing to account. This classification is typically reserved for deposits made between domestic banks. However, when the correspondent bank is a foreign institution, the terms vary. The owing to account in this situation is a nostro—derived from the Latin word for “ours”—account for the bank holding the deposit. Simply said, this is a bank account kept at another institution in a foreign currency. This is pursuant to a contract with the overseas correspondent bank for a vostro—the Latin word for yours—account. A vostro account is a term used by banks to refer to accounts held by other businesses in their local currency. Thus, the correspondent bank will refer to its holding bank account as a nostro account, while the holding bank will refer to it as a vostro account.

Here is an illustration to help you understand. As an example, suppose Bank A makes an interbank deposit with Bank B, which is located in another nation. To Bank A, the account is referred to as a nostro account—our account on your ledger—whereas to Bank B, it is referred to as a vostro account, or your account.


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Definition Sources


Definitions for Interbank Deposits are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 8th January, 2022 | 0 Views.