Eurocurrency market

Definition and background

The Eurocurrency market consists of banks (called Eurobanks) that accept deposits and
make loans in foreign currencies. A Eurocurrency is a freely convertible currency
deposited in a bank located in a country which is not the native country of the currency.
The deposit can be placed in a foreign bank or in the foreign branch of a domestic US
bank.
[Note of caution! The prefix Euro has little or nothing to do with the newly emerging
currency in Europe.]

In the Eurocurrency market, investors hold short-term claims on commercial banks which
intermediate to transform these deposits into long-term claims on final borrowers.

The Eurocurrency market is dominated by US $ or the Eurodollar. Occasionally, during

weak dollar periods (latter part of 1970s and 1980s), the EuroSwiss franc and the
EuroDM markets increased in importance. The Eurodollar market originated post WWII
in France and England thanks to the fear of Soviet Bloc countries that dollar deposits held
in the US may be attached by US citizens with claims against communist governments!

Thriving on government regulation

By using Euromarkets, banks and financiers are able to circumvent / avoid certain
regulatory costs and restrictions. Some examples are:

a) Reserve requirements
b) Requirement to pay FDIC fees
c) Rules or regulations that restrict competition among banks

Continuing government regulations and taxes provide opportunities to engage in

Eurocurrency transactions. However, ongoing erosion of domestic regulations have
rendered the cost and return differentials much less significant than before. As a result,
the domestic money market and Eurocurrency markets are closely integrated for most
major currencies, effectively creating a single worldwide money market for each
participating currency.