What Is the Interbank Market?｜Structure, Participants, and Differences from Other Markets Explained Simply
Share
What Is the Interbank Market?｜Structure, Participants, and Differences from Other Markets Explained Simply
The “interbank market” refers to the framework where financial institutions exchange funds and foreign currencies. There is no physical trading floor; transactions are conducted over-the-counter (OTC) via computers and communication networks. This article reorganizes the definition, structure, participants, relations with other markets, key features, and common questions in an easy-to-understand way (this is not investment advice).
Table of Contents
- Basics of the Interbank Market
- Structure and Participants
- Relationship with and Differences from Other Markets
- Key Features (Liquidity, Exchange Rates, Interest Rates)
- Frequently Asked Questions (Q&A)
- Summary
1. Basics of the Interbank Market
The interbank market refers to the market where financial institutions such as banks trade with each other (interbank trading market). Participation is restricted to financial institutions, which is its key feature. It is an abstract framework without a dedicated building or exchange, with institutions trading through electronic networks and other systems.
2. Structure and Participants
2-1. Transaction Framework
Financial institutions may:
- ・Engage in direct bilateral transactions, or
- ・Trade through brokers (broking)
The exchange rates formed here are called the interbank rate, which serves as the basis for client-side rates.
2-2. Examples of Participants
Only financial institutions can participate in the interbank market (individuals or general corporations cannot). Typical examples include:
- ・Central banks (e.g., Bank of Japan)
- ・Commercial banks
- ・FX brokers
- ・Securities companies
- ・Money market dealers
- ・Electronic broking platforms
3. Relationship with and Differences from Other Markets
3-1. Broad Categories of Financial Markets
Generally, financial markets are divided into:
- ・Short-term money markets
- ・Long-term financial markets
- ・Derivatives markets
The interbank market is part of the short-term money market, covering call money, bills, and foreign exchange. Broadly speaking, deposit markets, lending markets, and insurance markets are also financial markets outside the interbank space.
3-2. Difference from the Client Market
The key difference is who the counterparties are.
- ・Interbank Market: Transactions between financial institutions (like a wholesale market)
- ・Client Market: Transactions between financial institutions and corporations/individuals (like a retail market)
Client-side exchange rates are distributed based on rates formed in the interbank market.
3-3. Difference from the Open Market
- ・Interbank Market: Participation limited to financial institutions.
- ・Open Market: Accessible to entities beyond financial institutions. Includes repos, CP/CDs, and Treasury bills.
3-4. Difference from the Call Market
The call market is a type of interbank market. Its name comes from “money at call” (funds returned upon request). It is where very short-term funds are exchanged. A representative example is the uncollateralized overnight call market, with its uncollateralized call rate serving as Japan’s current policy interest rate.
4. Key Features (Liquidity, Exchange Rates, Interest Rates)
4-1. Liquidity and Scale
The interbank market is characterized by large transaction volumes and high liquidity. According to a 2022 survey by the Bank for International Settlements (BIS), the average daily turnover in global FX markets exceeded USD 7.5 trillion.
4-2. Formation of Exchange Rates
Exchange rates are determined by the supply-demand balance in the interbank market. These rates then form the basis for client-side rates.
4-3. Formation of Interest Rates
As part of the short-term money market, the interbank market serves to adjust short-term fund surpluses and shortages within one year. Funds are lent and borrowed in various forms—secured, unsecured, bills, etc.—with interest rates determined by supply and demand.
5. Frequently Asked Questions (Q&A)
Q1. Where is the interbank market located?
A. There is no physical trading floor; it refers to the framework of transactions between financial institutions. Deals are carried out via electronic networks and communications.
Q2. How does it differ from the client market?
A. The difference lies in the counterparties. Interbank: financial institutions only. Client market: financial institutions with individuals/companies.
Q3. How does it differ from the open market?
A. Interbank is limited to financial institutions, while the open market allows participation by non-financial entities. The open market includes repos, CP/CDs, and Treasury bills.
Q4. What is the relationship with the call market?
A. The call market is a type of interbank market, handling very short-term funds. A representative case is the uncollateralized overnight call rate, which corresponds to the policy interest rate of the Bank of Japan.
6. Summary
The interbank market is an abstract market where financial institutions trade funds and foreign exchange with each other, functioning as the wholesale layer of the financial system. It underpins client-side exchange rates and, by adjusting short-term funds, influences the formation of exchange rates and interest rates. Including short-term markets like the call market, it is notable for its scale and liquidity.