NY Fed Blogs on Eurodollar Markets
The Federal Reserve Bank of New York's Liberty Street Economics recently published an article titled, "Who Is Borrowing and Lending in the Eurodollar and Selected Deposit Markets?" It states, "A recent Liberty Street Economics post discussed who is borrowing and lending in the federal funds (fed funds) market. This post explores activity in two other markets for short-term bank liabilities that are often perceived as close substitutes for fed funds -- the markets for Eurodollars and 'selected deposits.'" The blog continues, "Eurodollars are unsecured U.S. dollar deposits that are booked at bank offices outside of the United States. A central function of Eurodollars is that they can be used by banks to meet their dollar funding needs. U.S.-based banks -- U.S. depository institutions or U.S. branches and agencies of foreign banks -- can accept Eurodollars, typically with an overnight maturity, in offshore branches and then transfer the funds onshore. Selected deposits are unsecured U.S. dollar deposits that also tend to have an overnight maturity, similar to Eurodollars. However, unlike Eurodollars, but like fed funds, selected deposits are booked at bank offices in the U.S. Historically, Eurodollars and selected deposits have played a role similar to fed funds as a source of short-term wholesale unsecured funding for banks, but there have been differences in how regulation has treated these dollar deposits. For instance, fed funds were historically exempt from reserve requirements; Eurodollars also became exempt in 1990. It was only in 2020 that selected deposits became exempt, when the Federal Reserve eliminated all requirements to hold reserves against certain types of deposits and other bank liabilities, including selected deposits. Additionally, prior to the repeal of Regulation Q in 2011, banks were not permitted to pay interest on demand deposits, including selected deposits." Asking, "Who's Borrowing?" they reply, "The main borrowers of Eurodollars and selected deposits are the U.S. branches and agencies of foreign banks (FBO branches). On an average day, FBO branches borrow between $50 billion and $200 billion, accounting for over 90 percent of total daily volume since 2016. As we discussed in an earlier post, FBO branches are also the main borrowers in the fed funds market, with a market share ranging between 65 and 95 percent of the total daily volume." "Who's Lending?" The article says, "The main lenders in Eurodollars and selected deposits are non-depository institutions that primarily engage in financial intermediation services such as brokerage, underwriting, credit origination, credit card, insurance, and pension services, among others.... [T]hese financial institutions represent 80 percent of the volume lent in the overnight Eurodollar and selected deposit markets." Finally, the blog summarizes, "Changes in regulation and in the economic conditions in the U.S. banking system since the Great Financial Crisis have contributed to the narrowing of the differences between Eurodollars, selected deposits, and fed funds, with selected deposits trading overtaking the Eurodollar market in recent years. Given their lower costs of borrowing, FBO branches are the main borrowers in all these markets. The set of lenders, however, is considerably larger for Eurodollars and selected deposits. The regulatory advantage of fed funds still makes them relatively more attractive, which is reflected in the higher rates at which they trade."
