Central bank loans
If short- or long-term lack of resources arises at credit institutions, they can turn to the central bank for a refinancing loan. Banks can obtain collateralised loans only by depositing eligible securities at the central bank. The owner of the securities is still the commercial bank, so the amount of credit received for it increases the balance sheet total. Central bank money enters the asset side and there central bank credit (liabilities) enters the liability side.
The so-called repo transactions can be regarded as collateralised loans as well. Their essence is that the business bank sells eligible securities to the central bank and and agrees to repurchase them at a predetermined price at a predetermined future date. Thus the repo is the combination of a spot selling and a forward buying of the same security. The difference between the spot and the future price reflects the repo rate. In case of a reverse repo the bank buys spot and sell forward the same securities.
In case of rediscounting the central bank purchases bills discounted by banks earlier.
In case of loans offered beside foreign exchange coverage, the business bank takes out a loan in domestic cash equivalents to the amount of its foreign exchange deposit (which is its collateral at the central bank). Foreign exchange-swap transaction can be mentioned here, when the business bank sells a kind of foreign exchange to the central bank for another particular foreign exchange, and the business bank repurchases it simultaneously for a specific period, on a predetermined rate. So, in practice, it means a spot purchase and a forward selling, or the other way round, spot selling and forward purchase. T
Interbank borrowing
Compared to the corporate sector, the short-term liquidity in the banking sector should meet much more severe requirements. Companies and individuals can be some days late with their dues without a relatively greater risk, illiquidity of a bank can lead to a panic attack among depositors.
Therefore, banks often have to take intraday loans from each other in order to ensure their liquidity. Interbank credits have some basic specialties compared to the corporate credit market. In general, the vast majority of interbank loans is short-term:
• overnight loans, where the conclusion of the contract and taking out the loan happen on the same day, the repayment of the loan is a working day later.
• tomnext (tomorrow-next), when the borrowing takes place one day after the conclusion, and the loan repayment the day after
• spotnext, where the granting of credit happens two days after the contract has been made.
Of course, the participants of the interbank market may reach an agreement about any kinds of constructions. Thus, interbank loans actually have no time limit, but due to the high interest rates, they are mainly used in case of liquidity problems, for a few days duration.
The second feature lies in the technique of contracting. While in case of corporate loans, literacy has an almost exclusive role, here oral agreements dominate, and technically it is followed by contracting written on-line, or by fax or other channels.
The third particularity is that there is no insurance behind the interbank transactions. It is explained by the short duration of transactions and the confidence of credit institutions in one another. Banks defend themselves against the risk by creating inner credit limits, in as much the bank offering the credit sets up limits, according to maturity types, based on the size of the partner asking for credit, its reliability so far, its creditability, banking regulation, etc. The limits can be different on the different levels of bank management.
Finally, a special feature of the interbank market is that trends in interest rates are much more erratic than in the corporate market. In case of tight liquidity market situation, since the borrower has to keep its liquidity in any case, a really high interest rate level may occur (of course its daily interest burden is bearable due to the short duration), while in broad liquidity periods the level of interbank interest rates may fall very low.
The best-known international interbank interest rate is LIBOR (London Interbank Offered Rate), which is the interest rate provided for first-class banks in the London interbank market.
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