Interbank Borrowing (lending) is a market for short-term and temporary position adjustment among financial institutions. It refers to the short-term financing between financial institutions with legal personality and financial branches authorized by a legal person for the purpose of adjusting positions as well as temporary capital surpluses and shortages.
In the daily operation of financial institutions, due to changes in deposits, increase or decrease in foreign exchange receipts and payments, etc., at the end of a business day, there is often an imbalance in capital receipts and payments. Revenues may surpass expenditure in some financial institutions, while the opposite may happen in others. Those with insufficient funds need to borrow funds from those with excess funds to balance their income and expenditure, so there is a need for short-term mutual borrowing of funds between financial institutions.
That the banks with excess funds lend money to those with insufficient funds is called capital lending; that the banks with insufficient funds borrow money from those with excess funds is called capital borrowing.
In short, it is the behaviour of financial institutions that want to borrow from other financial institutions due to sudden capital needs.
There are various types of inter-bank lending transactions, which are classified according to transaction methods, including credit lending and mortgage lending. According to the length of the period, there are overnight (1 day), 7 days, 1 month, 4 months and other varieties.
Means of transaction:
Interbank lending is generally carried out through the deposit reserve account of each commercial bank in the central bank, and is carried out in the following three ways:
1. The bank that requires the borrowing shall directly communicate with another bank. A commercial bank contacts and conducts the transaction.
2. Through the intermediary of brokers, both sides of the loan are facilitated.
3. The transaction is made through communication with the correspondent bank, that is, both the lending bank and the borrowing bank notify the correspondent bank by telephone, and the correspondent bank handles the transaction. The lending bank inform the central bank to transfer money from its reserve account to the account of the bank that requires the lending, thus completing the lending process.
Features of Interbank Borrowing (Lending):
1. First, the term of financing funds is relatively short. Because Interbank Borrowing (Lending) funds are mainly used for short-term and temporary capital needs of financial institutions.
2. The participants in Interbank Borrowing (Lending) are commercial banks and other financial institutions. Institutions involved in lending basically open deposit accounts at the central bank, and the main transactions in the lending market are the excess funds deposited by financial institutions in this account.
3. Interbank Borrowing (Lending) is basically credit lending. The lending activities are carried out between financial institutions, and the market access conditions are relatively strict. Financial institutions mainly participate in lending activities with their reputation.
4. Interest rates are relatively low. The Interbank Borrowing (Lending) rate is based on the central bank's re-lending rate and re-discount rate, and then freely negotiated by both lenders and borrowers, according to the tightness of social funds and the relationship between supply and demand. Since both lenders and borrowers are commercial banks or other financial institutions, their reputation is higher, and their risk of borrowing is lower, as well as the borrowing period is short, so the interest rate is low.