Definition of Interbank Market
What does the term "interbank market" mean? What is meant by the term "interbank market"?
The "interbank market" is the market that exists because of the borrowing that takes place between banks.
Banks with surplus funds can choose to lend excess money to banks that need to borrow funds (or take deposits). Interest rates are usually set by a group of banks and are adjusted based on the creditworthiness of the bank that is wanting to borrow the money.
For instance, a solid AAA borrower is going to pay a lower rate than a B rated borrower, as there is more risk in lending money (even very short-term loans) to the B rated borrower.
Banks borrowing money from each other is commonplace and happens everyday.
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