The financial system is intricately intertwined, and at its core lies the interbank market. This market plays a crucial role in facilitating the flow of funds between banks and supporting the global financial world. In this blog, we provide a detailed explanation of the interbank market’s mechanisms, key participants, and its position within the global financial markets. If you have an interest in finance, this is a must-see, so please continue reading.
- 1 1. What is the Interbank Market? An Explanation of Its Basic Mechanism
- 2 2. Main Participants and Characteristics of the Interbank Market
- 3 3. Position and Importance in Global Financial Markets
- 4 4. Interbank Market Trading Volume and Liquidity
- 5 5. 24-Hour Operation! Major Global Markets and Trading Flow
- 6 Summary
- 7 Frequently Asked Questions
- 8 Reference Sites
1. What is the Interbank Market? An Explanation of Its Basic Mechanism
The interbank market is a crucial market primarily for financial institutions to trade funds. Understanding its basic mechanism helps grasp the overall trends of the financial system.
Definition of the Interbank Market
The interbank market is a venue where transactions between banks or among financial institutions take place, and it does not involve a physical exchange. In this market, financial institutions primarily trade to adjust liquidity and manage or procure funds. Participating institutions include central banks, commercial banks, credit unions, securities firms, and others.
Functions of the Interbank Market
The interbank market primarily serves the following functions.
- Borrowing and lending of funds: Banks lend to other banks when they have surplus funds, and procure funds from other banks when they are short.
- Liquidity adjustment: By adjusting liquidity in daily operations, it meets short-term funding needs.
- Foreign exchange transactions: Includes transactions in different currencies, supporting international capital flows.
Trading Methods in the Interbank Market
In the interbank market, transactions are primarily conducted using the following methods.
- Telephone trading: Banks conduct transactions directly via telephone.
- Electronic trading platforms: Many financial institutions use computer systems or specific electronic platforms to conduct trades.
This improves transaction speed and efficiency, enabling increased liquidity.
Types of Transactions
The main types of transactions in the interbank market include the following:
- Call transactions: Transactions that involve short-term borrowing and lending of funds, frequently conducted in the call market.
- Foreign exchange transactions: Transactions that buy and sell currencies, playing an important role in international trade and investment activities.
- Bill trading: Includes buying and selling short-term bills, serving as a means to secure liquidity.
The interbank market plays an important role in supporting the foundation of the financial ecosystem. Understanding this market will lead to healthier capital management and liquidity management.
2. Main Participants and Characteristics of the Interbank Market
The interbank market is a specialized market where transactions primarily occur between financial institutions. In this section, we will take a closer look at the main participants of the interbank market.
Main Participants
Participants in the interbank market are mainly limited to the following financial institutions.
- Central Banks: They implement each country’s monetary policy and intervene in the market. In Japan, the Bank of Japan fulfills this role.
- Commercial Banks: Multiple banks participate and lend and borrow funds. This ensures liquidity and adjusts funding surpluses and deficits.
- FX Brokers: They act as intermediaries for banks in transactions. They are essential for increasing transaction efficiency.
- Brokerage Firms: They participate not only in capital market transactions but also in foreign currency trades. They provide financial products by leveraging extensive networks.
- Short-Term Finance Companies: Institutions specializing in short-term financial market transactions, playing an important role in the call and promissory note markets.
- Electronic Broking Services: They conduct transactions via computers, achieving efficiency and cost reduction.
Characteristics of Transactions
Transactions in the interbank market have the following characteristics.
Liquidity of Transactions: The interbank market is highly liquid, allowing large transactions to occur instantly. This enables rapid adjustment of funds over short periods.
Standardized Transaction Terms: Transactions are typically conducted in units of one million US dollars under standardized conditions. This reduces risk and enables efficient trading.
Risk Management: Financial institutions assess risk based on the counterparty’s creditworthiness and request collateral as needed. This ensures transaction safety.
Speed of Settlement: In the interbank market, settlements occur quickly, ensuring smooth cash flow. Settlement rules are established and reliable.
Off-Market Transactions: Some transactions are conducted without public exposure, allowing financial institutions to trade closely under non-public terms. This enables strategic trading.
Thus, the interbank market plays a vital role in supporting transactions between financial institutions, and its characteristics contribute to market efficiency and liquidity.
3. Position and Importance in Global Financial Markets
The interbank market plays a very important role in the global financial markets. This market is a venue where banks lend and borrow funds from each other, and its liquidity and size are noteworthy even in relation to other markets.
Position of the Interbank Market
The interbank market is classified as a short-term financial market and is considered important mainly for the following reasons.
Providing liquidity: The interbank market allows banks to raise needed funds quickly, helping them avoid daily cash flow problems. This liquidity is essential for ensuring the overall stability of the financial system.
Setting interest rates: The interest rates traded in the interbank market directly influence rates on other financial products and services. In particular, short-term rates serve as a benchmark when central banks set policy rates, thus having a significant impact on the macroeconomy.
Importance from an International Perspective
The interbank market is open not only to domestic financial institutions but also to international ones. Consequently, it has the following characteristics.
Global capital flows: Interbank markets exist in many countries worldwide, facilitating smooth cross-border capital movements. They also function as central venues for foreign exchange transactions, adapting to changes in each country’s economic conditions.
Resilience to financial crises: The stability of the interbank market becomes a crucial factor even when a financial crisis occurs. For example, high interbank trust makes it easier for funds to circulate even under extreme conditions, helping maintain the overall health of the economy.
Transparency and Regulation of Transactions
The interbank market is generally considered to have low transparency because transactions occur behind the scenes, but regulation has been tightening in recent years. This trend is important for the following reasons.
Reducing financial risk: Ensuring a more transparent trading environment reduces the risks that banks face. It makes risk identification and management easier, ultimately improving overall market stability.
Securing investor confidence: Improved transparency is essential for gaining investor trust. A stable market environment attracts new investment and contributes to promoting economic growth.
The interbank market is not just about lending and borrowing funds; it significantly influences the overall health and stability of the global economic system, and its importance is expected to grow even more in the future.
4. Interbank Market Trading Volume and Liquidity
The interbank market plays an extremely important role in the global financial system, and its trading volume and liquidity are key indicators of market characteristics. Here, we provide a detailed explanation of the interbank market’s trading volume and liquidity characteristics.
Interbank Market Trading Volume
As part of the short-term financial markets, the interbank market boasts a very large trading volume. According to data from the Bank for International Settlements (BIS), as of April 2022, the average daily turnover of the global foreign exchange market exceeded $7.5 trillion, illustrating that the interbank market is the hub of international financial transactions. Specifically, the following key trades are conducted:
- Foreign exchange transactions: Currency exchange and trading between banks
- Interest rate swaps: Transactions related to exchanging interest rates over different periods
- Call market funding: Transactions involving short-term borrowing and lending of funds
Thus, a variety of financial instruments are traded in the interbank market, and this forms the foundation for maintaining healthy market liquidity.
The Importance of Liquidity
A defining feature of the interbank market is its very high liquidity. Liquidity refers to the ability to execute trades quickly and efficiently in the market, enabling participants to flexibly transact the required amount of funds at the right time. Factors that increase liquidity include:
- 24‑hour operation: Because the interbank market operates across different time zones worldwide, trading activity is maintained around the clock.
- Diverse participants: Central banks, commercial banks, brokerage firms, and other financial institutions participate in trading, ensuring continuous, active transactions.
- Advancements in electronic trading systems: The adoption of advanced electronic platforms has increased transaction speed and efficiency, further strengthening liquidity.
Trading Activity and Its Impact
The abundant liquidity and large-scale trading in the interbank market have wide-ranging effects on other financial markets. For example, exchange rates are determined in this market and then transmitted to the markets of general consumers and businesses. In other words, rates formed in the interbank market become the benchmark for many transactions. Thus, the interbank market plays a central role in price formation across the entire financial system.
The interbank market’s trading volume and liquidity support the trust and rapid transactions between financial institutions, and these elements bring high efficiency and stability to the market.
5. 24-Hour Operation! Major Global Markets and Trading Flow
The foreign exchange market operates 24 hours a day due to its nature, with major markets in different countries and regions opening sequentially and trading taking place. This characteristic allows investors and traders to access the market at any time and trade without missing opportunities. Let’s look at the flow of major foreign exchange markets.
Opening and Closing Times of Major Markets
Below are the trading hours of major foreign exchange markets based on Japan time.
- Wellington Market: 5:00 ～ 13:00
- Sydney Market: 7:00 ～ 15:00
- Tokyo Market: 9:00 ～ 17:00
- Singapore Market: 10:00 ～ 18:00
- Dubai Market: 15:00 ～ 23:00
- London Market: 18:00 ～ next 2:00
- New York Market: 21:00 ～ next 6:00
These markets continue trading without interruption due to their geographical proximity. For example, when the Tokyo market closes, the London market opens immediately, followed by the New York market, and trading continues. This flow keeps currency markets constantly fluctuating, and investors are required to trade based on the latest information.
Trading Flow and Characteristics
Choosing Trading Partners
In the interbank market, participants trade directly. Interbank transactions are the focus, but brokers and electronic trading platforms also play important roles.Ensuring Liquidity
One advantage of 24-hour operation is that liquidity is always ensured. This liquidity brings price stability and helps keep spreads (the price difference between buying and selling) small.Rapid Information Transmission
The opening and closing of each market speeds up the flow of information, allowing the impact of external factors (economic indicator releases, geopolitical risks, etc.) to be reflected immediately. Therefore, traders are required to grasp market trends in real time and respond immediately.Volatility Changes
With market openings and closings, trading volume changes in each region, which triggers volatility (price fluctuation). Especially when the London or New York markets open, trading volume typically surges.
In this way, the foreign exchange market conducts active trading day and night, and participants need to make the most of this flow. Understanding the characteristics of each major market and trading strategically is the key to success.
Summary
Interbank markets are a critical venue for transactions between financial institutions, playing a foundational role in supporting the global financial system. The scale of transactions and high liquidity in this market significantly influence various financial activities such as price formation and funding. Moreover, because they operate 24 hours a day, major markets around the world trade continuously, ensuring that the latest information and opportunities are always available. Understanding the trends in interbank markets and whether you can leverage their characteristics will be a key factor that determines the competitiveness and profitability of financial institutions.
Frequently Asked Questions
What is the interbank market?
The interbank market is an important market where primarily financial institutions trade funds with each other. In this market, institutions conduct transactions to adjust liquidity and manage or raise funds. Participants include central banks, commercial banks, credit unions, securities firms, and others.
Who are the main participants in the interbank market?
The main participants in the interbank market are central banks, private banks, currency brokers, securities firms, short-term financing companies, electronic brokering services, and others. These institutions engage in lending and borrowing of funds, foreign exchange transactions, and bill trading.
Why is the interbank market important?
The interbank market provides liquidity for the entire financial system and significantly influences interest rate setting. It also supports international capital flows and helps strengthen resilience to financial crises. Market transparency and regulatory strengthening are important for risk management and maintaining investor confidence.
How does the interbank market operate 24 hours a day?
The interbank market operates 24 hours a day because major markets around the world open sequentially. Markets in Wellington, Sydney, Tokyo, Singapore, Dubai, London, and New York trade at different time zones. This continuous flow of trading keeps currency markets constantly fluctuating, requiring participants to respond quickly.
Reference Sites
インターバンク市場とは、銀行間取引（金融機関同士の取引）が行われる市場を指します。本記事では、インターバンク市場の定義や…
インターバンク市場（Interbank Market）は、銀行同士が直接取引を行う金融市場のことを指します。主に外国為替…
