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Interbank lending is a market that exists among the banks, and it is all about banks lending money to other banks. Banks usually lend out money to other banks, but the terms of the loans are usually short term. The maturity period for the loans lent to the banks is usually one week. When one bank lends a loan to another bank, it usually charges a certain interest rate which is dependent on the period to maturity.
The interest rate charged is referred to as the interbank rate. At times, banks get in situations whereby they do not have adequate cash to satisfy the demands of its clients. In such a situation, the bank has to obtain a loan from another bank to satisfy the clients. On the other hand, a bank may have excess liquid assets to the extent that it can lend out the cash and earn an interest from the assets.
Such banks lend money to other banks (Navarro, 2011). Over the last one year, the interbank rates by the central bank have been reduced significantly in Europe, Asia and India. This article will discuss the changes in interbank lending rates in the continents mentioned. A country from each of the continents is to be investigated in the article. The countries to be investigated are China, India and Switzerland.
Central Banks in Europe, China and India
The central bank plays a significant role in regulating the economy of a nation. When the economic growth slows down, the central bank lowers the lend rates so as to increase the flow of money to speed up the economy.
This causes the inflation rate to increase. In the recent years, there have been a slow down in the economy which has hit most parts of Europe and America. It has also affected other parts of the globe such as India, China and also Japan.
It has been reported that, for the first time since 2009, China has experienced a low growth rate in the manufacturing sector (Davis and Orlik, 2011). In the effort to counter the slow growth rate in the economy, China central bank lowered the cost of lending so as to boost the economy. The central bank of china has the reserve requirements for the banks (The Economist Newspaper Limited, 2012).
The action by the China Central bank came at a time when the same measures were being taken in Europe. The European Central bank also cut down the lending rates in the effort to ease the borrowing burden by the other banks. The European Central bank together with the Bank of England started taking actions to lower the cost of dollar loans to the European countries (The Economist Newspaper Limited, 2012).
Several central banks in Europe lowered their lending costs. The Swiss National bank was one of the banks that took measures to lower their lending costs and also took measures to weaken their currencies.
Despite lowering its lending cost, the Swiss National Bank has accused other banks such as the European Central Bank and the Japanese bank of causing too much influence on the interbank lending cost. It accuses them of spreading the influence to other nations. The London Interbank Offered Rate is the one that sets the benchmark for lending rates by other banks in Europe and it is being accused of influencing these rates too much to benefit itself (Vaknin, 2012).
In India, the economy slowed down, and it grew with the lowest rates for the first time since the year 2009. This had substantial effects in the central bank and the other banks as well since it became difficult for them to lend out money due to the high rates which scared borrowers. In the effort to improve the economic growth in India, the central bank took measures to lower the interbank lending rates.
At the same time, it allowed international supermarkets into the country. This step was criticised by politicians since it brought too much competition in the internal market. Lowering the lending rates to the bank increases the growth rate and hence the Central bank of India was trying to boost the economic rate by lowering the interbank lending rates (Lucarelli, 2011).
The banking crisis that hit most parts of Europe happened due to financial crisis, which started in the year 2007. In most parts of the world, the economic growth slowed down causing an economic recession. Banks went short of funds to meet the demands of their customers. The financial strains made it difficult for countries in paying the loans they acquired from other banks due to the high lending rates.
As a result, central banks took action to lower the interbank lending rates in the effort to rescue the banks and also to boost the economic growth which had slowed down. This did not achieve too much. Some countries have regained their economic strength, but others continue to suffer from the economic turbulence that was experienced. The government leaders need to embrace good economic policies to avoid the occurrence of a financial crisis.
Davis, B. & Orlik, T. (2011). China’s Move Shifts Growth to Top of Agenda. WSJ. Web.
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Lucarelli, B. 2011, The economics of financial turbulence alternative theories of money and finance. Cheltenham, Edward Elgar. Web.
Navarro, A. 2011, Global capitalist crisis and the second great Depression: egalitarian systemic models for change. Lanham, Lexington Books.
The Economic Newspaper Limited 2012, Business this week. Web.
Vaknin, S. 2012, “Bankers’ Banks”: The Role and Functions of Central Banks in Banking Crises. Web.