Eurocurrency

Background Information The emergence of Eurocurrency is closely tied to the origins of the Eurodollar as it was the first type of Eurocurrency. Eurodollars began from large quantities of US dollar-denominated deposits being held in European, namely London, banks during the 1950s. Over several decades, economists have produced several explanations of how eurocurrency came about, why it occurred in London, and how London managed to maintain a competitive advantage in the market as eurocurrency expanded globally. The Bretton Woods Era spanned from 1944 to 1973 and saw national policymakers, notably those of Britain and the US, agree to a fixed or pegged exchange rate system. Under this system, national currencies were "pegged" against the US dollar which itself was now convertible into gold. Drivers of Eurocurrency in the 1950s By mid-1955, US and foreign businesses and nations were regularly using Eurodollars to hold US-dollar balances or obtain US-dollar denominated loans outside of the US. The eurocurrency market was birthed organically from the rise of the Eurodollar. Ultimately, there was multiple causes for the rise of the Eurodollar which lead to the creation of Eurocurrency. Firstly, large holdings of US dollars entered Europe shortly after WW2. This was a result of the fixed exchange rate system that lead to more countries using US dollars for trade, as well as increased imports into the US itself from Europe. Moreover, the US provided economic aid to European nations after WW2 in the form of damage assistance under the US governments' Marshall Plan. Secondly, after WW2 communist governments including the Soviet Union and China transferred their holdings held in the US over to European banks. This is believed to have been done for two primary reasons; (1) over fears that US authorities will seize their assets, and (2) to accumulated goodwill with Eurobanks as a strategy to nurture a future source of loans and funding. Thirdly, the 1957 sterling crises forced the UK's strongest movement toward alignment with the Bretton Woods plan. Here, the Bank of England banned sterling-financed trade for non-sterling countries as a result of a sharp increase in the bank rate to 7%, compelling London-based banks to join the rest of the world and use dollars for trade. This alongside the demand for other types of eurocurrencies outside of their home markets lead to the innovation of the eurocurrency market. Competitive Advantage of London The inception of eurocurrency occurred in London with the introduction of the Eurodollar in 1955. Even after eurocurrency had expanded globally however, London maintained its position as the centre of the Eurodollar market which is still true of today. Economists provide disputed explanations for why London was able to gain and maintain this competitive advantage. Ronald McKinnon theorised that it was attributed to London's pre-existing foreign financing expertise retained from Britain's dominant trade history in the 19th Century and servings as the centre of the sterling when it was a major international currency. However, criticisms of this theory deemed it "rather static and deterministic" and lacking any archival evidence. McKinnon also emphasised the regulatory freedom provided to commercial banks in London by the Bank of England, aligning with recounts of the Treasury questioning whether financial institutions in London had excessive influence on decisions made by the Bank of England. Nonetheless, both the Treasury and Bank of England agreed that London should remain an important financial centre even after the sterling was no longer a major international currency. Therefore, imposing restrictive regulations would have been counterintuitive, leading to London's permissive environment. In reality, eurocurrency market centres in general enjoyed freedom from supply side restrictions such as reserve requirements and interest rate ceilings which allowed them, in particular London, to gain a competitive advantage by providing high and low rates of interest according to the class of the borrower and lender. Additionally, London's competitive advantage was enhanced by tight restrictions throughout the rest of Europe due to possible risks of "hot money", increased bank liquidity, and potential reliance on reserves in the case of bank runs. ==Currencies==

The four main Eurocurrencies are the US dollar, the Euro, the sterling and the Japanese yen; the currencies of the major economies of the world. Eurocurrency Markets A eurocurrency market is the money market for any currency deposited outside of its home market. The key participants in these markets includes banks, multinational corporations, mutual funds, and hedge funds. Eurocurrency markets are generally chosen as a source of finance over domestic banks for their ability to offer lower interest rates of borrowers and higher interest rates for lenders situationally. This because eurocurrency market have less regulatory requirements, tax laws, and typically no interest caps. Nonetheless, there are higher risks, particularly when banks experience periods of poor solvency which can lead to a run on the banks. There are several eurocurrency markets, with the two most widely used being the Eurodollar market and the Euroyen market. There are also various smaller eurocurrency markets including the Euroeuro market and the Europound market. Eurodollar Market The Eurodollar market involves holdings of US dollars outside of the jurisdiction of the Federal Reserve System, the US central bank. These holdings may arise via two primary ways. Firstly, from purchases of goods and services made in US dollars to suppliers who maintain European bank accounts - these suppliers may be European or non-European. The market emerged in 1984, at the beginning of the Japanese asset price bubble that saw Japan pursue financial liberalisation and internalisation. During the 1990s, interest rates in Japan experienced substantial declines, making the relatively high rates of interest paid by Euroyen accounts attractive investments. Today Euroyen deposits are used by non-Japanese companies to efficiently obtain investments from Japanese investors. Euroyen bonds allow foreign companies to avoid the regulations enforced by the Bank of Japan (BoJ) and in bond registration with the Tokyo Stock Exchange (TSE). Euroeuro Market The Euroeuro market involves deposits of euros outside of the jurisdiction of the European Central Bank. Europound Market The Europound market involves sterling deposits outside of the jurisdiction of the Bank of England. == Eurocurrency Network ==

The concept of eurocurrency can have two implications. Firstly, it can be the accumulation of all the currencies and banking facilities worldwide that are participating of the offshore banking network. Eurocurrency marks function within the global financial system with market centres spread across the global. Therefore, powerful financial technologies and information systems are required to connect market centres to enable communications and transactions to occur. For example, technologies such as high-speed communication lines link market centres enabling fast eurobanking transactions, and also giving rise to the overnight market. == Regulations and Domestic Policy ==

Regulatory History In the 1970s, regulating the eurocurrency market became a key priority for policymakers globally. This was because the growth of Eurodollars forced domestic banks to participate in offshore banking in order to stay competitive against rapidly growing foreign banks. Usage of Reserve Requirements Reserve requirements refer to a particular predetermined amount of cash which banks must have on-hand for the purpose of meeting liabilities in the case of sudden withdrawals. In the case of eurocurrency, this is a crucial regulatory measure with the high risk of bank runs. Typically, the central banks of individual nations enforce reserve requirements for its commercial banks. For example, the US central bank - The Federal Reserve, requires commercial banks to retain money in reserves against their commitments to depositors under the Monetary Control Act 1980. Interest rates for other eurocurrencies often move in parallel with corresponding domestic interest rates, seen as a control used by national governments to limit international capital flows. ==Eurobanks==

A eurobank is a financial institution anywhere in the world which accepts deposits or makes loans in any foreign currency. ==Eurocredits==

Eurocredit is a loan whose denominated currency is not the lending bank's national currency. A eurocredit loan would be made by a U.S. bank to a lender requiring a denominated currency which differs from the bank's local currency (USD) for specific reasons, most likely some sort of business operations or trade requirements. Despite the inclusion of the word "euro," a eurocredit is not immediately derived from the euro. Eurocredits are short- to medium-term loans of Eurocurrency extended by Eurobanks to corporations, sovereign governments, nonprime banks, or international organizations. The loans are denominated in currencies other than the home currency of the Eurobank. Because these loans are frequently too large for a single bank to handle, Eurobanks will band together to form a bank lending syndicate to share the risk. The credit risk on these loans is greater than on loans to other banks in the interbank market. Thus, the interest rate on Eurocredits must compensate the bank, or banking syndicate, for the added credit risk. On Eurocredits originating in London the base lending rate is LIBOR. The lending rate on these credits is stated as LIBOR +X percent, where X is the lending margin charged depending upon the creditworthiness of the borrower. Additionally, rollover pricing was created on Eurocredits so that Eurobanks do not end up paying more on Eurocurrency time deposits than they earn from the loans. Thus, a Eurocredit may be viewed as a series of short-term loans, where at the end of each time period (generally three or six months), the loan is rolled over and the base lending rate is repriced to current LIBOR over the next time interval of the loan. ==See also==