Question

Discussion: Borrowing between banks answer as long as possible

Answer 1

Borrowing between banks is also known as interbank lending market.Banks take loans in betwwen them and are mostly of short term loans whose period normally lasts for overnight or a week maximum.The rate at which these loans are made is known as overnight rate or interbank rate.Many a time banks run out of liquid assets to sattisfy their clients and in that case that have to go to other banks who are having more liquid assets to help the needy bank with overnight loan.

Interbank loans are necessary for the smooth functioning of the banks.As the banks according to regulation has to keep the reserve requirements sometimes they may ran out of money and in that case interbank loans have a special role to play.Interbank rates are based on the maturity of the loans and also market conditions.