What is Eurocurrency?
Eurocurrency is a currency that is deposited at a foreign bank outside of its home country. Contrary to its name, the term does not refer to euros that are deposited outside of Europe. It is a general term that applies to all currencies that are deposited anywhere outside of its local country. For example, if you deposit Japanese yen at a bank in the United States, it is considered to be Eurocurrency.
History of Eurocurrency
The Eurodollar is considered to be the initial origin of Eurocurrency. The Eurodollar was initially a term that refers to how USD was deposited in banks in Europe, especially London. European banks held a lot of USD after World War II, as the United States provided financial aid to Europe.
The fixed exchange rate system at that time also created an opportunity for more countries to invest in USD. Eventually, the Eurodollar transitioned to become Eurocurrency due to globalization. More individuals around the world began to deposit local currency at a foreign bank outside of Europe.
Although it is used all around the world, London remains the center of the Eurocurrency market at present. It’s been able to maintain a competitive advantage in the market because of the freedom in regulations in the commercial banking sector.
Therefore, banks in London are able to provide interest rates that pertain to the class of the borrower and lender, increasing the use of Eurocurrencies in London, while the rest of Europe adhere to tighter banking restrictions.
Uses of Eurocurrency
Eurocurrency is commonly used by corporations and financial institutions, such as mutual funds and hedge funds, in order to receive financing. It is often seen as an advantageous source of capital and a beneficial way to receive international funding because of its ability to switch to other foreign currencies.
It is also an attractive choice as a financial instrument because local interest rates can be avoided due to relaxed restrictions in comparison to local banking regulations. Therefore, many individuals and businesses use foreign currencies as a way to protect themselves against risks in foreign exchange and international trade.
A Eurobank is a financial institution that allows the deposits and loans of foreign currency. In other words, a Eurobank is a bank that accepts the use of Eurocurrency as a financial instrument. A Eurobank can be located anywhere in the world – it does not need to be located in Europe only. For example, a bank located in Canada that holds South Korean won is considered to be a Eurobank.
Eurobanks enjoy restrictions and regulations that are more relaxed in comparison to typical banks, which allows them to reduce their operating costs. In turn, they are able to offer clients a lower cost of banking. For example, Eurobanks are able to offer foreign currency at low interest rates to the borrower and high interest rates to the lender. They can do so because the Eurocurrency market does not have restrictions for interest rate ceilings.
Eurobanks often make transactions with foreign currency in large amounts, as $1 million is often considered to be one unit. It is because the clients are usually businesses or large corporations that use Eurocurrencies to reduce financial risks.
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