What impact does the existence of the overnight interbank market have on the level of settlement balances held by the commercial banks? Briefly explain.
Overnight interbank market is a market that has various constituents that are heterogeneous and each is a type of product is a short –term credit instrument.
Types of the products available in this market are:
It deals with short term loans and is for types of builders or dealers who borrow from commercial banks.
It needs keeping a security in the bank and seeking a loan against it.
It involves instruments like Bills of exchange, treasury bills and are promissory notes that are exchanged if any amount is payable.
Etc.
Existence of such markets may influence the commercial banks as below:
Because of this, commercial banks are also forced to lend at lower rates. This reduces the balances held by commercial banks.
Arbitration may force commercial banks accordingly to stop arbitration in the market.
For example, now even commercial banks have started giving loans against collateral security.
What impact does the existence of the overnight interbank market have on the level of settlement...
What impact does the existence of the overnight interbank market have on the level of settlement balances held by the commercial banks? Briefly explain.
Suppose that the interbank loan rate, which is the interest rate that commercial banks charge each other, goes up and approaches the overnight lending rate of the central bank. What action does the central bank likely to take in this case? What are the policy instrument(s) to implement?
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