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Interbank lending

<Interbank Lending>

Contents

Expanded Definition

Interbank lending is a direct result of the Federal Reserve financial requirement for it's member banks. Each bank is required to keep a certain amount of cash in their reserve, so they lend/trade their excess reserve on an overnight basis to provide needed funds to another bank. The Fed sets the rate on these transactions.

Recent Examples

In Oct 2008, the instability of financial institutions made lending banks nervous to issue any funds overnight for fear that the borrowing banks could fail. This added to the financial turmoil that was already reeling the economy and the markets.

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