A deposit in a currency foreign to the bank’s domestic currency is a Eurocurrency deposit. Banks take Eurocurrency deposits either in the interbank market or from nonbank depositors to fund their Eurocurrency loans. Although the term Eurocurrency originally referred to foreign-currency deposits held at banks in Western Europe, such deposits anywhere in the world are also called Eurocurrency deposits – for example, US dollars held on deposit outside the United States are Eurodollars.
Eurocurrency deposits are not subject to the banking regulations of the currencies’ home country or commonly of the countries in which the deposits are held. The absence of regulations that effect domestic deposits, such as reserve requirements, deposit insurance and interest-rate restrictions, enables banks to take Eurodeposits at rates slightly higher and offer Euroloans at rates somewhat lower than the corresponding rates for domestic deposits and loans.
A Euro-certificate of deposit is a negotiable fixed- or floating-rate interest-bearing certificate of deposit issued by banks in bearer form at par with interest and principal paid in a Eurocurrency and an interest rate pegged to LIBOR, commonly in denominations of $1 million and a maturity of less than six months, and quoted on an add-on basis. Euro-CDs are sold directly by banks to depositors or via brokers. Many banks that are active lenders in the syndicated Euroloan market issue long-term variable-rate CDs with a maturity of up to five years for the funding of their Euroloans.
| Origination of a Euro CD (Example) |
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ECDs issued by the London branches of US banks have a greater implied credit risk than domestic CDs and, thus, tend to offer a slightly higher yield – disregarding the positive effect the lack of regulation also has on interest rates paid on deposits. On the other hand, ECDs are more liquid than Eurocurrency time deposits and, therefore, require a lower yield than Eurocurrency deposits of the same maturity with the same bank. It is principally the illiquidity associated with time deposits that encouraged banks to develop the ECD.