The interbank market refers to banks and other financial-trading companies doing business, mostly lending, with each other.
Overnight, Every Night
Most interbank transactions are overnight or short-term loans that banks etc. grant to each other mostly to hedge their foreign-currency (forex) and interest rate exposure, although forex speculators also use the market. Interbank transactions between more than 8,300 institutions in over 200 countries take place over the SWIFT (Society for Worldwide Interbank Financial Telecommunications) network. The size of the interbank currency market is estimated at over one trillion dollars daily.
The interest rate charged by British banks on the interbank market, known as LIBOR (London Interbank Offered Rate), rose rapidly as the international credit crisis began spreading in early 2008. The spread between LIBOR and both the overnight interest swap (OIS) rate and 3-month U.S. Treasury bills widened as banks and others sought the safe haven of greenbacks. By late October 2008, however, LIBOR had fallen 3.54% for three-month dollar-denominated interbank loans and 4.92% for three-month euro loans.