Interbank Deposit Explained 2025: How Banks Exchange Funds & Current Rates

Julia Kagan is a financial and consumer journalist, formerly a senior editor in personal finance at ZAMONA.

What Are Interbank Deposits in 2024?

An interbank deposit refers to a financial arrangement where one bank holds funds on behalf of another bank. This requires the holding bank to open a 'due to' account, essentially a payable ledger entry, representing funds owed to the other institution. The bank receiving the deposit is known as the correspondent bank.

Key Points to Remember

• Interbank deposits involve one bank holding funds for another through a dedicated account.
• Holding banks maintain 'due to' accounts to track these liabilities.
• These transactions are generally proprietary, conducted mainly among banks themselves rather than retail clients.

How Interbank Deposits Work in Today’s Financial Market

Operating within the interbank market, these deposits facilitate currency trades and liquidity management exclusively between banks and major financial institutions—not retail investors. Banks use this system to borrow and lend funds, ensuring they meet regulatory reserve requirements and optimize cash flow. These transactions significantly contribute to overall market liquidity.

When an interbank deposit is arranged, the holding bank creates a 'due to' account for the depositing bank, which acts as a payable account on the ledger. The interest rates applied on these deposits, known as interbank rates, are influenced by factors such as loan maturity, prevailing market conditions, and the creditworthiness of the institutions involved. These rates represent the lowest borrowing costs available exclusively to large banks.

Understanding Correspondent Banking and International Accounts

In domestic contexts, the bank holding the 'due to' account is the correspondent bank. However, when deposits cross international borders, the terminology shifts. The holding bank's account for the foreign institution is termed a 'nostro' account (Latin for 'ours'), while the foreign bank refers to its account at the holding bank as a 'vostro' account (Latin for 'yours'). For example, if Bank A in the US deposits funds at Bank B in the UK, Bank A views this as its nostro account, whereas Bank B regards it as a vostro account.

Frequently Asked Questions (FAQs)

Why Do Banks Engage in Interbank Loans and Deposits?

Banks use interbank deposits and loans to manage liquidity efficiently. They borrow funds to cover short-term needs or lend excess cash. These transactions are typically short-term, often overnight or lasting just a few days.

How Do Interbank Deposits Differ from ACH Transfers?

ACH (Automated Clearing House) transfers facilitate payments for businesses and consumers and involve interbank systems for verification. In contrast, interbank deposits occur solely between financial institutions for liquidity and operational purposes.

What Is the Purpose of a 'Due To' Account?

A 'due to' account is a ledger entry created by the holding bank to represent funds owed to the correspondent bank in an interbank deposit arrangement. It serves as a payable account ensuring accurate tracking of these deposits.

Conclusion

Interbank deposits are critical financial arrangements in which one bank holds funds for another via a 'due to' account. These transactions underpin the interbank market, enabling banks to manage liquidity, comply with regulations, and facilitate large-scale currency trades. While typically restricted to financial institutions, understanding interbank deposits provides insight into the backbone of global banking operations.

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