Eurodollars

Eurodollars come into existence when the ownership of dollar deposits in U.S. banks passes into the hands of foreign banks. The dollar deposits, more commonly called “demand deposits” or “checking accounts,” remain in U.S. banks, but the owners of the deposits are foreign banks, or foreign branches of U.S. banks. Individuals in foreign countries have dollar deposits in U.S. banks, but these deposits do not count as Eurodollars. Dollar deposits owned by foreign banks count as Eurodollars because these banks conduct a business of attracting dollar deposits and making dollar loans. Eurodollar deposits in foreign banks are interest-paying time deposits, usually of large amounts, and borrowers of dollars can turn to these foreign banks for dollar loans.

In the late 1950s, European banks first began holding deposits denominated in dollars, and borrowing and lending in dollars. The probable cause of the growth of the Eurodollar market lay with interest rate ceilings in the United States. Regulation Q, promulgated by the Federal Reserve Board, put a legal ceiling of less than 6 percent on interest rates that time deposits could pay in U.S. banks. The payment of interest rates that exceeded the legal interest rate ceiling in the United States constituted one of the major attractions of Eurodollar deposits. When interest rates soared in the 1970s, foreign banks, not subject to U.S. banking regulations, were able to pay much higher interests on time deposits, and make dollar loans on favorable terms. In the 1980s, the deregulation of U.S. banking took away some of the competitive advantage of Eurodollars, but the Eurodollar market had already established itself. From 1976 until 1992, Eurodollars grew from $14 billion to $56 billion.

The growth of multinational corporations, major customers in the Eurodollar market, may have contributed to the expansion of Eurodollars. Growth was further facilitated because the Eurodollar market made dealing in dollars a daytime affair in European time zones. Large United States banks also have borrowed funds in the Eurodollar market, and during the Cold War, the Soviet government kept dollar deposits in European banks to prevent the U.S. government from freezing Soviet assets in a political dispute.

London is the headquarters for the Eurodollar market, but Eurodollar transactions take place worldwide. Banks in the Bahamas, Cayman Islands, Canada, Hong Kong, and Singapore hold dollar deposits and lend dollars.

Eurodollars are a subspecies of Eurocurrencies, all of which have extraterritorial markets such as the Eurodollar market. Other important Eurocurrencies are Japanese yen, German marks, British pounds, French francs, and Swiss francs. Luxembourg is headquarters for Euromark deposits, and Paris and Brussels for Eurosterling deposits.