International business: determinants of interbank activities

Abstract

This paper investigates the determinants of the international interbank market, a significant component of international trade in financial services. The sample encompasses both monthly and quarterly data from 1983 to 1993. The superiority of the monthly results suggest that the interbank market should be modelled within a short-term framework. This data interval captures the short-term movement of funds between currencies, Eurobonds, the nonbank market and the domestic banking market by banks to maximize returns. Moreover, the interbank market does not necessarily move in line with fundamental trade and income variables. Rather, the market is sensitive to return differentials, the relative cost of capital, the yield curve and international nonbank assets. The empirical results also indicate that nationality remains important in interbank trading because of the advantages it imparts on the home country in dealing in its home currency, particularly if that currency is a vehicle currency.