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Inter-Bank Lending
In financial economics, interbank lending refers to the process by which banks lend and borrow funds from each other in the interbank market. This market facilitates the flow of funds between banks, allowing them to manage their liquidity, meet customer demands, and fund their operations.Interbank lending typically occurs through two main channels:
- Bilateral transactions: Banks may lend and borrow funds directly from each other through bilateral agreements, often based on established relationships and credit lines. These transactions can range from overnight to several months in maturity.
- Central bank facilities: Central banks, such as the Federal Reserve, often provide facilities for interbank lending, such as the discount window or standing facilities. These facilities can help ensure that banks have access to funds during times of stress or financial instability.
Interbank lending plays a critical role in the banking system by helping to distribute liquidity and allocate credit efficiently. It also contributes to financial stability by allowing banks to manage their funding needs and meet unexpected cash outflows.