1
$\begingroup$

It is often stated that eurodollar borrowing is clost substitute for Fed funds borrowing. In other words, when US banks cannot fund themselves domestically, they might go to the eurodollar market and borrow some money to satisfy thier reserve requirment. Although it seems intuitive that in eurodollar borrowing you are borrowing from banks in other countries, I believe it implicitly involve a loss of reserve in a US bank. This is because since foreign banks cannot hold reserve at Fed and the borrower wish to borrow reserve, the only way this can happen is for the foreign bank to demand its US correspondant (the US bank where it deposits its dollar) to transfer the amount of reserve to the borrower. So implicitly, it is also the US bank that is lending its reserve. Am I correct?

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.