Interbank Deposits: The Basics

Interbank deposits are financial transactions in which one bank holds funds in an account for another institution. In order to facilitate the arrangement, the holding bank must open a “due to account” for the other bank. By doing this, the holding bank is essentially providing the services of a depository financial institution to the other bank.

The purpose of this arrangement is to enable banks to transfer funds safely between each other without having to use the traditional money transfer services. This gives them greater control over liquidity, allowing them to manoeuvre between the large amounts of money held in different accounts.

The most common form of interbank deposits is used by banks to settle large financial deals. For example, a bank may be involved in a transaction in which it must make payments to multiple parties in different locations. To complete the transaction, it will move money between its own accounts, as well as making payments over the interbank system to other banks. These payments can be made securely, quickly and inexpensively.

Interbank deposits may also be used for other purposes, such as short-term investments and loan transactions. For instance, banks can transfer funds between each other for loans or new investments. This ability to quickly transfer funds between banks also helps banks settle credit card transactions between cardholders and merchant banks.

Interbank deposits are not just used by banks, however. Other large financial institutions, such as insurance companies and pension funds, may arrange interbank deposits as well. These deposits are especially beneficial for insurance companies because they can transfer funds quickly and safely between the many different accounts they hold.

Overall, interbank deposits are an essential part of the financial system. Without them, banks and other financial companies would be unable to transfer funds quickly and securely between different institutions—making it impossible for large-scale financial deals to take place. Thankfully, these secure deposits allow banks and other entities to successfully complete financial transactions in an efficient and cost-effective way.