DETERMINANTS OF INTEREST DIFFERENTIALS BETWEEN THE U.S. AND EURODOLLAR CREDIT MARKETS

Abstract

The origins of the Eurodollar market can be traced back to the late 1950s. Since that time it has grown into what many observers believe to be second to only the U.S. financial market. Its growth has been paralleled by a considerable volume of literature. This volume reflects partly confusion and controversy regarding the true nature of this phenomenen. Our concept of the Eurodollar market is that of an external market for intermediated funds denominated in dollars. In other words, we argue that the Eurodollar phenomenon reflects the fact that financial institutions operating outside the

United States (and its regulatory framework) compete successfuly with banks within the U.S. when it comes to attracting dollar denominated (time) deposits and competing for dollar denominated loans. There are a number of reasons which explain this fact, among others the absence of reserve requirements, the lack of other (costly) regulatory obligations, the wholesale nature of the market, fierce competition, and related factors.