Eurocurrency and eurobond markets avoid domestic interest rate regulations, reserve requirements and other barriers to the free flow of capital.
[citation needed] The relevance of eurocurrency deposits has been disputed ever since its inception in the 1950s by notable economists including Ronald McKinnon,[2] yet it remains a prevalent aspect of the global financial system.
[3] Environmental and political factors commonly underpin most theories, influencing the decisions of nations during this period known as the Bretton Woods Era.
[2][5] The Bretton Woods Era spanned from 1944 to 1973 and saw national policymakers, notably those of Britain and the US, agree to a fixed or pegged exchange rate system.
This was a result of the fixed exchange rate system that lead to more countries using US dollars for trade, as well as increased imports into the US itself from Europe.
[3] This is believed to have been done for two primary reasons; (1) over fears that US authorities will seize their assets, and (2) to accumulated goodwill with Eurobanks as a strategy to nurture a future source of loans and funding.
Ronald McKinnon theorised that it was attributed to London's pre-existing foreign financing expertise retained from Britain's dominant trade history in the 19th Century and servings as the centre of the sterling when it was a major international currency.
[2][3] Nonetheless, both the Treasury and Bank of England agreed that London should remain an important financial centre even after the sterling was no longer a major international currency.
[3] In reality, eurocurrency market centres in general enjoyed freedom from supply side restrictions such as reserve requirements and interest rate ceilings which allowed them, in particular London, to gain a competitive advantage by providing high and low rates of interest according to the class of the borrower and lender.
[12] Today, the Eurodollar market is the largest source of global funding for businesses and nations, estimated to be financing over 90% of international trade deals.
Firstly, the economic power of the US, particularly its influential position in the world economy and steady deterioration of the other currencies during the inception of Eurocurrency in the 1950s.
[13] The market emerged in 1984, at the beginning of the Japanese asset price bubble that saw Japan pursue financial liberalisation and internalisation.
Secondly, it can refer to the sum of all the technologies i.e. data processing and communication lines,[14] used to enable stakeholders around the world to interact and participate in the eurocurrency market.
Therefore, powerful financial technologies and information systems are required to connect market centres to enable communications and transactions to occur.
[15] Since this realisation, governments have attempted various regulatory measures such as imposing reserve requirements, ceilings on interest rates and extending supervisory authority into the unregulated eurocurrency market.
[14][16] Reserve requirements refer to a particular predetermined amount of cash which banks must have on-hand for the purpose of meeting liabilities in the case of sudden withdrawals.
[15] However, studies including the Granger causality test show that the “stickiness” of eurocurrency interest rates only exists with respect to the Eurodollar market.
Eurocredits are short- to medium-term loans of Eurocurrency extended by Eurobanks to corporations, sovereign governments, nonprime banks, or international organizations.
Additionally, rollover pricing was created on Eurocredits so that Eurobanks do not end up paying more on Eurocurrency time deposits than they earn from the loans.