Question7. Interbank Market. Why do you think it is important for many of the world‘s largest commercial and investment banks to be considered on the run in the interbank market?
The interbank market for forex serves commercial turnover of currency investments as well as a large amount of speculative, short-term currency trading. According to data compiled in 2004 by the Bank for International Settlements, approximately 50% of all forex transactions are strictly interbank trades.
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One of the traditional attributes of the on-the-run interbank market was the ability of the top tier banks to lend and transact amongst themselves internationally without distinguishing credit quality. It allowed tiering in the interbank market; it has been proven over time that is fast and effective implementation of international financial transactions.
The interbank market has operated in the past, on its highest levels, as a no-name market. It meant that for the banks at the highest level of international credit quality, foreign transactions between banks could be conducted without discriminating by name. Therefore, they traded among are themselves at no differential credit risk premiums. A major money center bank trading on such a level was said to be trading on-the-run. Thus, on-the-run banks are viewed to have steadfast credit quality. Banks that are not on-the-run are considered to be of less credit quality, sometimes reflecting more country risk than credit risk, and pay slightly higher rates in the interbank market