What is the interbank interest rate?

Interbank Offered Rate (IAR) is the interest rate applied to short-term loans between banks. This term is also known as the interbank exchange rate, overnight rate, or reserve requirement rate. The interbank rate is part of the State Bank of Vietnam's policy interest rates.

The State Bank of Vietnam stipulates that commercial banks must maintain a mandatory reserve ratio to ensure liquidity for the financial system.

However, a bank's cash reserves can fluctuate constantly due to customer demand for withdrawals, disbursements, or transaction changes.

When a bank fails to maintain the required reserve ratio (typically determined at the end of the day after an audit), it needs to borrow urgently from other banks to meet this requirement.

These loans typically have very short terms, sometimes lasting only overnight, and the interest rate applied to them is the interbank rate.

Characteristics of interbank interest rates

The nature of the interbank interest rate is essentially the interest rate on a loan, where the borrower pays an additional amount of interest as a percentage of the borrowed amount. Overnight interest rates fluctuate and change continuously, as determined by the State Bank of Vietnam.

Overnight interest has three main characteristics:

Higher than personal savings interest rates: Because banks need to borrow urgently and the loan term is usually very short.

Short loan terms: Typically ranging from overnight to a few weeks or one month.

Volatility: This interest rate is not fixed but changes continuously depending on supply and demand in the market and the monetary policy of the State Bank of Vietnam.

How to calculate interbank interest rates

Interbank interest rates are calculated by the Central Bank based on several factors, including the supply and demand for capital in the system, macroeconomic conditions, and monetary policy objectives.

The overnight interest rate applies specifically to interbank lending, aimed at maintaining liquidity and stability within the banking system. It does not apply to loans to individuals or businesses, so you don't need to calculate it. Just knowing it helps you understand and predict economic trends.

The significance and role of interbank interest rates in the economy.

Interbank interest rates play a crucial role in maintaining stability and promoting the development of the financial system and the economy. Its role can be analyzed from several perspectives:

For banks

Borrowing by banks: This helps banks quickly compensate for cash shortages, ensuring safe liquidity ratios as required by the government. This also helps prevent disruptions to the bank's business operations.

Lending banks: Utilizing idle capital to generate profits, they earn high returns from short-term lending. Transactions between banks are considered safe due to the reliability and repayment capacity of the parties involved.

For the economy

Inflation control: This is a key monetary policy tool that helps the central bank control the rate of credit growth and curb inflation.

Boosting investment: Low interbank offered rates make it easier for financial institutions to borrow capital at low costs, thereby promoting investment in production, business, and development projects.

Supporting banking operations: Interbank interest rates directly affect deposit and lending rates, enabling banks to adjust their credit strategies and develop their businesses.

Shaping monetary policy: Interbank interest rates are a key tool for managing monetary policy, helping the central bank regulate credit, control finances, and maintain economic stability.

Protecting the value of the currency: Reasonable interest rates help protect the value of the domestic currency, reduce the risk of devaluation, and ensure purchasing power for the people.

Promoting economic development: Creating conditions for businesses to expand production, create more jobs, and boost economic growth.

For the financial market

Overnight interest rates provide flexibility for credit institutions, enabling them to quickly borrow and lend short-term, ensuring liquidity in the market.