The overnight market is the component of the

money market The money market is a component of the economy that provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less. As short-term securities became a commodity, the money market became a compon ...

involving the shortest term

loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that ...

. The overnight market is primarily used by banks and other financial institutions.

Lenders A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property ...

agree to lend borrowers funds only "overnight" i.e. the borrower must repay the borrowed funds plus

interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...

at the start of business the next day. Given the short period of the loan, the interest rate charged in the overnight market, known as the

overnight rate The overnight rate is generally the interest rate that large banks use to borrow and lend from one another in the overnight market. In some countries (the United States, for example), the overnight rate may be the rate targeted by the central ban ...

is, generally speaking, the lowest rate at which

bank A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Because ...

s lend money. Most of the activity in the so-called overnight market in fact occurs in the morning immediately after the start of business for the day. Banks and financial institutions analyse their cash reserves on a daily basis, and assess whether they have an excess or a deficit of cash with respect to their needs. More specifically, deposit-taking

financial institutions Financial institutions, sometimes called banking institutions, are business entities that provide services as intermediaries for different types of financial monetary transactions. Broadly speaking, there are three major types of financial insti ...

(such as banks) begins with forecasting the institution's and its clients'

liquidity Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity, the ease with which an asset can be sold * Accounting liquidity, the ability to meet cash obligations when due * Liq ...

needs over the course of that day. If this projection is that the institutions' clients will need more money over the course of the day than the institution has on hand, the institution will borrow money on the market that day. On the other hand, if the analyst projects that the institution will have surplus money on hand beyond that needed by its clients that day, then it will lend money on the overnight market that day. In this context, the term "overnight" means that the cash borrowed is repaid the following day. The bulk of trading occurs in the morning and is based on these projections. If, however, over the course of the day, the actual amount of money required by the institution's clients departs from that projected in the morning, it may become necessary for the institution to borrow money on the overnight market to meet this unexpected demand from its clients; conversely, if the institution finds itself with more funds on hand than it anticipated late in the day, it will then lend those funds on the overnight market. The overnight rate fluctuates over the course of a business day, depending on the amount of money demanded from and supplied to the overnight market over the course of the day. The rate quoted as the "overnight rate" may be the rate at the end of the day, or an average of the rate over the course of the day.

Bank A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Because ...

s are the largest participant in the overnight market, although some other large

, e.g.

mutual funds A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV ...

, also buy and sell on the overnight market as a way to manage unanticipated cash needs or as a temporary haven for money until the institution can decide on where to invest that money.

References

{{DEFAULTSORT:Overnight Market Banking Interest rates Financial markets

See also

References