What is a Eurobank?

The prefix "euro" in "eurobank" has nothing to do with Europe or the Euro currency; it is a common prefix for financial instruments or institutions that deal with currencies other than the local currency. A eurobank refers to a bank that makes transactions in foreign currencies, including deposits and loans. For example, an Australian bank that holds deposits in US Dollars (USD) or a Brazilian bank extending loans in Japanese Yen (YPY). A eurobank can operate in its own country while handling foreign currencies or operate as a foreign branch in another country, handling that country's currency. Eurobanks facilitate movement of financial capital between various countries by making it easier to obtain and keep foreign currencies.

In the past, few financial institutions would handle foreign currencies. The first large inter-currency transaction occurred shortly after World War II. Communist governments became worried that the US government would freeze their funds in the US and decided to transfer their USD funds to banks under their control.

As the USD became an important currency for international trade, financial institutions in other countries began stocking up on the USD. The eurobanks outside the USA often offered more attractive interest rates on USD deposits and loans compared to banks in the US because they don't have to comply with US banking regulations, such as maintaining a minimum reserve amount, payment of Federal Deposit Insurance Corporation (FDIC) fees and following rules that protect competition between banks. The eurobank became a popular financial institution that offers both accessibility to foreign funds and low-cost service.

Many eurobank transactions involve transferring deposits to and from another financial institution. For example, a businessman earns a payment in USD and deposits it to a US bank account. He then realizes that a bank in London offers higher rates of return on USD deposits, so he transfers his funds to the bank in London.

A eurobank often allows a client to borrow an approved amount of a certain currency as well. The eurobank usually charges an interest on the borrowed amount, at a floating rate that is linked to the London Interbank Offered Rate (LIBOR). It also charges a fee on the unused portion of the line of credit, usually less than 1 percent of the unused funds. The eurobank sometimes allows the borrower to switch from one currency to another on certain dates. The borrower can then match the currencies with his or her cash flows, adjusting his or her exposure to risks related to fluctuations in currency exchange rates.