A new market in unsecured interbank funding steps up
The AFX marketplace provides a new venue for US regional and community banks to lend and borrow from each other overnight. It could be the foundation for a new credit-sensitive benchmark rate.
In the US, a venture-owned fintech company is building a marketplace where something quite revolutionary is happening.
Whisper it, but it seems that banks that find themselves with an excess of deposits might lend them out overnight to other well-capitalized banks that find themselves temporarily short of funds.
For such short-term loans, banks do not even require collateral.
One might call this an interbank funding market. A robust one might be useful, given this year’s tremors when a few regional banks saw sudden, rapid and wholesale flight of customer deposits.
Even further out at the extreme edge of financial innovation, it is possible that the banks borrowing money in this interbank market to fund loans to businesses might price those loans at a margin above their own cost of interbank funding.
Richard Sandor, the economist and entrepreneur who pioneered interest-rate futures contracts on US Treasuries at the Chicago Board of Trade in the 1970s and later spot and futures markets on sulphur dioxide-emission allowances in the 1990s, founded and launched the American Financial Exchange (AFX) back in 2015.