The Banks and the Markets

If you want to know who the main user of the money markets are, then the answer is simple - it is the banks themselves that are the main users of the market.

They use them in order to trade their own liquidity positions. To understand why this is and what the motivation is, then you need to consider the banking dilemma, which roughly is as follows:

The Banks have all the deposits from customers in their coffers, so when someone pays in money it swells slightly the sum deposited with the bank. Now in order to make money on those deposits, the bank needs to lend the money to those who need it - borrowers - and the lending rate is higher than the interest rate paid on deposits and roughly that's how banks make their money, in simple terms.

Of course, this means the most profits come from lending the maximum amount of money, in fact ideally they want to lend all the money they have.

Dilemma time comes up here, because of course most deposits are not guaranteed so people could take them out whenever they want, and so the Bank of England dictates a bank must keep a certain percentage of its assets in liquid assets, for instance cash.

Hence the banks use the markets to trade their own liquidity positions as a result.

Related Articles

Treasury Bills Explained
The European Central Bank
Market participants: the Bank of England
US market interest rates
What is a Repo
Getting a Water Meter Fitted

More Stocks and Shares Articles