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Eurodollars: the offshore dollar banking system
Since the late 1950s· Concept
Fact, law or dataA rule, statute, definition or measured number.
Dollar deposits and loans held at banks outside the United States, beyond the Fed's direct reach.
See it on the Money & Finance map →How it works
A eurodollar is simply a dollar deposit in a bank outside the US, in London, Tokyo or the Cayman Islands; the 'euro' is historical. The market grew from the late 1950s, when Soviet-bloc banks and London lenders wanted dollars outside US rules and US interest-rate ceilings pushed deposits offshore. Foreign banks lend these dollars to companies and governments worldwide. The BIS estimates about $13 trillion of dollar credit to borrowers outside the US, plus far more owed through currency swaps.
Why it matters
It makes the dollar the world's money far beyond US borders, but offshore banks have no Fed safety net, so dollar shortages abroad can become crises.
Facts, rules and data
BIS global liquidity indicators and locational banking statistics; histories by Catherine Schenk and others trace its 1950s London origins.
Debates and risks
Its true size is unknown: much sits off balance sheet in currency swaps, which BIS researchers call 'missing' global debt.
Inside this (1)
Connections (6)
▸Eurodollars: the offshore dollar banking system extend the reach of The US dollar as the world's reserve currencyFact, law or data
The connection
Offshore banks lend dollars to companies and governments that never deal with a US bank, so dollar credit reaches far beyond US borders. That creates dollar debts worldwide, which in turn create worldwide demand for dollars to repay them, reinforcing the dollar's central role.
When and why
London from the late 1950s, later Tokyo, Singapore, Hong Kong and the Caribbean; about $13 trillion of offshore dollar credit today (BIS estimate).
How we know
BIS global liquidity indicators and the Fed's reports on the dollar's international role.
Debates and risks
Whether this web of offshore dollar debt strengthens the dollar's position or makes the whole system fragile is debated.
▸Eurodollars: the offshore dollar banking system priced loans off LIBOR until the switch to SOFR: the benchmark rate that replaced LIBORFact, law or data
The connection
For decades eurodollar loans were priced off LIBOR, the rate London banks said they would pay to borrow from each other. After the 2012 rigging scandal, and as such lending dried up, regulators replaced it with SOFR, built from over $2 trillion a day of overnight Treasury repo trades. Commercial loans moved from LIBOR-plus to Term SOFR-plus spreads.
When and why
The New York Fed's ARRC chose SOFR in 2017; US dollar LIBOR panels ended June 30, 2023, with the 2022 LIBOR Act covering old contracts.
How we know
ARRC reports, the UK Financial Conduct Authority's March 2021 cessation announcement and the Adjustable Interest Rate (LIBOR) Act.
Debates and risks
SOFR lacks LIBOR's bank-credit component; some banks wanted a credit-sensitive rate, but alternatives such as BSBY have faded.
▸Eurodollars: the offshore dollar banking system settle through Correspondent banking: nostro and vostro accountsFact, law or data
The connection
A dollar deposit in London is ultimately backed by the London bank's own dollar account at a US bank, its 'nostro' account in New York. When eurodollars move between banks, final settlement runs through those correspondent accounts and US systems like CHIPS and Fedwire. That US touchpoint gives US sanctions their global reach.
When and why
New York, the hub of dollar clearing; CHIPS has operated since 1970.
How we know
CHIPS and Fedwire volume data, and enforcement cases such as BNP Paribas's $8.9 billion penalty in 2014 for clearing sanctioned dollar payments.
Debates and risks
Some offshore dollar transfers net out on a single bank's own books without touching New York; how much is unclear.
▸Fed dollar swap lines and the FIMA repo facility backstop Eurodollars: the offshore dollar banking systemFact, law or data
The connection
Offshore banks borrow short-term in dollars to fund longer dollar loans and securities, but they cannot borrow from the Fed. When dollar funding seizes, swap lines let their home central banks lend them dollars, making the Fed the eurodollar system's lender of last resort at one remove.
When and why
2007–09, peaking near $580 billion in December 2008, and again in March 2020.
How we know
Studies by New York Fed economists show dollar funding spreads, such as LIBOR-OIS and the cross-currency basis, narrowed after lines opened.
Debates and risks
Moral hazard: a reliable Fed backstop may encourage foreign banks to take on more dollar funding risk.
▸Global money flows: how capital moves between countries run heavily on offshore credit from Eurodollars: the offshore dollar banking systemMainstream view
The connection
Much cross-border dollar lending is done by non-US banks, funded with offshore deposits and currency swaps rather than by US banks. Companies in Korea, Brazil or Turkey often borrow dollars from lenders in London or Tokyo. So the cost and availability of offshore dollar funding shapes how much capital moves.
When and why
London since the 1960s; now also Tokyo, Singapore, Hong Kong and Caribbean centers.
How solid is the link?
BIS locational banking statistics and global liquidity indicators.
Debates and risks
BIS researchers estimate over $80 trillion of dollar obligations sit off balance sheet in currency swaps, poorly captured in flow data.
▸Eurobonds: international bonds sold offshore since 1963 grew out of Eurodollars: the offshore dollar banking systemFact, law or data
The connection
By the early 1960s, London banks held large pools of offshore dollar deposits outside US rules. Eurobonds gave those dollars a long-term home: borrowers sold dollar bonds in London to investors holding eurodollars, avoiding US taxes, disclosure rules and the 1963 Interest Equalization Tax. The bond market grew as the long-term arm of the offshore dollar system.
When and why
London, from 1963; the Autostrade issue came first, and the market boomed after US capital controls of 1965–68.
How we know
Histories by Catherine Schenk and Barry Eichengreen, BIS data, and contemporary Bank of England reports on the London dollar market.
Debates and risks
Whether Eurobonds would have grown anyway, or mainly because of US taxes and controls that were lifted in 1974, is debated by historians.