Eurodollars are USD deposits held in banks outside of North America, free from regulations imposed by the Federal Reserve. They never leave the US, but are held in foreign banks. The concept was created in the 1950s to protect Soviet assets from seizure.
It is sometimes beneficial for a person or organization to hold US dollar (USD) denominated bank deposits in a bank outside of North America. These dollars are referred to as Eurodollars. Despite the name, there is nothing necessarily European about Eurodollars. They also have no relation to the euro currency. A dollar-denominated deposit in Japan or Argentina would still be called a Eurodollar deposit. Most of these accounts are held in Europe, but many are held in East Asia and Caribbean island nations.
The main advantage of Eurodollars is the fact that they are free from any regulations imposed on US banks by the Federal Reserve, which is the central bank of the United States. Among other things, this means that banks holding Eurodollar deposits do not have to pay deposit insurance premiums on those deposits. They are also free from the obligation known as a reserve requirement. Banks in the US are legally required to hold a certain percentage of depositors’ funds on hand as cash and can lend out the remainder. The absence of restrictions by the reserve requirement allows more Eurodollars to be lent to borrowers.
The process by which Eurodollars are transferred around the world can be complex, especially for someone unfamiliar with finance. One important thing to remember about this process, though, is that while foreign banks may hold US dollar-denominated deposits, Eurodollars never actually leave the US. A foreign bank with a Eurodollar deposit holds that deposit in a US bank, just like a bank customer, but this asset is balanced by the fact that the deposit is still owed to the person whose money it is. In other words, the net effect of Eurodollars on a foreign bank’s balance sheet is zero. In that sense, the warehouse remains in the US at all times.
The first Eurodollars were created in the 1950s as an indirect result of the expansion of foreign dollar reserves after World War II. In addition to foreign dollar deposits, some countries, including the Soviet Union, had deposits in American banks. After certain events of the Cold War, the Soviet government feared that its US assets would be frozen.
To guard against this possibility, some Soviet holdings were transferred to a Soviet-owned bank that held a British charter, with the idea that the British bank would in turn deposit the money in American banks. That way, the Soviets could still have assets in the US and would be protected from seizure by the fact that the money was directly controlled, not by the Soviets, but by Great Britain. On February 28, 1957, the first Eurodollars were created in this way, in the amount of a deposit of $800,000.
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