#1631 1955 · Midland Bank (London) · Finance / banking
The same dollar, booked abroad—escaping a rate cap by crossing the border
问题
US law capped what banks could pay on deposits, so dollars earned a capped rate at home but market rates abroad
背景
Under Regulation Q (required by law from 1933) the Federal Reserve capped the interest a US bank could pay on deposits, and a ceiling plus reserve requirements came bundled with the deposit. Since the cap followed the bank's nationality and the instrument's booking, a US bank could not legally pay market rates to hold dollars at home. Yet US dollars were not confined to American soil: large balances sat in banks across Europe and London, booked outside American jurisdiction and therefore outside the ceiling's reach—and those offshore dollars were earning whatever the market cleared.
In mid-1955 London's Midland Bank needed cheap dollar funding relative to sterling. Rather than accept the capped domestic return or fight the regulators, it began openly bidding for existing dollar deposits held in London and Europe, paying above the US interest ceiling and using spot-and-forward deals to switch the proceeds into sterling at a below-market cost. Because the deposits were booked at a non-US bank outside US territory, Regulation Q's ceiling and reserve requirements never reached them. The practice spread: London banks under UK sterling-credit controls (1955) moved to lending dollars for third-party finance, and the offshore pool grew into the Eurodollar market.
换别人会怎么做
Petition the Federal Reserve to raise the deposit-rate ceiling, or quietly accept the capped domestic rate and forgo the higher return to stay fully compliant.
他们看到了什么
When a rule caps what a product can pay, the cap binds only inside a territory. Move the identical instrument to where the rule stops and the cap stops applying—the product is unchanged yet unregulated
那一手
Midland Bank stopped competing for capped domestic deposits and instead paid market rates on dollar balances already sitting abroad, then used the spot/forward dollar-sterling market to turn them into cheaper sterling (its own account). The surrounding innovation was bigger: London banks, blocked by 1957 UK controls on sterling credit to non-residents, began booking and lending dollar deposits as a substitute. The instrument was the same US dollar; the only change was the jurisdiction the dollar was booked in and the institution that carried it.
为什么管用
Regulation Q and reserve requirements were anchored to American institutions, American soil and the domestic booking, not to the dollar itself or the economic job of holding and lending it. Midland Bank exploited that gap: because the deposits it bid for were booked at a non-US bank outside US territory, no American regulator had jurisdiction over them, so the ceiling never attached even though the currency and the product were identical to a capped domestic deposit. The 1957 UK sterling-credit controls pushed the whole London market the same way, converting a regulatory handicap on one side of the Atlantic into a pricing advantage on the other. Savers and lenders moved their dollars to the offshore pool because it paid more with no added product difference, and the market's shared existence made the caps visibly temporary—the demonstrated arbitrage, not any lobbying, is what put the domestic ceilings under pressure.
值了多少
One booking move seeded the Eurodollar market — an offshore dollar pool near $70bn by 1970 that outpaid the capped domestic system.
什么时候会失灵
The escape holds only while the two jurisdictions stay separate and no regulator re-draws the boundary to catch the relocated instrument. Offshore books concentrate risk precisely because they shed the protections that justify the caps: no deposit insurance, thinner capital and oversight requirements, and cross-border infrastructure. When a firm borrows dollars offshore but the assets behind them turn sour, the run and the losses arrive with no insured backstop—the same mechanism that first made the pool cheap. Sovereigns also close loopholes: once Eurodollar activity grew large enough to threaten monetary and reserve policy, authorities moved to regulate it (international capital-adequacy and reporting rules), and a systemic failure in the offshore dollar web is eventually met by central-bank intervention—the escape works only until the border it relied on is closed or the uninsured risk it wrote materializes.
后来呢
The Eurodollar market became the world's dominant short-term money market. From a handful of dollar deposits in the late 1950s it reached roughly $70 billion by the end of the 1960s and continued expanding into trillions, becoming the funding base for international banking, the origin of the LIBOR benchmark and of eurodollar futures. The pool demonstrated that controls and caps could be bypassed by jurisdictional choice, and it was a factor pushing the US to unwind deposit-rate regulation in later decades. The offshore market also carried more risk than insured domestic deposits—no deposit insurance, thinner oversight—risk that materialized in later crises.
资料来源
- [1]The Origins of the Eurodollar Market in London: 1955-1963Schenk, Explorations in Economic History 35(2) — Oxford Centre for Global History, 1998global.history.ox.ac.uk
- [2]Bretton Woods and the Growth of the Eurodollar MarketFederal Reserve Bank of St. Louis, 2022stlouisfed.org