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Eurodollar System (Offshore Dollar Credit)

Reference entry · last updated September 17, 2026

The Eurodollar system is the market for unsecured U.S. dollar deposits held at banks or bank branches outside the United States. The name is historical. The deposits are dollars, not euros, and the market now operates in all major financial centers.[1]

1. First principles: a dollar booked offshore

A Eurodollar deposit is a dollar claim on a bank whose books sit outside U.S. territory. The holder typically starts with a dollar balance at a U.S. bank and places that balance with a bank abroad. The receiving bank can lend those dollars to a third party without converting them into another currency. The "Euro-" prefix later generalized to other offshore currencies (Eurosterling, Euroyen).[1][2]

Because the booking location is offshore, the deposit historically sat outside U.S. reserve requirements and interest-rate ceilings that applied to onshore deposits. The dollars themselves still clear through the U.S. banking system. The innovation is jurisdictional, not a second dollar.[1][3]

2. London origins, 1955–1963

Catherine R. Schenk, using Bank of England archives, dates the postwar market earlier than the usual 1957 story. Midland Bank bid for dollar deposits in mid-1955, paying more than U.S. Regulation Q allowed on comparable onshore deposits, then swapped the dollars into sterling. Until July 1963, Regulation Q capped interest on 30-day U.S. deposits at 1 percent and on 90-day deposits at 2.5 percent.[2]

The more common textbook trigger is the 1957 sterling crisis. British authorities restricted sterling credits to non-residents and barred sterling finance of third-party trade. London banks then used dollar deposits as the credit instrument. St. Louis Fed authors restating that literature also note Midland's 1955 interest-arbitrage. London's advantage was a domestic squeeze combined with relative freedom for non-sterling books.[2][3]

BIS reporting on European banks' dollar liabilities begins in the 1960s. St. Louis Fed calculations from the 1969 BIS annual report put the net eurodollar market at $75 billion in 2020 dollars in 1964 and $264 billion in 1969, a 252 percent rise over those five years.[3]

3. U.S. regulation and funding use

U.S. banks can take Eurodollar deposits through offshore branches (often in the Caribbean) and transfer the funds onshore. The Federal Reserve Bank of New York treats those deposits as unsecured wholesale dollar funding, close substitutes for federal funds. The Fed has imposed a zero reserve requirement on net Eurodollar deposits of U.S.-based banks since 1990. A broader set of lenders can place Eurodollars than can lend federal funds.[1]

McCauley, McGuire, and Sushko, using 38 years of BIS locational banking data, find that the market has played several roles, most of all intermediation among non-U.S. residents. They argue it has had little to do with the direction of net capital flows or the U.S. current account balance.[4]

4. Relation to Triffin's dilemma

Triffin's dilemma is about official reserve supply and the convertibility of a key national currency. The Eurodollar system is private credit: banks outside the United States match dollar deposits and loans. Official dollar reserves can be placed in that market, but the market's size is not the same object as the U.S. official-settlements deficit Triffin measured. Treating eurodollar growth as proof that the United States must run a current-account deficit conflates the two.[4][5]

5. See also

6. References

  1. Marco Cipriani and Julia Gouny, "The Eurodollar Market in the United States," Federal Reserve Bank of New York, Liberty Street Economics, 27 May 2015.
  2. Catherine R. Schenk, "The Origins of the Eurodollar Market in London: 1955–1963," Explorations in Economic History 35 (1998): 221–238. Free full text (author PDF).
  3. Paulina Restrepo-Echavarría and Praew Grittayaphong, "Bretton Woods and the Growth of the Eurodollar Market," Federal Reserve Bank of St. Louis, On the Economy, 20 January 2022.
  4. Robert N. McCauley, Patrick McGuire, and Vladyslav Sushko, "Eurodollar banking and currency internationalisation," BIS Quarterly Review, June 2012.
  5. Michael Bordo and Robert N. McCauley, "Triffin: dilemma or myth?" BIS Working Papers No. 684, December 2017.