What it means
The essential feature is that the loan has no fixed term. Either side can end it on demand, which makes the money about as close to cash as a loan can be, and it is why the funds are often described as money at call.
Historically the market was dominated by brokers borrowing from banks to finance client margin positions. Today the wider interbank market performs the same function, letting a bank with surplus reserves lend to one that is short overnight.
Because the loans are extremely short and usually collateralised, rates sit close to the central bank's policy rate. When cash suddenly becomes scarce, however, the call money rate can spike sharply, which is why regulators watch it as an early warning indicator.
Corporate treasurers rarely lend call money directly, but they encounter it through money market funds. Those funds hold call and overnight instruments precisely because they can be turned into cash without waiting for a maturity date.
The trade off is yield against certainty. Call money pays less than a one month or three month deposit, and the rate can be reduced at any moment, so it suits balances that must stay liquid rather than balances being invested for return.
The risk sits with whoever relies on it for funding rather than with the lender. A borrower that finances long term assets with money repayable on demand has a maturity mismatch, and supervisors now impose liquidity rules specifically to limit how far banks can depend on this kind of very short funding.
In practice
Real-world examples.
Example
A mid sized bank finishes a trading day $40,000,000 short of its required reserve balance after a large corporate withdrawal. It borrows the shortfall in the call money market overnight and repays the following morning once incoming customer receipts have cleared.
Example
A money market fund holds 18% of its portfolio in call and overnight instruments so it can meet redemption requests without selling longer dated paper at a loss. When investors withdraw $60,000,000 in a single week, the fund simply recalls those loans.
Example
A securities broker funds client margin lending partly through call loans from two commercial banks. When one lender recalls $15,000,000 with a day's notice during a volatile week, the broker has to draw on a committed credit line to replace it.
Formula
Calculation
Interest on a call loan = principal x annual rate x (days outstanding / 360)
A bank lends $25,000,000 of surplus reserves into the call money market at an annual rate of 4.8%, and the borrower repays after five days.
A full year at that rate would produce $25,000,000 x 4.8% = $1,200,000 of interest. The loan ran for five days on a 360 day convention, so the interest due is $1,200,000 x 5 / 360 = $16,666.67.
The borrower repays $25,000,000 + $16,666.67 = $25,016,666.67. Note how modest the absolute number is relative to the principal, which is the point: call money is about liquidity management, not earning a meaningful return.Case study
Seen in the real world.
The following is an illustrative and entirely fictional example. Kestrel Clearing Partners, an invented brokerage, financed a large part of its client margin book with call money because it was the cheapest funding available at 4.6%, compared with 5.9% on a committed one year facility. On $200,000,000 of borrowing, that difference was worth 1.3% x $200,000,000 = $2,600,000 a year.
The saving looked compelling until a stressed week in the fictional scenario. Two lending banks recalled a combined $70,000,000 within 48 hours, exactly when clients were also drawing on their margin accounts, and the call money rate for replacement funding jumped to 7.4%.
Kestrel survived by drawing a standby facility it had almost cancelled the previous year, at a cost far above the savings it had made. The illustrative lesson is that funding which can be withdrawn on demand is cheap for a reason, and that the reason tends to reveal itself at the worst moment.
Watch out
Common mistakes.
- Treating call money as a stable funding source when the lender can withdraw it without notice.
- Confusing call money with a call deposit account, which is a bank product for depositors rather than an interbank loan.
- Reading a low call money rate as a sign the market is safe, when the rate reflects current conditions and can move within hours.
Questions
People also ask.
Why is the call money rate watched so closely?
Because it responds immediately to cash shortages in the banking system, so a sudden spike often signals funding stress before it appears anywhere else.
Is call money secured?
Frequently yes, with government securities pledged as collateral, though some interbank call lending is unsecured between institutions with strong credit standing.
Can an ordinary business lend in the call money market?
Not directly, since participation is limited to banks and licensed financial institutions, but a business can get similar exposure through a money market fund.
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