banks pay for funds in the London market. The quote spread for a selected maturity is therefore the difference between LIBOR and LIBID.   CD Yields The yield quoted on a CD is a function of the credit quality of the issuing bank, its expected liquidity level in the market, and of course the CDs maturity as this will be considered relative to the money market yield curve. As CDs are issued by depository institutions as part of their short-     term funding and liquidity requirement, issue volumes are driven by the demand for loans and availability of alternative sources for potential bor- rowers. However, the credit quality of the issuing bank is the primary con- sideration. In the U.S. market, "prime" CDs-issued by highly rated domestic banks-trade at a lower yield than "non-prime" CDs. Similarly, in the UK market, the lowest yield is paid by "clearer" CDs which are issued by the clearing banks (e.g., RBS NatWest plc, HSBC and Barclays plc). In both markets, CDs issued by foreign financial institutions such as French or Japanese banks will trade at higher yields. CDs yields are higher than yields on Treasury securities of like matu- rity. The spread is due primarily to the credit risk that a CD investor is exposed to and the fact that CDs offer less liquidity. The spread due to credit risk will vary with both economic conditions in general and confi- dence in the banking system in particular, increasing in times when the mar- kets risk aversion is high or when there is a crisis in the banking system. Eurodollar CDs offer a higher yield than U.S. domestic CDs on aver- age for three reasons. First, there are reserve requirements imposed by the Federal Reserve on CDs issued by U.S. banks in the United States that do not apply to issuers of Eurodollar CDs. The reserve requirement effec- tively raises the cost of funds to the issuing bank because it cannot invest all the proceeds it receives from the issuance of the CD and the amount that must be kept as reserves will not earn a return for the bank. Because it will earn less on funds raised by selling domestic CDs, the domestic issuing bank will pay less on its domestic CD than a Euro CD. Second, the bank issuing the CD must pay an insurance premium to the FDIC, which again raises the cost of funds. Finally, Euro CDs are dollar obliga- tions that are payable by an entity operating under a foreign jurisdiction, exposing the holders to a risk (called sovereign risk) that their claim may not be enforced by the foreign jurisdiction. As a result, a portion of the spread between the yield offered on Euro CDs and domestic CDs reflects what can be thought of as a sovereign risk premium. This premium varies with the degree of confidence in the international banking system. Exhibit 6.2 presents a Bloomberg screen of rates for domestic and Eurodollar CDs for various maturities out to one year on November 6, 2001. Note