EURIBOR

What is Euribor - the Euro Interbank Offer Rate?

Euribor, also known as the Euro Interbank Offer Rate, is a reference benchmark derived from the average interest rates at which banks within the eurozone offer unsecured short-term loans on the inter-bank market. The timeframes for these loans, which are used to compute the Euribor, typically span from one week to one year.

Euribor serves as the standard rate that governs the lending and borrowing of surplus reserves among banks for brief durations, ranging from one week to a year. These brief loans are commonly structured as repurchase agreements (repos), designed to ensure bank liquidity and enable idle excess funds to generate interest returns.

Euribor Explained

Similar to how individuals and businesses borrow funds from banks, financial institutions themselves engage in borrowing from other banks when the need arises, entailing the payment of interest. This practice takes place within the interbank market.

Euribor, or the Euro Interbank Offer Rate, encompasses a series of five money market rates that correspond to varying maturities: one week, one month, three months, six months, and twelve months. These rates are subject to daily updates and represent the average interest that eurozone banks apply when lending to each other without requiring collateral.

Euribor rates hold a pivotal role as the primary reference rates within the European money market. These interest rates serve as the foundation for determining the costs and rates associated with a wide array of financial instruments, including interest rate swaps, interest rate futures, savings accounts, and mortgages. This is precisely why both professionals and individuals closely track the progression of Euribor rates, given their significant impact on the financial landscape.

Who Contributes to the Euribor Rate?

Euribor rates hold significant significance as a benchmark for various financial instruments denominated in euros, encompassing mortgages, savings accounts, car loans, and a variety of derivative securities. Similar to the role played by LIBOR in the UK and the US, Euribor plays a comparable role within the eurozone.

The Euribor rate receives contributions from a group of 19 panel banks. These financial institutions are responsible for handling the most substantial volume of transactions within the eurozone money market.

The Euribor rates are established from the average interest rates at which an several European banks borrow funds among themselves.

As of May 2023, the panel banks participating in this process include:

1. Raiffeisen Bank International AG (Austria)

2. Belfius (Belgium)

3. Barclays (Britain)

4. BNP Paribas (France)

5. Crédit Agricole s.a. (France)

6. HSBC France (France)

7. Natixis / BPCE (France)

8. Société Générale (France)

9. Deutsche Bank (Germany)

10. DZ Bank (Germany)

11. Intesa Sanpaolo (Italy)

12. UniCredit (Italy)

13. Banque et Caisse d’Épargne de l’État (Luxembourg)

14. ING Bank (Netherlands)

15. Caixa Geral De Depósitos (Portugal)

16. Banco Bilbao Vizcaya Argentaria (Spain)

17. Banco Santander (Spain)

18. CECABANK (Spain)

19. CaixaBank (Spain)

How is the Euribor Calculated?

The Euribor undergoes daily calculation and is made public at 11:00 a.m. (Central Europe Time). While one might assume that the process for determining Euribor, which serves as the interest rate for interbank borrowing, is intricate and automated, it actually relies on a straightforward daily survey shared among participating banks. The calculation comprises three fundamental steps:

1. Data Collection. Each day at 10:45 a.m., the banks taking part must input the interest rate at which they are prepared to lend or borrow funds for varying maturities, such as one day, one month, and three months. External factors like supply and demand, economic growth, and inflation impact the rates presented by each bank.

2. Exclusion. The system aggregates these input rates and eliminates the highest and lowest 15% of quotes. This step prevents extreme rate submissions by banks from distorting the Euribor.

3. Average Computation. At 11:00 a.m., the calculated Euribor is released. The final value is derived from the average of the remaining rates, rounded to three decimal places.

Euribor vs. Eonia

Eonia, known as the Euro Overnight Index Average, is a daily reference rate that signifies the weighted average of unsecured overnight interbank lending within the European Union and the European Free Trade Association (EFTA). It is computed by the European Central Bank (ECB) using data from 28 panel banks.

Similar to Euribor, Eonia serves as a rate employed in interbank lending across Europe. Both benchmarks are provided by the European Money Markets Institute (EMMI). The primary distinction between Eonia and Euribor lies in the durations of the underlying loans. Eonia represents an overnight rate, whereas Euribor encompasses eight distinct rates linked to loans with varying maturities from one week to 12 months.

Additionally, the contributing panel banks differ: while 28 banks contribute to Eonia, only 19 banks contribute to Euribor. Lastly, it’s noteworthy that the calculation of Euribor is overseen by Global Rate Set Systems Ltd. rather than the ECB.

Is Euribor Undergoing Replacement?

Interbank Offered Rates (IBORs) have traditionally served as interest rate benchmarks across various countries, occasionally exhibiting variations in values. Following the Benchmarks Regulation (BMR) implementation in January 2018, significant IBOR benchmarks were required to undergo reform to align with the new regulatory framework. This reform encompassed benchmarks like Euribor and LIBOR, among others.

As a result, Euribor has undergone reform and is slated to persist until December 2025.