Finance

Euro Interbank Offer Rate

                           Euro Interbank Offer Rate

The Euro Interbank Offer Rate or Euribor is a reference rate based on the average interest rates at which Eurozone banks offer unsecured short-term lending to other banks in the euro wholesale money market or interbank market. Euribor is the shortened form of the Euro Interbank Offered Rate. They are determined on the average interest rates at which a large number of European banks borrow each other’s funds.

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Why is it used?

Euribor rates are considered an important interest rate benchmark for various euro-based financial products like mortgages, savings accounts, car loans, and various derivatives securities. Like Libor is used in America and Britain, Euribor is used by Eurozone banks. It refers to a group of eight money market rates corresponding to different maturities such as the one-week, two-week, one-month, two-month, three-month, six-month, nine-month, and 12-month rates. These rates are updated daily and represent the average interest rate that eurozone banks charge one another for uncollateralized loans. Euribor is calculated on a regular basis using the average interbank rate given by the 18-bank panel at 11:00 a.m. CET. In the first instance, the level of the prices is determined by supply and demand. There are, however, external variables, such as economic growth and inflation, which can affect the rate level.

Who contributes to the Euribor rate?

The panel banks are the banks with the highest volume of business in the eurozone money market. The 20-panel banks that contribute to Euribor are:

  • Belfius (Belgium)
  • BNP Paribas (France)
  • HSBC (France)
  • Natixis (France)
  • Crédit Agricole (France)
  • Société Générale (France)
  • Deutsche Bank (Germany)
  • DZ Bank (Germany)
  • National Bank of Greece
  • Intesa Sanpaolo (Italy)
  • Monte dei Paschi di Siena (Italy)
  • UniCredit (Italy)
  • Banque et Caisse d’Épargne de l’État (Luxembourg)
  • ING Bank (Netherlands)
  • Caixa Geral De Depósitos (Portugal)
  • Banco Bilbao Vizcaya Argentaria (Spain)
  • Banco Santander (Spain)
  • CECABANK (Spain)
  • CaixaBank (Spain)
  • Barclays (Britain)

Euribor calculation method:

Each panel bank must notify Thomson Reuters by 10:45 a.m. CET, at what interest rates it concludes/can conclude euro loans on the interbank money market. Upon collecting the rates from all the banks, Thomson Reuters eliminates the highest and lower 15% of values. The official Euribor rate is based on the average of the remaining 70 percent ‘Medium Values’ and the result is rounded to 3 decimal places.

Importance of Euribor:

The Euro interbank offer rates are important as they provide the basis for the price or interest rate of all kinds of financial products, like interest rate swaps, interest rate futures, saving accounts, and mortgages. Different euro-denominated derivative instruments such as forward rate agreements, futures contracts, interest rate swaps, and financial products such as mortgages, savings accounts, car loans, etc. are priced using Euribor rates. Euribor rate patterns can help to recognize interest rate changes that can be used for different analytical reasons, allowing monetary policy and central bankers to make better policy decisions.

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Conclusion:

The Euribor is critical for both the euro area and the global financial system to function effectively. It is of systemic importance for financial stability as it supports more than 180,000 billion euros worth of contracts. It is an effective benchmark rate measured and decided by an independent body and serves as a significant indicator of the cost of financing for eurozone banks. It forms the basis for pricing various marketable debt instruments which are often less liquid and thus affect the conditions of finance and credit.

 

Author – Abha Shetty

About the author – Abha is a second-year BMS student and FRM level 1 candidate. She is very intrigued by the world of financial markets and hopes to master the art of investing and trading.

 

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