Euro Interbank Offer Rate (Euribor)

Introduction

The Euro Interbank Offer Rate (Euribor) is a benchmark interest rate for borrowing between banks. It is a daily reference rate based on the interest rates banks offer to lend unsecured funds to other banks in the euro wholesale or interbank market.

EURIBOR is a crucial benchmark for financial institutions and borrowers, as it prices various financial products such as loans, mortgages, derivatives, and other financial contracts.

Define Euribor

Euribor is a daily reference rate calculated by the European Money Markets Institute (EMMI) based on the average interest rates. A panel of 18 banks partake in computing this rate. The rate is calculated and published daily for 8 maturities, ranging from overnight to 12 months, and is expressed as a percentage with four decimal places.

How Euribor Works?

The Euribor rate is determined based on the contributions provided by a panel of banks in the Eurozone. Each day, these banks submit their rates to EMMI, which then calculates the average of the submitted rates after excluding the highest and lowest quartiles. The resulting rate is then published on EMMI's website and other financial platforms.

The Euribor rate is calculated using a methodology that ensures transparency, accuracy, and reliability. EMMI reviews the methodology periodically to ensure that it remains relevant and reliable. European authorities supervise and oversee the Euribor rate, including the European Central Bank (ECB) and the European Securities and Markets Authority (ESMA).

Who Contributes to Euribor?

The Euribor panel consists of around 19 banks in the Eurozone that are active in the interbank market. These banks are selected based on their reputation, market share, and expertise in the Eurozone money market.

The banks are required to submit their rates daily to EMMI, which then calculates the Euribor rate based on the submissions. The Euribor panel is diverse, consisting of banks from different countries and sizes.

This diversity ensures that the Euribor rate reflects the prevailing market conditions in the Eurozone money market. The panel is also subject to periodic review and adjustments to ensure that it remains representative of the Eurozone money market.

What are the uses of Euribor?

The Euro Interbank Offer Rate (Euribor) has various applications in the financial industry, including the following −

• Pricing financial products − Euribor is used as a guide for pricing various financial products such as loans, mortgages, and other financial contracts. The rate is a reference point for determining the interest rate financial institutions charge for lending money.

• Risk management − Euribor is a benchmark for pricing and settling financial derivatives contracts. The rate calculates the value of interest rate swaps, futures, options, and other derivatives contracts traded in the Eurozone.

• Portfolio management − Euribor is used by investors and fund managers to track the performance of their investment portfolios. The rate is a basis for evaluating the performance of fixed-income securities such as bonds and other debt instruments.

• Market analysis − Euribor is used by financial analysts and economists to monitor and analyze the prevailing market conditions in the Eurozone money market. The rate provides insights into the liquidity, credit risk, and other market dynamics in the Eurozone.

• Regulatory compliance − Euribor is used by financial institutions to comply with regulatory requirements such as the European Market Infrastructure Regulation (EMIR) and the Markets in Financial Instruments Directive (MiFID II). The rate is used as a standard for determining the price of financial instruments and for reporting to regulatory authorities.

Significance of Euribor

Euribor is significant in the Eurozone financial industry as it is a benchmark for pricing financial products. Euribor is calculated and published daily by EMMI based on contributions from a panel of around 19 banks in the Eurozone.

The rate is subject to supervision and oversight by European authorities to ensure transparency, accuracy, and reliability. Financial institutions widely use the rate to determine the interest rate charged on loans and other financial products.

Investors and fund managers also use Euribor to evaluate the performance of fixed- income securities and financial analysts to monitor market conditions in the Eurozone.

Market Influence on Euribor

Market conditions, economic indicators, and central bank policies influence the Euribor rate. The rate is closely related to the European Central Bank's monetary policy, and ECB policy changes can significantly impact the Euribor rate. The rate is also affected by the level of liquidity in the interbank market and the credit risk of the participating banks.

Manipulations in Euribor

Several instances of manipulation of the Euribor rate by participating banks have occurred in the past. These manipulations have led to fines and legal action against some banks and have raised concerns about the reliability and accuracy of the rate.

The European Union has taken several measures to improve transparency and oversight of the Euribor rate. Establishing the European Money Markets Institute (EMMI) and the European Securities and Markets Authority (ESMA) are examples that oversee the Euribor rate's calculation and publication.

Conclusion

Euribor is a crucial benchmark interest rate used in the Eurozone to price various financial products. It is based on the average interest rates banks offer to lend unsecured funds to each other in the Eurozone interbank market. Euribor plays a significant role in the Eurozone financial industry and profoundly impacts borrowers, lenders, and investors.

FAQs

Q1. What is Euribor?

Ans. Euribor stands for the Euro Interbank Offer Rate. It is the interest rate at which Eurozone banks offer unsecured funds to other banks in the euro wholesale money market.

Q2. What is the purpose of Euribor?

Ans. Euribor is a reference rate for various financial instruments, including mortgages, loans, and derivatives.

Q3. How is Euribor calculated?

Ans. Euribor is calculated as a weighted average of the interest rates that a panel of banks in the euro wholesale money market report as their offered rates for unsecured loans to other banks.