What is Euribor?
Euribor (Euro Interbank Offered Rate) is a reference interest rate used in the euro zone. It represents the average interest rate at which certain major European banks lend money to each other.
The Euribor index is used to define the rate at which banks grant loans to companies or individuals, over an equivalent term. It is commonly used in the indexation formula for variable-rate loans and revolving credit, as well as in many financial products (savings accounts, mortgages, etc.).
Euribor was launched on December 15, 1997 by the European Banking Federation (EBF) and the Association Cambiste Internationale (ACI), with the aim of becoming the "reference rate for the new euro money market".
How is it calculated?
Euribor is calculated daily by aggregating the interest rates offered by a panel of major European banks. Here are the general steps in the Euribor calculation process:
Selection of contributing banks: A group of contributing banks is selected for each maturity (e.g. 1 month, 3 months, 6 months, 1 year). These banks are major financial institutions that actively participate in the eurozone interbank market.
Sending rate proposals : Each business day, the contributing banks send their rate proposals. They indicate at what rate they would be willing to lend money to other banks in the eurozone for the specified maturity.
Proposal processing : Once the proposals have been received, the highest and lowest rates are discarded. This is to avoid extremes that could skew the rate.
Average calculation : The average of the remaining rates is then calculated. This average becomes the Euribor rate for that specific maturity.
Publication: The calculated Euribor rate is published daily by the Euro Banking Association (EBA) and the Federation of European Securities Exchanges (FESE). It is generally made public around 11:00 am (Brussels time).
Use as a benchmark: Once published, Euribor is used as a benchmark for a variety of financial products, including mortgages, corporate loans, financial derivatives contracts and more.
Why is the 3-month Euribor rate important?
There's a lot of talk about the 3-month Euriborrate - which, as its name suggests, is the rate set for euro interbank loans with a three-month maturity. Why do companies and individuals take such an interest in this rate?
On the one hand, the3-month Euribor is generally used as a reference for variable-rate loans. In this case, the rate granted for the loan is equal to the 3-month Euribor rate plus the margin of the financial institution granting the loan. The 3-month Euribor is also the basis for the second largest interest-rate market in the euro zone (behind the government bond market): the swap market (contracts for the exchange of financial flows between banks and/or financial institutions).
Don't confuse Euribor and LIBOR
While Euribor represents interbank interest rates in the euro zone, LIBOR is the interbank interest rate on the London financial market.
LIBOR (London Interbank Offered Rate) is the British money market rate.
This rate is equal to the arithmetic mean of the rates offered on the banking market for a given maturity (between 1 and 12 months) and in a given currency (euro, pound, dollar, etc.).
The subject of a gigantic financial scandal, Libor will disappear in 2021, warned the Financial Conduct Authority (FCA), the British authority overseeing island benchmarks.
