What is the Euro Interbank Offered Rate (Euribor)?
The Euro Interbank Offered Rate (Euribor) refers to the interest rate at which euro-denominated wholesale funds are borrowed and loaned by banks in the European Union (EU) and the European Free Trade Association (EFTA) countries to each other in the unsecured money market.
- The Euro Interbank Offered Rate (Euribor) refers to the interest rate at which euro-denominated wholesale funds are borrowed and loaned by banks in the European Union (EU)
- Euribor is determined daily using the average of the interbank rates provided by an 18-bank panel at 11:00 a.m. CET.
- It is an important benchmark rate used to price various derivative instruments and financial products in the eurozone.
Understanding the Euribor
Euribor is a reference rate published daily by the European Money Markets Institute (EMMI). It is based on the average interest rates offered by banks to lend unsecured funds to other banks in the eurozone in the wholesale money market or the interbank market. Euribor is an important interest rate benchmark authorized under the EU Benchmarks Regulation (BMR).
Euribor is published daily at 11:00 a.m. CET (Central European Time) for each day the Trans-European Automated Real-Time Gross Settlement Express Transfer (TARGET) system is open. Euribor rates are spot rates, i.e., the rates are applicable starting two days after the initial measurement day.
The interest rate is calculated based on a 360-day convention, i.e., the interest is calculated using a day count over a 360-day year. While calculating the Euribor rates, the highest and lowest 15% of all the quotes collected are eliminated. After doing so, the remaining rates are averaged and rounded to three decimal places.
History of Euribor
Euribor was first published on January 1, 1999, along with the introduction of the euro. From its inception until November 2013, the Euribor was a set of money market rates corresponding to the maturities of 3 weeks, 4, 5, 7, 8, 10, and 11 months. In November 2013, the overall number of maturities was reduced from fifteen to eight, and rates were published for money market rates corresponding to the maturities of 1 and 2 weeks and 1, 2, 3, 6, 9, and 12 months.
Before Euribor was established, each country in the eurozone followed its respective interbank rate. Since its establishment, domestic rates, such as the Paris’ PIBOR, Frankfurt’s FIBOR, and Helsinki’s Helibor, etc. are now integrated into the Euribor.
Contributors to the Euribor
Currently, Euribor is derived using the average interbank rate between a panel of 18 banks in the eurozone:
- Banks from EU countries participating in the euro
- Banks from EU countries not participating in the euro
- Large international banks from non-EU countries but with important eurozone operations
The 18-bank panel of contributing banks is given below. The financial institutions handle the largest volume of the eurozone money market transactions.
- Belfius (Belgium)
- BNP Paribas (France)
- HSBC France
- Natixis (France)
- Crédit Agricole (France)
- Société Générale (France)
- Deutsche Bank (Germany)
- DZ Bank (Germany)
- Intesa Sanpaolo (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 (United Kingdom)
Uses and Importance of Euribor
Euribor rates are used to price various euro-denominated derivative instruments, such as forward rate agreements, short-term interest rate futures contracts, interest rate swaps, and various financial products, such as mortgages, savings accounts, car loans, etc. Euribor serves the same purpose in the eurozone as LIBOR (London Interbank Offered Rate) does in the United Kingdom and the United States of America.
The Euribor is of systemic importance for financial stability. The EMMI estimates that the benchmark supports more than 180,000 billion euros worth of contracts.
From its inception until March 2009, the 1-year Euribor stayed between 2%-6%. It first peaked at 5.3% in August 2000 during the dot-com bubble, followed by an all-time high of 5.5% in September 2008, right before the financial crisis. Since then, the Euribor rates have been on a decline, with an occasional rise in the rates between 2010 and 2011.
In May 2015, the 1-month Euribor rate dropped below 0% for the first time, followed by negative rates for other corresponding maturities. Since May 2015 until today, the Euribor rates for various maturities have remained negative.
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