What is Euribor?

Definition and Basics

Euribor (Euro Interbank Offered Rate) is a key benchmark interest rate that represents the average rate at which a selection of European banks lend unsecured funds to one another in the euro wholesale money market. In simpler terms, it's the rate at which banks in the Eurozone lend money to each other.

Euribor serves as a reference rate for a vast array of financial products, including:

• Variable-rate mortgages
• Savings accounts and deposits
• Corporate loans
• Interest rate swaps and derivatives
• Government and corporate bonds

The importance of Euribor extends far beyond banking circles. It directly affects the finances of millions of households and businesses across Europe, particularly those with variable-rate loans tied to this benchmark.

History and Development

Euribor was established on January 1, 1999, coinciding with the introduction of the euro as an accounting currency. The creation of Euribor was a direct result of the need for a standardized interest rate benchmark for the newly formed Eurozone.

Prior to Euribor, each European country had its own interbank rate, such as PIBOR in France, FIBOR in Germany, and MIBOR in Spain. The introduction of the euro necessitated a unified benchmark that would reflect lending conditions across the entire currency union.

The European Banking Federation (EBF) and the Financial Markets Association (ACI) jointly created Euribor, establishing a panel of contributor banks that would submit daily estimates of interbank lending rates.

Following the 2008 global financial crisis and subsequent rate-fixing scandals involving LIBOR (the London Interbank Offered Rate), Euribor underwent significant reforms to enhance its transparency, reliability, and resilience to manipulation. In 2019, Euribor transitioned to a new hybrid methodology that prioritizes actual transactions over expert judgment whenever possible.

Today, Euribor is administered by the European Money Markets Institute (EMMI), which ensures the benchmark's compliance with the EU Benchmarks Regulation (BMR).

How Euribor is Calculated

Euribor is calculated using a hybrid methodology that combines:

1. Actual transaction data: Whenever sufficient eligible transactions are available, these form the basis of the calculation.
2. Transaction-derived data: When transaction data is insufficient, the calculation incorporates data from related markets or from other timeframes.
3. Expert judgment: As a last resort, when neither of the above sources provides sufficient data, panel banks may use their expert judgment to provide submissions.

Each business day, a panel of 18 contributor banks submits their data to EMMI by 10:45 CET. These banks are selected based on their activity in the euro money markets and represent a diverse geographic spread across the Eurozone.

After receiving all submissions, EMMI applies a calculation methodology that:

• Eliminates the highest and lowest 15% of submissions (trimmed mean)
• Calculates the average of the remaining submissions
• Rounds the result to three decimal places

The final Euribor rates are published daily at 11:00 CET for all available maturities.

Euribor Maturities

Euribor is calculated for five different maturities, each representing a different lending period:

• 1-week Euribor: Represents the rate for very short-term interbank loans. This rate is highly sensitive to immediate liquidity conditions and central bank operations.
• 1-month Euribor: Reflects short-term funding costs and is influenced by near-term monetary policy expectations.
• 3-month Euribor: One of the most widely used benchmarks, particularly for floating-rate notes and interest rate derivatives.
• 6-month Euribor: Commonly used as a reference rate for variable-rate mortgages in many European countries.
• 12-month Euribor: The longest maturity, often used for annual reset mortgages and reflecting longer-term interest rate expectations.

Historically, Euribor was also calculated for 2-week, 2-month, and 9-month maturities, but these were discontinued in December 2018 as part of the benchmark reform process.

The different maturities typically form a yield curve, with longer maturities generally (but not always) having higher rates than shorter ones, reflecting the increased risk associated with longer lending periods.

Impact on Mortgages and Loans

For millions of Europeans, Euribor's most direct impact is on mortgage payments. Variable or adjustable-rate mortgages in the Eurozone are typically priced using a formula:

For example, if you have a mortgage based on 12-month Euribor + 1%, and the 12-month Euribor rate is 3.5%, your interest rate would be 4.5%. This rate would typically be reset annually, on the anniversary of your mortgage.

The choice of Euribor maturity varies by country and bank:

• In Spain, 12-month Euribor is the most common reference for mortgages
• In Finland, many mortgages reference 3-month or 6-month Euribor
• In France, both 3-month and 12-month Euribor are commonly used

When Euribor rises, borrowers with variable-rate loans face higher monthly payments. Conversely, when Euribor falls, these borrowers benefit from lower payments. This direct link between Euribor and household finances makes it a closely watched indicator for millions of people.

Beyond mortgages, Euribor also affects:

• Consumer loans and credit lines
• Business loans and corporate financing
• Interest rates on savings products
• Pricing of financial derivatives

Relationship with ECB Policy

Euribor rates are strongly influenced by the European Central Bank's (ECB) monetary policy decisions, particularly its key interest rates:

• Main refinancing operations rate (MRO): The interest rate banks pay when they borrow money from the ECB for one week.
• Deposit facility rate: The rate banks receive for depositing money with the ECB overnight.
• Marginal lending facility rate: The rate banks pay to borrow money from the ECB overnight.

When the ECB raises these rates to combat inflation, Euribor rates typically follow suit. Conversely, when the ECB cuts rates to stimulate economic growth, Euribor tends to decrease.

However, Euribor is not directly set by the ECB. It's a market-determined rate that reflects not only current ECB policy but also expectations about future policy changes, interbank lending conditions, and broader economic factors.

The relationship between ECB rates and Euribor can be visualized as a transmission mechanism:

1. ECB sets its key policy rates
2. These rates influence the cost of short-term liquidity for banks
3. Banks adjust their interbank lending rates accordingly
4. These adjustments are reflected in Euribor
5. Euribor changes then pass through to retail and corporate lending rates

This transmission mechanism is a crucial part of how monetary policy affects the real economy. By influencing Euribor, the ECB can indirectly impact borrowing costs for households and businesses across the Eurozone.

Historical Trends and Significant Events

Since its inception in 1999, Euribor has experienced significant fluctuations, reflecting changing economic conditions and monetary policy in the Eurozone:

• 1999-2000: Euribor started around 3% and rose to nearly 5% as the ECB tightened policy.
• 2001-2003: Rates declined following the dot-com bubble burst and global economic slowdown.
• 2005-2008: Rates climbed again, peaking above 5% in 2008 before the global financial crisis.
• 2008-2009: Dramatic decline as the ECB cut rates aggressively in response to the financial crisis.
• 2011: Brief increase as the ECB raised rates prematurely during the European debt crisis.
• 2012-2014: Steady decline as the ECB cut rates to combat deflationary pressures.
• 2015-2021: Unprecedented negative territory, with rates falling below zero as the ECB implemented negative deposit rates and quantitative easing.
• 2022-present: Sharp rise back into positive territory as the ECB raises rates to combat inflation.

The period of negative Euribor rates (2015-2021) was particularly remarkable, as it challenged conventional economic thinking. During this time, some variable-rate mortgage holders in Europe effectively had negative spreads, with their bank margin partially offset by the negative Euribor.

The 2022-2023 rate hiking cycle has been one of the most aggressive in ECB history, with Euribor rising rapidly from negative territory to multi-year highs in response to persistent inflation pressures.

Comparison with Other Benchmarks

Euribor is one of several important interest rate benchmarks in the global financial system. Understanding how it compares to other benchmarks provides valuable context:

Euribor vs. €STR (Euro Short-Term Rate)

• €STR is a newer benchmark introduced by the ECB in 2019
• While Euribor represents unsecured interbank lending rates, €STR represents the wholesale euro unsecured overnight borrowing costs of euro area banks
• €STR is based entirely on actual transactions, not expert judgment
• €STR is published by the ECB, while Euribor is published by EMMI
• €STR typically runs lower than Euribor of comparable maturity

Euribor vs. EONIA (Euro Overnight Index Average)

• EONIA was discontinued on January 3, 2022, replaced by €STR
• EONIA represented overnight unsecured lending in the interbank market
• During its final years, EONIA was calculated as €STR plus a fixed spread of 8.5 basis points

Euribor vs. LIBOR (London Interbank Offered Rate)

• LIBOR was discontinued for most currencies by the end of 2021, with USD LIBOR continuing until June 2023
• LIBOR covered multiple currencies including USD, GBP, EUR, CHF, and JPY
• Both were based on panel bank submissions, though Euribor has undergone more successful reforms
• LIBOR has been replaced by various risk-free rates like SOFR (for USD) and SONIA (for GBP)

Unlike LIBOR, Euribor successfully underwent reforms that allowed it to continue as a compliant benchmark under the EU Benchmarks Regulation. This continuity has provided stability for the vast number of financial contracts that reference Euribor.

The Future of Euribor

While LIBOR has been discontinued, Euribor is expected to continue as a key benchmark for the foreseeable future, thanks to successful reforms that have enhanced its reliability and compliance with regulations.

However, the benchmark landscape continues to evolve, with several developments worth monitoring:

• Increased use of risk-free rates: There's a gradual shift toward using risk-free rates like €STR for certain financial products, particularly derivatives.
• Ongoing regulatory scrutiny: Benchmark rates remain under close regulatory supervision to ensure their integrity and representativeness.
• Potential methodology enhancements: Further refinements to the Euribor calculation methodology may be implemented to increase its robustness.
• Market structure changes: Evolving interbank lending practices and money market structures may influence how Euribor is calculated and used.

For borrowers with Euribor-linked loans, it's important to stay informed about these developments while recognizing that Euribor is likely to remain a stable and important benchmark for years to come.