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3 questions to help you understand Euribor
Euribor is short for Euro Interbank Offered rate. Euribor rates are based on the average interest rates at which banks borrow funds in euros from one another. When we mention Euribor it often refers to THE Euribor, like there is only one Euribor interest rate. This is not correct, since there are in fact 8 different Euribor rates, all with different maturities: 1 week, 2 weeks, 1 month, 2 months, 3 months, 6 months, 9 months and 12 months.
What is Euribor used for?
Euribor was first published in 1999, the year that the euro as a currency was introduced. Euribor is used in the euro wholesale money market (or interbank market), an over-the-counter market where only banks, the European Central Bank, the central national banks and some financing firms and credit institutions can operate.
Every day, in this market, banks with liquidity surplus lend to banks with demand for liquidity. An interest rate is charged for money borrowed, depending on the term of the loan (from 1 week to 12 months).
How is Euribor calculated?
A panel of 26 banks with a first class credit standing and an excellent reputation provides daily quotes of the 8 Euribor rates to the European Money Markets Institute (EMMI).
These quotes are based on supply and demand of money in the Eurozone but also on some external factors like economic growth and inflation. Then the EMMI calculates the average rates (which is called fixing in banking jargon).
Why is Euribor so important?
Euribor rates are important for professionals as well as for individuals because these rates affect our daily lives directly. banks use them to calculate the price or interest rate of all kinds of financial products like savings accounts, short-term deposits and variable rate loans. These loans are generally calculated on the basis of the 3 month and 12 month Euribor rates.
In other words, if the interest rate of your savings account and your variable rate loan are currently low, don’t think too much: Euribor rates are low too.
12/2021
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