Meaning of EONIA
The EONIA (Euro Overnight Index Average based on abbreviationfinder) is a reference rate for unsecured overnight money on the Euro interbank market. The European Central Bank (ECB) calculates it for each business day from an average interest rate. This is based on the actual turnover of a selection of significant European banks with overnight money.
- The banks report the corresponding business volume to the ECB on a daily basis. This weights the interest rates and uses them to calculate the EONIA. The interest rate is therefore the rate at which banks in the euro area borrow money from one another.
- The EONIA is particularly important for interbank transactions; it serves as the basis for euro interest rate swaps as well as EONIA certificates and index funds.
- However, it also influences short-term investments by private individuals and variable-interest loans.
How is the EONIA calculated?
The ECB calculates the EONIA as a neutral institution as soon as the information from the panel banks is available. For this purpose, it uses the interest rates of the euro overnight transactions concluded by the banks on the interbank market. In advance, the panel banks calculate the total volume of their respective daily turnover with unsecured overnight deposits. From this they calculate an average interest rate weighted according to the volume of the individual transactions, which they send to the ECB. This ultimately determines the EONIA daily value. To do this, it eliminates the 15 highest and 15 lowest overnight money values reported by the banks. From the remaining values, the ECB forms an average value, the current EONIA.
Each of the panel banks transmits their data to the ECB daily by 6:30 p.m. at the latest. At around 7 p.m., this calculates the current EONIA daily value to three decimal places and forwards it to the Reuters news agency. The value will be published on the following bank business day and will serve as the reference interest rate for that day.
What is the EONIA used for in the interbank market?
The EONIA is most important for interbank trading – transactions between different credit institutions with financial instruments such as money, securities, derivatives or foreign exchange. The EONIA is used by European banks that lend each other money in euros as the reference interest rate for overnight money transactions with a term of one day. Loans with longer terms of up to one year have the EURIBOR (European Interbank Offered Rate) as their reference interest rate.
How important is the EONIA for investors?
The EONIA also serves as the reference interest rate for some financial investments. These include, for example:
- The daily bond of the Federal Republic of Germany, which has been available from the German Finance Agency since 2008.
- Money market funds, index funds and interest rate swaps use the EONIA as a basis.
- The average interest rate influences most short-term investments – private investors can use the EONIA to determine the development of their overnight interest
- EONIA ETFs (Exchange Traded Funds), another form of investment, are almost exactly modeled on the EONIA . Investments are made through benchmarks such as the EONIA index.
How important is the EONIA for borrowers?
Floating rate loans can use the EONIA as a reference rate. There is also an interest surcharge, the amount of which depends on the respective bank and the current economic situation. The EONIA forms the basis and is the cause of any interest rate fluctuations due to its daily recalculation.
What conditions must the panel banks meet?
The panel banks are selected on the basis of various criteria that are set out in the EONIA Code of Conduct. For example, the banks have to participate in euro interbank transactions and require first-class credit standing. There is no set number of banks from whose data the EONIA value has to be calculated. Each panel bank should only be representative enough of the European interbank market.
How has the EONIA developed in the past?
The EONIA started in January 1999 at 3.20 percent. Since then, there have been two significant highs in the development of the average interest rate: in 2001 it reached its high of 5.75 percent, in 2008 it rose again to 4.60 percent after a continuous decline. By the end of 2009, the price fell sharply. In August 2014 there was a negative EONIA value for the first time after lowering the key rate several times. In the years that followed, it remained below zero as the ECB embarked on an expansionary monetary policy as a result of the global financial crisis in order to keep the euro stable.