Meaning of EURIBOR
According to abbreviationfinder, the acronym EURIBOR stands for Euro Interbank Offered Rate. This is an average interest rate calculated every working day at which European banks lend each other time deposits. This reference interest rate is calculated exclusively for the euro.
- The EURIBOR is an important reference rate for loans.
- The interest rate is calculated for loans with different terms.
- The EURIBOR also has an indirect influence on savings interest.
The EURIBOR is an important reference interest rate for loans that are issued in the euro. But it is not the only reference interest rate influencing the financial market in Europe. Also important are:
- EONIA(Euro Over Night Index Average); it sets the average interest rate overnight
- LIBOR (London Interbank Offered Rate); it is calculated for different currencies
- different national reference rates; the German FIBOR (Frankfurt Interbank Offered Rate) is an example of this
How is the EURIBOR determined?
The European banks designated as panel banks report their offer rates to a special financial service provider every working day by 10:45 a.m. Central European time. This calculates an interest rate that is accurate to three decimal places from all the rates up to exactly 11 a.m. It will then be announced to all participating banks and the financial press.
The highest and lowest 15 percent of the reported interest rates are not included in the calculation of the reference interest rate in order not to falsify the average value. It is also common for the banks to add a surcharge of 0.5 to 2 percentage points to the EURIBOR interest rate when actually lending money.
Usually there is talk of one interest rate, with EURIBOR there are several. That’s because the reference rate for Loans with different maturities must be calculated. The time spans of these systems can be a few weeks or a few months.
How high or low the EURIBOR interest rate is is mainly determined by how high or low the demand for credit is. But there are also a number of other influences that determine the EURIBOR. This includes:
- Development of economic growth
- Development of inflation
- Creditworthiness of banks
- Banks’ trust in one another
- Consumer confidence in banks
What are panel banks?
The banks that are allowed to submit their interest rate offers from which the EURIBOR reference rate is calculated are referred to as panel banks. An advisory committee of the European Bankers Association determines which financial institution is declared a panel bank. In any case, a panel bank must have a first class credit rating and it must be one of the most important banks in the European foreign exchange market.
Why was the EURIBOR introduced?
The introduction of a common European currency also created a common financial market where banks can borrow money without converting currencies. For this reason, the EURIBOR was introduced on January 1, 1999. The initiators were both the European Banking Association and the internationally operating Financial Market Association. The previously used reference interest rate AIBOR (Amsterdam Interbank Offered Rate) was replaced by the EURIBOR and the financial market received an alternative to the LIBOR.
Why is it important to know the current EURIBOR rate?
The interest rate at which banks lend money to one another also influences the conditions at which banks offer their customers financial products. This is how the EURIBOR influences mortgages, is a reference value for short-term loans, and anyone who knows it also knows, for example, what the maximum interest rate is for Fixed deposit is real.
The effect of the EURIBOR interest rate on transactions between banks and their customers is particularly understandable with the example of savings investments: banks either borrow money from other banks or from their customers by offering them various savings options, among other things. In both cases, the banks have to repay the money with interest. Often the interest that banks pay to savers is lower than the EURIBOR interest payments they have to make to the other banks. If a bank lends money, some of which it has borrowed from savers, to another bank, then the difference between the lower savings interest and the higher EURIBOR interest is the profit that the bank makes. This is why investors often get less savings interest when the EURIBOR interest rate falls. Usually this happens with a little delay.