Euribor vs. Libor, ECB rates and Eonia

Posted on: 19th January 2015 in Finance

For people who don’t work in banks, Euribor can easily be confused with some other financial terms and rates. This article looks at the most common ones. First let’s define Euribor. Short for Euro Interbank Offered Rate, it is the average interest rate at which European banks are willing to lend money to each other (hence “interbank”). Actually, it is not a single rate, but a set of several (currently eight) interest rates for different maturities ranging from 1 week to 1 year.

Euribor vs. Libor

Libor is probably more familiar than Euribor to most people. The reason is that it has been around much longer. While Euribor only started when the European Monetary Union was established in 1999, the history of Libor goes back to mid 1980’s. Libor (London Interbank Offered Rate) is generally the same thing as Euribor – a set of reference interest rates based on the interbank lending market – but with two very important differences. Firstly, there is a difference in geography, or in composition of the panel of banks which report their interest rate quotes for the reference rate calculation. For Euribor they are banks trading in the Eurozone, while for Libor they are banks trading in London. Of course, given the globalization and concentration of the financial industry, many large banks have offices and trading desks in multiple countries and they are represented in both Libor and Euribor panels (for example Deutsche Bank, Societe Generale, Barclays or Citibank, to name just a few). Secondly, while Euribor only applies to Euro-denominated lending, there are different Libor rates for different (currently ten) currencies, including British pound (GBP), US dollar (USD), Japanese yen (JPY) and even Euro itself. It is therefore common to also specify the currency when talking about Libor rates – for example, you say GBP Libor or USD Libor.

Euribor vs. Euro Libor

EUR Libor rates (Libor rates for the Euro currency) are not exactly the same thing as Euribor, although their values are usually very similar. The first of the above-mentioned differences (composition of the panel of banks) still holds. EUR Libor is based on rates reported by London banks, while Euribor is based on rates reported by banks trading in Frankfurt, Paris, Milan and other places in the Eurozone.

Euribor vs. ECB interest rates

Euribor is also often confused with the interest rates decided and published by the European Central Bank (ECB). There is a strong economic relationship between them, as the very essence of ECB’s monetary policy is to influence liquidity on the interbank market (and therefore the Euribor rates) through its various operations and tools (one of them being the ECB interest rates). However, the ECB does not have any direct power over Euribor. While ECB interest rates apply to borrowing and lending between individual commercial banks and the ECB, Euribor rates apply to transactions among commercial banks themselves and are determined by supply and demand, without any direct involvement of the ECB. Like Euribor, Eonia (Euro Overnight Index Average) is also an interbank reference interest rate and also applies to the Eurozone money market and Euro-denominated transactions. It is calculated in a way very similar to Euribor, using quotes by the same panel of banks. The only difference is in the tenor (maturity or time horizon). While Euribor is a set of several rates for maturities ranging from 1 week to 1 year, Eonia is only a single rate which applies to overnight transactions (lending money only until the next day). With some simplification you can say that Eonia is like 1-day Euribor.