Know more about EURIBOR & mortgages

EURIBORs provide the basis for some of the world’s most liquid and active interest rate markets

January 17, 2013 11:03 IST | India Infoline News Service
The Euro Interbank Offered Rate (EURIBOR) is a daily reference rate based on the averaged interest rates at which Eurozone banks offer to lend unsecured funds to other banks in the euro wholesale money market (or interbank market). EURIBORs are used as a reference rate for euro-denominated forward rate agreements, short term interest rate futures contracts and interest rate swaps. They thus provide the basis for some of the world's most liquid and active interest rate markets. 

  • The EURIBOR is a gauge of the rate of interest charged for unsecured interbank funding in the wholesale Euro money markets, and is compiled daily by the European Banking Federation.
  • EURIBOR is widely used as a variable interest rate in bilateral and syndicated loan agreements denominated in Euros as well as for hedging and speculation on fluctuations in interest rates in the Euro money markets.
  • In theory, as EURIBOR is intended to measure unsecured bank funding costs, use of this rate in wholesale lending provides banks with a measure of the cost of bank funding on which to base the margin applied to borrowers. Many European banks use EURIBOR as the variable rate of interest charged on residential mortgages. In 2012, about 40% of loans to households in the Euro area are based on floating rates and EURIBOR is the most common reference rate used, in particular in Spain.
  • When used in this way, EURIBOR determines cash flows between household borrowers and lenders. Furthermore, many of these residential mortgages and loans are later packaged and used as collateral for asset-backed securities, which are then sold to both institutional and retail investors. These securities also pay a coupon, which may also be based on EURIBOR.
  • The use of a single interest rate Benchmark throughout the product chain has network effects including reducing the risk of mismatch in interest rate cash flows – but exposes retail customers directly to changes in EURIBOR.
Source: International Organization of Securities Commissions

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