Eonia stands for “Euro OverNight Index Average.” It was a reference rate used in the European Union’s (EU) financial markets to represent the average interest rate at which Eurozone banks lend unsecured funds to each other in the interbank overnight market.
Eonia was an important benchmark rate for the Eurozone’s money market, and it played a crucial role in various financial transactions, including derivatives, securities pricing, and interest rate swaps. It provided an indication of short-term interest rates and served as a reference point for calculating the cost of borrowing or lending money in the Eurozone’s money markets.
However, Eonia underwent changes due to regulatory reforms aimed at improving the accuracy and reliability of benchmark rates. In particular, the EU introduced the “Euro Short-Term Rate” (€STR) as a replacement for Eonia. The €STR is based on actual transactions and is more closely aligned with the recommendations of international benchmark standards.
As a result, Eonia was permanently discontinued in January 2020, and the €STR became the primary reference rate for the Eurozone’s money markets. The shift from Eonia to €STR was part of the global effort to enhance the transparency, integrity, and robustness of benchmark rates in financial markets.
EURIBOR, which stands for “Euro Interbank Offered Rate,” is a reference rate that represents the average interest rate at which Eurozone banks offer to lend funds to each other on an unsecured basis in the interbank market. It is one of the key benchmark rates for the Eurozone’s financial markets and serves as a fundamental reference point for various financial products, including loans, mortgages, and derivatives.
EURIBOR is calculated based on the submissions of a panel of major banks in the Eurozone. These banks provide their estimates of the interest rates at which they believe they could borrow funds in the interbank market. The highest and lowest submissions are excluded, and the remaining rates are averaged to determine the daily EURIBOR rate for different maturities (such as overnight, one week, one month, three months, six months, and twelve months).
Characteristics of EURIBOR:
- Maturities: EURIBOR is available for various maturities, ranging from overnight to one year, allowing market participants to choose the appropriate rate for their specific needs.
- Benchmark: EURIBOR serves as a widely used benchmark rate for a range of financial transactions, such as setting interest rates on loans and mortgages and pricing interest rate derivatives.
- Panel Banks: A panel of major banks contributes their estimated borrowing rates, and the rates are calculated using a specific methodology.
- Calculation: EURIBOR rates are calculated based on the trimmed arithmetic mean of the submitted rates, excluding the highest and lowest rates.
- Market Impact: Changes in EURIBOR rates can influence borrowing costs for consumers and businesses, impacting economic activity.
- Regulation: Like other benchmark rates, EURIBOR has undergone regulatory reforms to enhance its accuracy and transparency in response to market manipulation concerns.
- Evolution: As part of regulatory reforms, EURIBOR has undergone changes to improve its reliability and alignment with international benchmark standards.
Advantages of EURIBOR:
- Widely Accepted Benchmark: EURIBOR is widely recognized and accepted as a benchmark rate in the Eurozone’s financial markets, making it a standard reference point for various financial products.
- Market Consensus: It reflects the borrowing costs estimated by a panel of major banks, providing a consensus view of prevailing interbank lending rates.
- Various Maturities: EURIBOR is available for different maturities, allowing market participants to choose the rate that aligns with their specific borrowing or investment needs.
- Pricing Tool: It serves as a vital tool for pricing a wide range of financial products, including loans, mortgages, derivatives, and structured products.
- Transparency: The calculation methodology is relatively transparent, and the rates are publicly available, contributing to the overall transparency of financial markets.
- Market Influence: Changes in EURIBOR rates can influence interest rates throughout the economy, impacting borrowing and spending decisions.
Disadvantages of EURIBOR:
- Dependence on Panel Banks: The accuracy and reliability of EURIBOR depend on the honest and accurate submissions of panel banks. Concerns about manipulation have led to regulatory reforms.
- Potential Manipulation: Like other benchmark rates, EURIBOR has faced allegations of rate manipulation by some panel banks, which undermines its credibility.
- Market Illiquidity: During times of financial stress, the interbank lending market can experience liquidity issues, potentially affecting the accuracy of EURIBOR rates.
- Static Rate: EURIBOR is a static rate based on submissions and does not necessarily reflect actual transaction rates, which can vary based on market conditions.
- Benchmark Transition: Regulatory reforms have led to changes in benchmark rates, such as the transition from EURIBOR to risk-free rates like €STR, potentially causing disruption in financial markets.
- Limited Market Participants: EURIBOR submissions come from a panel of banks, and its accuracy can be influenced by the participation of a limited number of banks.
- Complexity: The calculation methodology, panel banks, and different maturities can make EURIBOR complex to understand for non-experts.
Important Differences between Eonia and Euribor
Basis of Comparison
|Full Form||Euro Overnight Index Average||Euro Interbank Offered Rate|
|Calculation Method||Volume-weighted average rate||Offered rate among banks|
|Time Horizon||Overnight rate||Short- to medium-term rates|
|Reference Rate||Reflects actual overnight transactions||Reflects interbank borrowing costs|
|Maturity||Single-day maturity||Various maturities (e.g., 1 week, 1 month)|
|Usage||Used for overnight loans, derivatives||Used for short-term loans, contracts|
|Interest Calculation||Simple interest||Compounded interest|
|Risk Profile||Minimal credit risk||Reflects credit risk among banks|
|Impact on Markets||Affects very short-term rates||Affects short- and medium-term rates|
|Role in Financial System||Provides overnight benchmark||Provides key short-term rate|
|European Central Bank Role||Influenced by ECB policy||Indirectly influenced by ECB policy|
|Regulatory Oversight||Regulated by ESMA||Regulated by ESMA|
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