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Beyond the loans they grant to individuals and businesses, banks also lend money to each other on a daily basis. These operations take place on the interbank market, the rates of which are published every day. Among them, the Euribor serves as a reference for numerous operations.
Launched on December 30, 1998, just before the introduction of the Euro, the Euribor is a benchmark interest rate. It refers to the interest rates on interbank loans in euros. In short, it is the rate at which banks lend money to each other to finance their needs. These short-term loans are meant to maintain banking liquidity and ensure that surplus funds, instead of remaining idle, are able to generate activity. The Euribor is set daily by the EBF (European Banking Federation) based on interbank rates of 57 European banks. Each bank proposes its interest rate for lending to other banks. The Euribor is then calculated by taking the average of the rates after removing extreme values. This calculated rate is published and used as a reference for many short-term unsecured loans and financial contracts on the interbank market. The Euribor is often broken down into 5 maturities: one week, 3 months, 6 months and 12 months. However, the most scrutinized rate is the 3-month Euribor, i.e. the average rate at which European banks lend money to each other for a period of 3 months.
The Euribor is widely used in several financial sectors. This rate has a strong impact on the daily life of individuals: it influences financing conditions, borrowing or investment decisions of individuals, businesses, and financial institutions. It notably serves as a benchmark for: • adjustable-rate loans: banks use it as a reference to determine the interest rates of variable-rate mortgage loans; • the calculation of the interest rate on the Livret A: the Euribor is one of the elements used to periodically revise the interest rate of the investment, along with the inflation rate and the €STR rate (overnight interbank rate that has replaced the EONIA); • mortgage loans and rate financial products (swaps...). Furthermore, the Euribor is an indicator of the economic and financial health of the eurozone due to its impact on interest rates and its influence on the markets. Its movements also act on the performance of financial products. The Euribor also provides valuable indications on the risk and performance of investments and allows investors to make informed decisions about their placements. Its variations can have rapid consequences on the value of financial products indexed or compared to its rate, particularly bonds, mutual funds (FCP), and derivative contracts. For example, a decrease in interest rates could lead to an increase in the value of bonds.
How is the Euribor set? European rules require banks to hold a certain proportion of their liquidity in the form of reserves, placed directly with the European Central Bank (ECB). This rate of mandatory reserves is legal. It enables authorities to maintain financial stability: the liquidity reserves are intended for refunding banks' customers in the event of a large withdrawal demand. One of the fears regularly invoked during crises is indeed the « bank run", or « bank panic ». This phenomenon was notably observed during the financial crisis of 1929 and is feared in every crisis like recently following the bankruptcy of the Silicon Valley Bank. During a bank run, the economic context sparks a mass panic: individuals and companies rush en masse to banks to retrieve the money they've deposited there. However, the very nature of banks is to invest or lend out the money deposited in their accounts. In the event of a bank run, they cannot accommodate everyone, leading to the bankruptcy of some establishments. It's in order to minimize this risk as much as possible that the ECB imposes a mandatory reserve rate on banks. The rate has an influence on the volume of loans they can grant. The higher it is, the less liquidity the banks will have available to use. Conversely, when this rate is low, they can lend much more. Therefore, this rate is one of the monetary policy tools to act on the economy depending on the context. The compulsory reserve rate is also crucial for interbank loans. When a bank has liquidity, it can lend it to other banks. Conversely, if it needs fresh cash, it has to borrow. Thus, banks lend each other money for very short periods (from one day to one year). When they cannot find enough liquidity from their counterparts, they can request a loan from the ECB. The latter will then provide them with credit at the refinancing rate which it regularly determines, depending on the monetary policy deployed. The base rate is also used as a reference in interbank transactions, and therefore serves as a basis for other interest rates, particularly for the Euribor.
The money market rate (benchmark rate) and the interbank market rate (Euribor) therefore have a direct influence on the interest rates offered by banks to economic agents (individuals, businesses, etc.) The higher the rate, the more difficult access to credit becomes, potentially slowing economic activity. Conversely, the lower the rates, the more the economy is stimulated. When benchmark rates decrease, banks can reduce interest rates on loans to households and organizations, encouraging borrowing, stimulating consumption, and promoting investment. To stabilize the economy and keep inflation around 2% (its monetary policy goal), the European Central Bank adjusts its benchmark rates. As a result, the interbank rate and credit rates follow suit. Between 2016 and 2022, the ECB's main refinancing rate was 0% and the 3-month Euribor was negative. The rates of loans to individuals and businesses were at their lowest point. The aim at the time was to stimulate the economy in response to the crises. In 2023, the ECB rate reached 3.5% and the interbank rate is almost at the same level. Borrowing is much more expensive, slowing activity and investment. The objective of these increases is to keep inflation in check, which reached 8.4% in the euro zone in 2022.
There are other important rates that perform specific roles in finance. • OAT: French Treasury Bonds are debt securities issued by the French state to finance its public debt. They are considered an indicator of the solvency of the French state; their interest rate depends on supply and demand in the bond market. • €STR: the €uro Short-Term Rate (or Ester) is the interbank reference rate in the euro zone for day-to-day loans between banks. It is used to calculate interest on different financial products and to assess the liquidity of the interbank market. It has been in force since October 2, 2019, and has gradually replaced EONIA (Euro Overnight Index Average). These rates are closely monitored by market players. They provide information on the state's solvency, the liquidity of the interbank market, and short-term financing conditions.
