The Euribor is the interest rate at which banks in the euro area lend money to each other. The name comes from the European InterBank Offered Rate, or in Spanish, "European type of interbank offer."
If a person or company goes to the bank to borrow, from whom does the bank borrow? very easy, to other banks. These types of transactions are called interbank transactions (between banks). In addition, in the same way that when we ask for a loan they charge us an interest, they also ask banks (when they ask other banks) for interest. That interest is called Euribor.
It is not only an interest rate but it is also an index that is calculated using as a reference the interest rates of the transactions between the main European banks through interbank deposits. Banks use different interest rates depending on the term for which money is lent (see interest rate term structure -ETTI-), therefore we can speak of Euribor at one week, one month or one year.
It largely depends on the interest rate set by the European Central Bank (ECB), since this is the interest rate at which the ECB lends to banks through auctions.
How the Euribor is calculated
It is impossible to calculate the Euribor by our means. To calculate it we should have all the data of the interbank operations that are crossed in the reference period. For example, to calculate the 3-month Euribor, we would need all interbank transactions that have this term as a reference. Now, that we cannot calculate it, it does not mean that we do not know how it is calculated. That is, if we had the data we could calculate the Euribor. The methodology is described by the European Monetary Markets Institute (EMMI). According to their reports, the Euribor is calculated as follows:
- All interbank transactions are crossed. The respective transactions are taken into account at each maturity. For example, to calculate the 3-month Euribor, all transactions with a maturity of 3 months are taken into account.
- 15% of operations with higher interest rates and 15% of transactions with lower interest rates are eliminated.
- With the remaining data, an average is made of the interest rate at which the different amounts have been exchanged at said maturity.
Carrying out the three previous steps, we could calculate the Euribor.
Euribor relationship with mortgages
When we hear about the Euribor, we always think about what we are going to pay in interest on the mortgage that we have been granted. To begin with, when banks calculate the interest on a mortgage, they can choose to use an interest rate:
- Fixed: It is maintained throughout the life of the mortgage.
- Variable: Its value is reviewed periodically, in order to adapt its value to the current state of the economy. Generally, an economic index such as the Euribor or the Libor is used.
When banks in Spain decide to grant a mortgage loan, they usually use the one-year Euribor as a reference, and they usually add a differential to calculate the interest they will charge on it (for example, 50 differential points on the Euribor, that is, that the interest will be the Euribor interest + 0.5%).
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