Legal Definitions - EURIBOR

EURIBOR stands for the EURO INTERBANK OFFERED RATE.

EURIBOR is a key benchmark interest rate that reflects the average rate at which a select group of major European banks lend unsecured funds to one another in the wholesale money market denominated in euros. Essentially, it represents the cost of borrowing money for banks within the Eurozone. This rate is widely used as a reference point for pricing various financial products, including corporate loans, mortgages, and complex financial derivatives, across Europe and globally.

Here are some examples illustrating how EURIBOR applies:

• Variable-Rate Mortgage: Imagine a family in Spain takes out a variable-rate mortgage to buy their home. The interest rate on their mortgage might be structured as "EURIBOR plus a fixed margin of 1.5%." This means that if the EURIBOR rate increases, their monthly mortgage payments will also rise, and if EURIBOR falls, their payments will decrease. This example shows how EURIBOR directly influences the cost of consumer borrowing for major purchases.

• Corporate Business Loan: A large German manufacturing company secures a multi-million euro loan from a consortium of banks to finance the construction of a new factory. The interest rate for this significant corporate loan is often tied to EURIBOR, perhaps "EURIBOR plus 0.75%," reflecting the company's credit risk. As EURIBOR fluctuates, the interest payments the company owes on its loan will adjust accordingly, impacting its operational costs. This demonstrates EURIBOR's role in large-scale business financing.

• Interest Rate Swap Agreement: A financial institution in France wants to manage its exposure to fluctuating interest rates. It enters into an interest rate swap agreement with another bank, where one party pays a fixed interest rate and receives a floating rate, often based on EURIBOR. For instance, the institution might pay a fixed 2% and receive "3-month EURIBOR." This allows them to hedge against potential adverse movements in market interest rates, illustrating EURIBOR's use in sophisticated financial risk management tools.