Legal Definitions - Euro Interbank Offered Rate

The Euro Interbank Offered Rate, commonly known as Euribor, is a crucial benchmark interest rate that reflects the average rate at which leading European banks are willing to lend unsecured, short-term funds in euros to one another. It is calculated daily based on interest rate submissions from a panel of major banks across the Eurozone, serving as a key indicator for the cost of borrowing in the European financial market.

Here are some examples illustrating how Euribor applies in different contexts:

• Variable-Rate Mortgages: Imagine a homeowner in France who has a variable-rate mortgage. The interest rate on their mortgage is often set as a percentage above Euribor (e.g., Euribor + 1.5%). If the Euribor rate rises, the interest portion of their monthly mortgage payment will increase, making their loan more expensive. Conversely, if Euribor falls, their payments could decrease.

  This example demonstrates how Euribor directly impacts the cost of consumer loans, such as mortgages, for individuals across Europe, as banks tie their lending rates to this benchmark.

• Corporate Lending: A large Spanish telecommunications company needs a short-term loan of several million euros to finance a new infrastructure project. The bank offers them a loan with an interest rate tied to Euribor, perhaps Euribor plus a specific margin reflecting the company's creditworthiness. The company's borrowing costs will fluctuate with Euribor over the life of the loan.

  Here, Euribor acts as the foundational rate for commercial loans to businesses, influencing their financing costs and, consequently, their investment decisions and profitability.

• Financial Derivatives: An investment fund managing a portfolio of euro-denominated assets wants to hedge against potential increases in interest rates. They might enter into an interest rate swap agreement where they pay a fixed rate and receive a floating rate tied to Euribor. If Euribor rises, the fund benefits from the higher floating rate, offsetting potential losses elsewhere in their portfolio.

  This illustrates Euribor's role as a reference rate for complex financial instruments and derivatives, allowing institutions to manage risk, speculate on future interest rate movements, or create structured financial products.