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, who does the bank borrow from? Very easy, to other banks. These types of transactions are called interbank transactions (between banks). In addition, just as when we ask for a loan they charge us an interest, the banks (when they ask other banks) also ask for an interest. That interest is called Euribor.
It is not only an interest rate but also an index that is calculated using as reference the interest rates of the transactions between the main European banks through interbank deposits . Banks use different interest rates depending on the term to which they lend money (see temporary structure of interest rates -ETTI- ), therefore we can talk about Euribor at a week, a month or a year.
It depends largely on the interest rate set by the European Central Bank (ECB) , since this is the interest rate that 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 that 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 Institute of Monetary Markets (EMMI). According to his reports, the Euribor is calculated as follows:
- All interbank transactions are crossed. Transactions corresponding to each due date are taken into account. For example, to calculate the 3-month Euribor, all transactions with a 3-month maturity date are taken into account.
- 15% of transactions with higher interest rates and 15% of transactions with lower interest rates are eliminated.
- With the remaining data, an average of the interest rate at which the different amounts have been exchanged at said maturity is made.
By performing the previous three steps, we could calculate the Euribor.
Euribor’s relationship with mortgages
When we hear about the Euribor, we always think about what we are going to pay interest on the mortgage granted to us. For starters, when banks calculate interest on a mortgage they can choose between using 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 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 interest of the Euribor + 0.5%).