Euribor is the acronym for the European type of interbank offer, or by its name in English Euro Interbank Offered Rate. Given this definition, we can say that it is an average interest rate that is used in loans, and that it is calculated to be used by the vast majority of European banks, which together make up the panel of banks.
While each of the banking institutions is independent in its operation, there is this type of data in order to be able to parameterize and standardize their financial behavior. So in order to be able to make a more accurate calculation of the Euribor, the lowest 15% and the highest 15% of the Interest rate that have been collected in the sampling. In this way, every day, clarifying that it only applies to business days, at 11:00 CET the interest rates belonging to the Euribor are already determined and published.
The banking system
But before we can continue talking about the Euribor, we must understand an important point.What is the type of interbank offer? Well the answer is relatively simple. The Euribor It has the functionality of being able to tax the loans that are made by banking institutions, clarifying that they are loans that are made between themselves.
The reason why it is necessary for banks to lend money to each other is to be able to guarantee that at all times there is the solvency of the interbank system. In this way, there must be a means that can control and calculate with what interest the loans should be repaid. It should be noted that in addition to the fact that interest must be paid, an amount called risk premium must also be covered.
Y because the Euribor varies? The main reason is that there is a level of trust between banks that they have in each other; It is data such as solvency, income statements, and cash flow statements that determine how much a bank can trust that another has the ability to repay the loan without any problem. Because of this, each bank sets its interest rate given the information it has available; but in order to give an idea of the general behavior of the banks, an arithmetic mean of the interest rate of the 50 main banks in Europe is carried out.
So far everything sounds very interesting, but perhaps not very relevant for normal people, however the reality is that it affects both normal people and banks themselves, let's see the reason for this.
The importance of the Euribor
The Euribor We already understood it as the interest rate that a bank must meet with respect to the loans made by another bank. But where does the bank that requested the loan get the money to pay the interest? The answer is from the end users of said money, that we are the people who request loans from the bank, above all it is important for those who request mortgage loans.
So so that the bank can be sure that it will have the solvency to cover the expenses caused by the loan requested from another bank, it does the calculation of the mortgage interest rate based on Euribor. In this way, it calculates the rate by applying the Euribor to six months or on other occasions to one year.
This means that the bank will offer the end user, a mortgage interest rate based on in the Euribor value that is in force; so that, if this is higher, the higher the interest rate that will be applied. This point is especially important for those who request a variable rate loan, since in these cases the interest rate that comes from your loan will be affected either positively or negatively, causing you to have to pay more or less interest.
It should be noted that to offer an end user fee, the bank usually applies a spread that oscillates between 0 and 1,5; What will define this difference are two main issues; the first thing is the economic profile of the client. The reason that this influences the differential is the same for which the interbank rate varies, the trust that the bank has in the user will largely define whether a greater or lesser differential is added.
The second aspect that influences the decision of the spread to apply is the user's own negotiating capacity, and although it seems almost impossible, in reality there are certain arguments that we can use in order to reduce the spread that will be applied. to our mortgage.
In short, it is important that if we have a mortgage credit or if we are thinking of requesting one, we must always bear in mind that the simulation made of our credit is not reliable or accurate; since the calculations are carried out daily, so that, if the Euribor increases, the quota that we have to cover for the mortgage will become more expensive, on the other hand, if the Euribor decreases, our quota would also decrease.
Another reason why it is provided special attention to the value of Euribor is that it is used as the basis for calculating the value of certain financial products. For example, this value is used as the reference for practically any type of derivative products such as futures income, or swaps, as well as agreements on all future interest rates.
Without a doubt the Euribor is quite an important indicator for everyoneFor both governments and financial institutions, as well as for ordinary people. Hence the importance that as end users we know where it comes from and how it affects us in daily life. But does it have limitations?
The main limitation of this financial reference is that it only applies to banks belonging to the European Union, so that if we want to perform the calculation for another region we will have to apply the reference used by that locality. To give an example, to be able to perform the calculation in the United Kingdom, the reference that we would have to use is the LIBOR, which has the same function as the Euribor, but in London.
It is also possible that we consider that in order to be able to compare the financial health of one region with respect to another it is possible to compare its interbank offers; usually one of the most common comparisons or references is that of Euribor with LIBOR.
The manipulation of the Euribor
Despite the fact that the entire system is designed to work for the benefit of both the institutions and the end users, there have been occasions when the personal interests of certain people have intervened in a way that has been manipulated. Euribor values, Knowing a little about this history will help us to better understand the weaknesses of this system. And how what has happened in the past has been corrected.
From the year 1999 that the Euribor came into force, until 2012 everything indicated that the Euribor was ideal, however, it was on February 22 that two renowned lawyers denounced that there was opacity in the mortgage type placing special emphasis on the Euribor; The main reason for this complaint was that no one was auditing its composition, so that the Euribor remained sensitive to possible manipulations.
And in fact in 2011 an investigation had been opened on the possible manipulation that could occur; The case of Euribor is not isolated, but banking institutions were also fined in other parts of the world such as Canada, where HSBC, JPMorgan, Royal Bank, among others, were fined.
Completion of the investigation culminated in the execution of fines by different banks, fines that amounted to 1.710 million euros. The banks that were sanctioned were 6. Without a doubt, this situation is regrettable, since the most important thing is that the finances of the users were directly affected by the interests of those involved.
A bit of the history of how the Euribor has performed gives us an indication of what would be ideal; And it is that during its first years what was observed is that its behavior is descending, however it was until 2008 in which a substantial rise in the interest rate was observed; even reaching a value of 4,42%, which is quite a lot when we compare it with its historical lows, which were achieved in 2015, where the value was 0,165% in the month of May of that year. Without a doubt, it is interesting to see the behavior of the past and analyze the situations that have involved the Euribor and its behavior, so that when we want we can observe and understand why said interest rate shows a certain behavior.