The London Interbank Offered Rate, more commonly referred to as LIBOR, represents the average interest rate that leading banks in London estimate they would be charged when borrowing from other banks. The Euro Interbank Offered Rate, known as EURIBOR, is a similar reference rate for Euro zone banks. While Euribor is only available in Euros, Libor is available in 10 different currencies. There isn't just one Libor or Euribor rate on any given date; they are sets of indexes for different maturities.
What are Euribor and Libor?
LIBOR stands for London Interbank Offered Rate. It is the average rate at which a selection of London banks are prepared to lend to one another. The official definition is:
The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11.00 London time.
Libor is not just one rate but a set of indexes. There are separate Libor rates reported for 15 different maturities and for 10 currencies.
The concept for the Euribor (Euro Interbank Offered Rate) is the same as for the Libor, but it is based upon estimates from leading European banks. Euribor is the average inter-bank interest rate that European banks are prepared to lend to one another. It is compiled by the European Banking Federation. The Euribor is also reported for 15 different maturities but only for one currency: the Euro.
How are Libor and Euribor Calculated?
Libor is calculated and published by Thomson Reuters on behalf of the British Bankers' Association (BBA). Each day that markets are open, the BBA surveys a panel of banks (18 major global banks for the USD Libor), asking them to estimate the interest rate they would have to pay to borrow money from other banks. The four highest and four lowest responses are discarded, and an average is calculated based on the middle 10. This average is then reported at 11:30 AM as the Libor rate for that day.
Euribor is calculated in a similar fashion, but the panel of banks submitting the interest rate estimates is much larger and from all over Europe. As of 2014, this panel consists of 26 banks with the highest volume of business in the Euro zone money markets. The highest and lowest 15% of the estimates are discarded from the calculation, and the remaining rates are averaged and rounded to three decimal places. Euribor is also calculated and published by Reuters.
Maturities are lending periods, i.e., how long an amount of money is lent for. Both the Euribor and the Libor calculate different rates for each maturity they analyze.
The Euribor has eight different maturities: one and two weeks, and one, two, three, six, nine, and 12 months.
The Libor has seven different maturities. These are overnight, one week, and one, two, three, six, and 12 months. In the United States, many private contracts reference the three-month dollar Libor.
In late 2013, both the Libor and Euribor decreased the number of their maturity listings from 15.
Euribor is only available for the Euro, while Libor is available for 10 different currencies: Australian dollar, British pound sterling, Canadian dollar, Danish krone, Euro, Japanese Yen, New Zealand dollar, Swiss franc, and US dollar. The Libor is also available for the Euro, but it is mainly for continuity purposes for contracts that were in place before the EMU. Otherwise, the Euribor is more widely used.
Libor and Euribor Rates
Euribor was first published on 30 December 1998. Libor officially started on 1 January 1986, but it had a trial period in December 1984.
Daily Euribor and Libor rates can be found here:
Applications in Finance
The Libor is used as a benchmark against which financial instruments that are denominated in Euros are measured. It is not used to measure U.S. transactions that are based on dollars.
The Libor is used as a reference rate by many financial instruments, including rate fixings instruments (such as interest rate swaps), commercial field products (such as term loans and variable rate mortgages), and hybrid products (such as collateralized mortgage obligations). In the U.S., 60% of prime adjustable rate mortgages and almost all subprime mortgages are indexed to the Libor. For example, a variable rate mortgage may be based on the six-month Libor rate, plus 3%.