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.
LIBOR is being deprecated and replaced by:
- Secured Overnight Financing Rate (SOFR) for USD (U.S. dollar)
- Sterling Overnight Index Average (SONIA) for GBP (British pound)
- Tokyo Overnight Average Rate (TONA) for JPY (Japanese yen)
EURIBOR has been reformed in order to comply with the EU Benchmarks Regulation. It is now calculated using a ‘hybrid’ methodology, and is likely to continue as the main benchmark used in Euro-denominated loans and derivatives. However, the ECB (European Central Bank) has recommended that €STR (Euro short-term rate) should be used as the primary basis for a fallback rate (where appropriate).
Comparison chart
 | EURIBOR | LIBOR |
|---|---|---|
| Stands for | Euro Interbank Offered Rate | London Interbank Offered Rate |
| Calculation | 44 European banks submit daily estimates for inter-bank borrowing costs. 15% highest and lowest estimates are discarded and the remaining are averaged to determine the daily rate. | A panel of 18 banks submits daily estimates for inter-bank borrowing costs. The 4 highest and lowest estimates are discarded and the remaining 10 are averaged to determine the daily rate. |
| Currencies | Euro | US Dollar (5 maturities), GBP (3m only). However, Libor is getting deprecated and will no longer be available. It is being replaced by SOFR (Secured Overnight Financing Rate). |
| Maturities | Five (1w, 1m, 3m, 6m, 12m) | Seven (overnight, 1w, 1m, 2m, 3m, 6m, 12m) |
| Computed | Daily | Daily |
| Used for U.S. transactions | Only those in Euros | Yes |
| Administered by | European Banking Federation (until 2015); European Money Markets Institute (after 2015) | British Bankers Association |
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 published and made available for a fee by an organization called the European Money Markets Institute (prior to 2015, Euribor was compiled by the European Banking Federation). The Euribor is also reported for 15 different maturities (tenors) 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.
Maturities
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 five different maturities, also known as tenors: one week, one month, three months six months and 12 months.[1]
overnight, one week, one month, two months, three months, six months, and 12 months.
The Libor also has five different maturities. These are overnight, one week, one month, two months, three months, six months and 12 months. overnight, one week, and one, two, three, six, and 12 months.[2] In the United States, many private contracts reference the three-month dollar Libor.
Currencies
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 Rates
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%.
References
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