EURIBOR vs. LIBOR

Attribute	EURIBOR	LIBOR
Definition	EURIBOR is the Euro Interbank Offered Rate, the average interest rate at which a selection of European banks lend funds to one another.	LIBOR is the London Interbank Offered Rate, the average interest rate at which a selection of leading banks in London lend funds to one another.
Calculation	EURIBOR is calculated as the average of the interest rates submitted by a panel of banks.	LIBOR is calculated as the average of the interest rates submitted by a panel of banks.
Geographical Focus	EURIBOR focuses on European banks and the Eurozone.	LIBOR focuses on banks in London and is widely used globally.
Currencies	EURIBOR is primarily based on the Euro currency.	LIBOR is available in various currencies, including USD, GBP, EUR, JPY, etc.
Regulation	EURIBOR is regulated by the European Money Markets Institute (EMMI).	LIBOR is regulated by the ICE Benchmark Administration (IBA).
Usage	EURIBOR is commonly used as a reference rate for Euro-denominated financial products.	LIBOR is widely used as a benchmark for various financial products, including loans, derivatives, and contracts.

Introduction

EURIBOR and LIBOR are two widely used benchmark interest rates in the global financial markets. They play a crucial role in determining borrowing costs for various financial instruments, including loans, derivatives, and bonds. While both rates serve similar purposes, they have distinct differences in terms of calculation methodology, underlying currencies, and regulatory oversight. In this article, we will delve into the attributes of EURIBOR and LIBOR, highlighting their similarities and differences.

Calculation Methodology

EURIBOR, short for Euro Interbank Offered Rate, is calculated based on the average interest rates at which a panel of European banks lend to one another in the euro money market. The European Money Markets Institute (EMMI) oversees the calculation process, which involves discarding the highest and lowest 15% of the contributed rates to ensure accuracy and reliability.

On the other hand, LIBOR, or the London Interbank Offered Rate, is determined by the average interest rates at which a panel of global banks lend to one another in the London interbank market. The Intercontinental Exchange (ICE) Benchmark Administration is responsible for calculating LIBOR, using a similar methodology to EURIBOR, but with a different panel of contributing banks.

Underlying Currencies

One of the primary distinctions between EURIBOR and LIBOR lies in the underlying currencies they represent. As the name suggests, EURIBOR is denominated in euros, reflecting the borrowing costs within the eurozone. It serves as a reference rate for various financial products, including euro-denominated loans and derivatives.

On the other hand, LIBOR is available in multiple currencies, including the US dollar, British pound sterling, euro, Swiss franc, and Japanese yen. Each currency has its own panel of contributing banks, resulting in different LIBOR rates for each currency. This flexibility makes LIBOR a widely used benchmark rate in global financial markets, catering to the needs of various jurisdictions.

Regulatory Oversight

EURIBOR and LIBOR also differ in terms of regulatory oversight and governance. EURIBOR is regulated by the European Central Bank (ECB) and the European Securities and Markets Authority (ESMA). These regulatory bodies ensure the integrity and transparency of the rate-setting process, as well as monitor compliance with relevant regulations.

On the other hand, LIBOR has faced significant scrutiny and reforms in recent years due to manipulation scandals. In response, the Financial Conduct Authority (FCA) in the UK has taken over the regulatory oversight of LIBOR, implementing stricter regulations and transitioning to alternative benchmark rates by the end of 2021. The transition away from LIBOR is driven by the need for a more robust and reliable benchmark rate.

Market Impact

Both EURIBOR and LIBOR have a significant impact on the global financial markets. Changes in these benchmark rates can influence borrowing costs for individuals, businesses, and governments, as well as impact the valuation of financial instruments tied to these rates.

EURIBOR, being specific to the eurozone, has a direct impact on the borrowing costs within the region. It affects the interest rates on mortgages, corporate loans, and other financial products denominated in euros. Changes in EURIBOR can influence consumer spending, investment decisions, and overall economic activity within the eurozone.

Similarly, LIBOR has a global impact due to its widespread use in various currencies. It affects borrowing costs for international loans, derivatives, and bonds. Changes in LIBOR can have implications for cross-border lending, currency exchange rates, and the overall stability of the global financial system.

Transition to Alternative Rates

As mentioned earlier, the transition away from LIBOR is underway due to its inherent weaknesses and the need for more reliable benchmark rates. Various alternative rates, such as the Secured Overnight Financing Rate (SOFR) in the US and the Euro Short-Term Rate (€STR) in the eurozone, have been developed to replace LIBOR.

The transition process involves significant challenges, including the need to renegotiate existing contracts tied to LIBOR and ensuring market participants are well-prepared for the switch. The transition to alternative rates aims to enhance the robustness and integrity of benchmark rates, reducing the risk of manipulation and improving the overall functioning of financial markets.

Conclusion

In conclusion, EURIBOR and LIBOR are both important benchmark interest rates used in the global financial markets. While they share similarities in terms of their calculation methodology and market impact, they differ in underlying currencies, regulatory oversight, and the ongoing transition to alternative rates. Understanding the attributes of EURIBOR and LIBOR is crucial for market participants, policymakers, and individuals alike, as these rates shape borrowing costs and influence the overall stability of the financial system.