Administrators of the Euribor bank-to-bank lending rate are proposing a revamp of the borrowing benchmark in an effort to increase the number of banks that contribute to its calculation. This comes more than a decade after a series of rigging scandals damaged the reputation of interbank rates, resulting in the switch-off of Euribor’s larger cousin, Libor.
While Libor has been largely replaced with overnight rates compiled by central banks such as the Federal Reserve, European Central Bank, or Bank of England, trillions of euros of financial products, including mortgages and car loans, are still tied to Euribor.
The proposed changes aim to reduce the burden on institutions that provide input by using a standardized approach. The main proposal is to eliminate a requirement for banks to provide custom estimates in certain circumstances when no actual borrowing or lending takes place. This change is expected to encourage more banks to participate in the process. Currently, there are only 19 banks contributing rates, compared to 50 in 1999.
Jean-Louis Schirmann, CEO of Euribor’s administrator, the European Money Markets Institute (EMMI), expressed the desire to see more diversification in the rate-setting panel. Schirmann hopes to attract banks from geographical areas that are currently not represented. Having a geographically diverse panel is seen as crucial for obtaining a comprehensive view of euro-denominated lending costs.
Schirmann pointed out that countries with active bank-to-bank lending markets, such as Finland, Ireland, and Greece, currently have no banks on Euribor’s panel. Additionally, he called for more German banks to join alongside Deutsche Bank and DZ Bank.
EMMI currently calculates the rates using a combination of actual transactions and estimates, which has proven to be reliable so far. The proposed changes, which will be implemented next year following consultations, will rework the calculation processes to better reflect changes in interest rates and perceived credit risks.
By cutting the need for banks to provide bespoke “Level 3” estimates, the proposed changes are expected to significantly reduce the time and costs involved for banks. These changes aim to revive Euribor and restore trust in the bank-to-bank lending rate, which plays a crucial role in the pricing of various financial products.
More detail via Reuters here… ( Image via Reuters )