EURIBOR vs. LIBOR — What's the Difference?

EURIBOR (Euro Interbank Offered Rate) is a daily reference rate based on the averaged interest rates at which Eurozone banks offer to lend unsecured funds to other banks in the euro wholesale money market (or interbank market). It plays a crucial role in the European financial markets, influencing mortgages, savings, and loans. LIBOR (London Interbank Offered Rate), on the other hand, was a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans. It covered multiple currencies, including the US Dollar, British Pound, Japanese Yen, and others, serving as a global reference point for short-term interest rates.

EURIBOR is specifically tied to the Euro currency, reflecting the health and stability of the European banking sector and the broader economy of the Eurozone. LIBOR, whereas, was used worldwide, affecting a vast array of financial instruments and contracts across different currencies, making it a cornerstone of the global financial system.

The calculation of EURIBOR is based on contributions from a panel of banks within the Eurozone, ensuring it accurately represents the cost of euro-denominated interbank lending. Conversely, LIBOR was determined through submissions by a panel of banks from around the world, estimating the rates at which they expected to borrow from one another in various currencies, before its phase-out began in favor of more reliable benchmarks.

EURIBOR is essential for the pricing of Euro-denominated financial products, including loans, savings accounts, and mortgages within Europe. LIBOR’s influence was broader, impacting global financial products and contracts, from complex derivatives to consumer loans, until its transition to alternative rates like SOFR (Secured Overnight Financing Rate) for the US dollar began due to concerns over its reliability and the integrity of its calculation method.

The governance and oversight of EURIBOR have been strengthened in recent years to enhance transparency and reliability, following the financial scandals that affected the credibility of LIBOR. The transition away from LIBOR to more robust and transparent rates seeks to mitigate the risks associated with benchmark manipulation and ensure a more stable and trustworthy reference rate system.