The Eurolibor is the interbank interest rate at which the main banks established in London lend euros to each other, within a specified period. The Eurolibor interest rate is presented in euros, and not in pounds.
Ultimately, the Eurolibor can be considered as the Libor of the Euro. Libor is the daily bank rate based on the interest rates at which British banks lend money on the interbank market. Mainly, it is used as a reference for Euromarket contracts formalized before the creation of the euro, although this use is not exclusive.
The main characteristics of the Eurolibor are the following:
- Area of application. This indicator is useful in the UK, mainly among the large London banks.
- The interest rate is expressed in euros.
- The term over which the Eurolibor is calculated is variable: the price can be referred from one day to twelve months.
- It is published by the British Bankers Association (BBA), also known as the Banking Panel that includes 16 financial institutions chosen from those listed on the London Market.
- It is applied as a reference for intra-community contracts (that is, between the United Kingdom and another country in the euro zone) that were concluded before the creation of the euro.
- It can be considered as another gauge of the pound against the euro.
Its calculation is very similar to that of Libor. As we have commented previously, it is based on the quotation of 16 financial entities chosen by the BBA in a period of 1 day to 12 months (depending on the Eurolibor that you want to obtain). 25% of the best and worst quotes are eliminated and the Eurolibor is obtained by the arithmetic mean of 50% of the remaining quotes.
Differences with the Euribor
Euribor is the interest rate at which banks in the Euro Zone lend money to each other. The main differences with the Eurolibor are the following:
- The number of financial entities used for the calculation : The Eurolibor uses 16 financial entities designated by the BBA that are listed on the London Market. However, the Euribor uses 50 financial institutions both from countries in the Euro zone and from countries outside the Euro zone. In short, the Euribor shows a greater number and variety of financial entities.
- The methodology for calculating the indices is very similar in both: 15% of the worst and best prices are eliminated in the Euribor, and in the Eurolibor, 25%.
- The Eurolibor is published by the British Bankers Association while the Euribor is published by the Bridge Telerate.
Apart from technical differences, the Euribor is a more widely used benchmark than the Eurolibor. The latter only has true functionality in the London Market, and only in very specific situations, since for most cases the Libor index is used.