# EURIBOR  vs ECB rate



## daveccork (22 May 2007)

Hi all

Just wondering if there should be a difference between the ECB rate (3.75%) and the EURIBOR when applying for a commercial mortgage. If so what is the reason for it?

A friend of mine received info from the bank quoting a cost of funds of 3.9% as per EURIBOR with their margin added onto it. This is obviously in excess of the base rate of 3.75% as per the ECB.

I did not see the documentation myself but was told this by my friend .......... any comments welcome. I know I am probably missing something obvious.

thanks in advance


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## room305 (22 May 2007)

daveccork said:


> Hi all
> 
> Just wondering if there should be a difference between the ECB rate (3.75%) and the EURIBOR when applying for a commercial mortgage. If so what is the reason for it?
> 
> ...



Euribor is the interbank offered rate and it may vary from the ECB as it is based on an average of overnight interbank lending rates. There is also a secondary market for trading the Euribor, which will fluctuate continuously based on the market assumption of what the Euribor will settle at in specified time period (eg. one week, one month etc.).

The ECB base rate is a target rate set by the ECB as a factor of their monetary policy. They will try and influence the market around this rate but they cannot directly set the rates at which the banks will lend to one another (and their customers) hence the difference between the two.


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## daveccork (22 May 2007)

thanks for your response room305.

so if a bank (NIB for example) quotes ECB plus .50% does that mean it may actually be EURIBOR plus lets say .30% ? and that the bank will not get getting the full .50% margin.

Is the EURIBOR used by the banks for fixed rate loans?


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## michaelm (22 May 2007)

daveccork said:


> so if a bank (NIB for example) quotes ECB plus .50% does that mean it may actually be EURIBOR plus lets say .30% ? and that the bank will not get getting the full .50% margin.


NIB's LTV <50% Tracker rate is ECB +.5%.  The actual margin the bank makes should be of little concern.


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## room305 (22 May 2007)

daveccork said:


> so if a bank (NIB for example) quotes ECB plus .50% does that mean it may actually be EURIBOR plus lets say .30% ? and that the bank will not get getting the full .50% margin.



I have no idea. The bank may get the money to lend from any number of sources - other banks, deposits, bond sales to investors etc. The EURIBOR rate is a calculated overnight interbank lending rate from various prime banks in the EMU. EURIBOR contracts also trade on the derivatives market with a fixed-settlement at the EURIBOR rate on a particular date. So it changes daily and the bank will not necessarily be borrowing at this rate in any case.


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## marksa (22 May 2007)

room305 said:


> Euribor is the interbank offered rate and it may vary from the ECB as it is based on an average of overnight interbank lending rates.


 
There is a lot of mis-information going through this thread. First of all Euribor is an official fixing rate set each day at 11am CET for a variety of lending maturities - from overnight (Eonia) out to 1 year. The rates are to be found here
http://www.euribor.org/html/content/euribor_data.html

There has been comment that they are used in the derivatives market - yes in so far as they are used as the floating index rate for a variety of derivative instruments such as interest rate swaps.

It is true that Euribor rates change each day, so you cannot compare like for like with ECB rate, they are of course an indicator of what the market thinks is the direction that ECB rate is heading to.

The OP's friend has not indicated what Euribor they have been quoted. However, as you can see from the 2007 data file on the above link page, the 1 week Euribor is 3.85, whereas the 12month is 4.40. A difference of 55bps. The Euribor maturity is effectively like a mini fixed rate for that period. If you are borrowing for say 5 years on 12 month Euribor, there are 4 resets of rates  plus the current rate for example.

As you can see, the Euribor rate is price sensitive to the day's market - whereas the ECB rate is fixed until the next meeting.

Borrowing on Euribor usually gives better pricing as the Bank can hedge the risk easier in the market than ECB repo rate as there is no derivative market in ECB repo rate.


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