What is the difference between ECB and Euribor?

[ClubMan]

Banks are borrowing at well above ECB. EURIBOR is over 1% higher than the ECB rate and has been consistently so for most of the last year.

Thanks. I didn't know that. Is Euribor separate from the ECB's rates? Seems to be.

 

[z109]

Re: How do we reduce the risk to the taxpayer?

Thanks. I didn't know that. Is Euribor separate from the ECB's rates? Seems to be.

Yes, it's set daily by the BBA (British Bankers Association) based on what a sample of leading banks say it is costing them to borrow on interbank markets. As I understand it, the CDS spread is also added to the cost of borrowing (this is the cost to insure the lending), so Irish banks (which have high CDS spreads) are paying more than, say, Barclays (which is seen as lower risk) would. Again as I understand it, the problem with the credit crunch isn't that there is no money being lent, it is that the cost of this money is prohibitively high so banks are unable to get economic money to lend (they can't make a profit on it).

For comparison, Euribor was about 0.1% points higher than ECB rates before the credit crunch, it is now more than 1% higher - see the comments on this page from finfacts:
http://www.finfacts.com/Private/dbn/dbn.htm

PS I have been talking in this and my earlier post about 3 month EURIBOR.
PPS EURIBOR determines the cost of variable rate mortgages, hence the rises in costs of these mortgages without the ECB raising rates - they've risen by about 0.75% without an ECB rate rise.

 

[Sunny]

Re: How do we reduce the risk to the taxpayer?

Yes, it's set daily by the BBA (British Bankers Association) based on what a sample of leading banks say it is costing them to borrow on interbank markets. As I understand it, the CDS spread is also added to the cost of borrowing (this is the cost to insure the lending), so Irish banks (which have high CDS spreads) are paying more than, say, Barclays (which is seen as lower risk) would. Again as I understand it, the problem with the credit crunch isn't that there is no money being lent, it is that the cost of this money is prohibitively high so banks are unable to get economic money to lend (they can't make a profit on it).

For comparison, Euribor was about 0.1% points higher than ECB rates before the credit crunch, it is now more than 1% higher - see the comments on this page from finfacts:
http://www.finfacts.com/Private/dbn/dbn.htm

Not quite. The BBA are responsible for setting LIBOR. Euribor is set by the European Banking federation. Its also not the case of adding CDS spreads on to the cost of borrowing per say for the calculation of Euribor. Remember, Euribor is a benchmark rate. Its set by dealer poll amongst prime banks (highly rated) and so Euribor reflects the cost of borrowing for the top banks in Europe (and like Libor is open to manipulation). Of course banks are free to charge anything they want over Euribor to banks where they consider there is increrased credit risk. Hence you are correct, Irish Banks costs of funding is probably alot higher than what Euribor is actually published to be. I heard rumours that one Irish banks cost of funding for overnight borrowing last Monday before the guarantee was over 9% (and even then they struggled to get money).

 

[ClubMan]

Re: How do we reduce the risk to the taxpayer?

PPS EURIBOR determines the cost of variable rate mortgages, hence the rises in costs of these mortgages without the ECB raising rates - they've risen by about 0.75% without an ECB rate rise.

Thanks - that's interesting. I never knew that and it puts into perspective some of the complaints about variable rates not following trackers more closely (even if they are not obliged to).

 

[z109]

Re: How do we reduce the risk to the taxpayer?

Not quite. The BBA are responsible for setting LIBOR. Euribor is set by the European Banking federation. Its also not the case of adding CDS spreads on to the cost of borrowing per say for the calculation of Euribor. Remember, Euribor is a benchmark rate. Its set by dealer poll amongst prime banks (highly rated) and so Euribor reflects the cost of borrowing for the top banks in Europe (and like Libor is open to manipulation). Of course banks are free to charge anything they want over Euribor to banks where they consider there is increrased credit risk. Hence you are correct, Irish Banks costs of funding is probably alot higher than what Euribor is actually published to be. I heard rumours that one Irish banks cost of funding for overnight borrowing last Monday before the guarantee was over 9% (and even then they struggled to get money).

Apologies, yes, it is not the BBA.

What I meant to say with the CDS thing is that they influence the cost to a particular bank, not that they have an effect on EURIBOR itself. Sorry for the confusion and thanks for clearing it up.

Yes, the manipulation of EURIBOR, LIBOR and dollar LIBOR has been an intersting sideshow - basically there are rumours flying that prime banks are understating how much it is costing them to get cash to keep their funding costs low. This became evident a while ago when one bank (Lloyds, I think it was) that was seen as rock solid was reporting borrowing costs above other banks that were seen as much more risky (HBOS or RBS, I think). Apologies if the names are wrong, but you get the gist.