What Is the Euro Overnight Index Average (EONIA)?
Let me explain what the Euro Overnight Index Average (EONIA) is—it's the average overnight reference rate at which European banks lend to one another in euros. You should know that EONIA represents the interest rate for one-day loans between these banks, functioning as a key interbank rate. However, due to European regulatory reforms, EONIA has been replaced by the Euro Short-Term Rate (ESTER) starting in January 2022.
Key Takeaways
To sum it up directly, the Euro Overnight Index Average (EONIA) acts as the average overnight reference rate for euro-denominated lending between European banks. It's specifically the interest rate for one-day interbank loans. The European Central Bank (ECB) calculates EONIA based on loans from 28 panel banks. Because of regulatory changes in Europe, EONIA was phased out in 2022 and replaced with the more comprehensive ESTER benchmark.
How the Euro Overnight Index Average Works
Here's how EONIA operates: it's a daily reference rate that captures the weighted average of unsecured overnight interbank lending across the European Union and the European Free Trade Association (EFTA). The ECB calculates it using data from loans made by 28 panel banks.
You need to understand that banks must adhere to reserve requirements set by the central bank—these are the portions of deposits they keep on hand rather than lending out. This reserve helps ensure banks have liquidity to cover potential loan losses. But at the end of a business day, some banks might face short-term cash shortages from unexpected withdrawals, so they borrow from banks with surpluses. That borrowing rate is the overnight rate.
In Europe, EONIA specifically averages the overnight rates from 28 established panel banks.
EONIA vs. EURIBOR
Let me compare EONIA to EURIBOR, which stands for Euro Interbank Offered Rate. EURIBOR is another interbank rate, based on average interest rates from large European banks for lending to each other, but it includes various maturities, each with its own rate.
Both are provided by the European Money Markets Institute (EMMI), a non-profit founded in 1999. However, EURIBOR's calculation is handled by Global Rate Set Systems Ltd., not the ECB.
The main differences are in the loan maturities: EONIA is strictly overnight, while EURIBOR offers five rates for terms from one week to 12 months. Also, EURIBOR draws from 19 banks, compared to EONIA's 28 panel banks.
EURIBOR matters because banks use it as a benchmark for setting interest rates on products like mortgages and savings accounts.
ESTER
In 2018, the ECB created a working group to develop a new European benchmark rate. Past scandals with quote-based rates prompted these banking reforms, leading to ESTER—short for Euro Short-Term Rate—replacing EONIA.
ESTER is an overnight rate as well, but it averages wholesale rates in Europe, which are used by banks and institutional investors like pension funds. A primary reason for the switch is that ESTER involves more contributing banks than EONIA, making it broader and more reliable.
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