Euro Overnight Index Average (EONIA)

What Is the Euro Overnight Index Average (EONIA)?

The Euro Overnight Index Average (EONIA) is the average overnight reference rate for which European banks loan to each other in euros. The EONIAis the interest rate for one-day loans between European banks and is considered an interbank rate. Nonetheless, European regulatory changes brought about the EONIA rate being supplanted by the ESTER (Euro Short-Term Rate) effective January 2022.

How the Euro Overnight Index Average Works

EONIA is a daily reference rate that communicates the weighted average of unsecured overnight interbank lending in the European Union and the European Free Trade Association (EFTA). It is calculated by the European Central Bank (ECB) in light of the loans made by 28 panel banks.

Banks must meet certain reserve requirements that are commonly set by the central bank. A reserve is the amount or percentage of total deposits that a bank must keep close by and not loan out. A reserve requirement safeguards banks so they have sufficient cash or liquidity in case of loan losses. Be that as it may, banks can experience short-term cash flow shortages toward the finish of a business day, for example, when there are unforeseen cash withdrawals. Subsequently, the banks that are short on cash can borrow from different banks that have cash flow overflows. The rate that banks borrow from one another is called the overnight rate.

In Europe, EONIA addresses the average overnight rate of 28 of the most settled banks called panel banks.

EONIA versus EURIBOR

EONIA is like EURIBOR, which is short for Euro Interbank Offered Rate. EURIBOR is likewise an interbank rate and is involved the average interest rates from large European banks that are utilized for lending to each other. Nonetheless, EURIBOR has different maturities in which every maturity has its own interest rate.

The two benchmarks are offered by the European Money Markets Institute (EMMI), which is a non-benefit organization established in 1999. In any case, EURIBOR is calculated by a benchmark administrator called Global Rate Set Systems Ltd., and not by the ECB.

The key difference among EONIA and EURIBOR is the maturities of the loans whereupon they are based. EONIA is an overnight rate, while EURIBOR has eight interest rates in view of loans with maturities that reach from multi week to 12 months. Additionally, EURIBOR has 18 banks that add to the rates while EONIA has 28 panel banks.

EURIBOR is important since it is the benchmark rate utilized by banks while determining the interest rate for different financial products, including mortgage loans and savings accounts.

ESTER

In 2018, the ECB framed a working group to assist with laying out another benchmark rate for Europe. All things considered, bank outrages have happened utilizing statement based interest rates as benchmarks. Accordingly, banking changes prompted ESTER or "\u20acSTER," which is short for Euro Short Term Rate, supplanting EONIA.

ESTER is likewise an overnight interest rate however addresses an average of the wholesale rates in Europe. These wholesale rates are ordinarily utilized with banks and institutional investors, for example, pension funds. One of the key purposes behind the switch to ESTER is that there will be more banks adding to the average ESTER rate than right now with EONIA.

Features

• Due to European regulatory changes, EONIA was supplanted in 2022 with a more exhaustive benchmark called ESTER.
• The Euro Overnight Index Average (EONIA) is the average overnight reference rate for which European banks loan to each other in euros.
• The EONIA is the interest rate for one-day loans between European banks.
• The Euro Overnight Index Average is calculated by the European Central Bank (ECB) in view of the loans made by 28 panel banks.