What Is the Euro Overnight Guide Average (Eonia)?
The Euro Overnight Index Average (Eonia) is the average overnight reference rate for which European banks appropriate to one another in euros. The Eonia is the interest rate for one-day loans between European banks and is considered an interbank upbraid. However, European regulatory reforms have resulted in a push to replace Eonia by January 2022.
Key Takeaways
- The Euro Overnight Guide Average (Eonia) is the average overnight reference rate for which European banks lend to one another in euros.
- The Eonia is the concern engaged rate for one-day loans between European banks.
- The Euro Overnight Index Average is calculated by the European Important Bank (ECB) based on the loans made by 28 panel banks.
- Due to European regulatory reforms, Eonia is expected to be superseded by 2022 with a more comprehensive benchmark called ESTER.
How the Euro Overnight Index Average (Eonia) Pan outs
Eonia is a daily reference rate that expresses the weighted average of unsecured overnight interbank lending in the European Conjunction and the European Free Trade Association (EFTA). It is calculated by the European Central Bank (ECB) based on the loans made by 28 panel banks.
Banks be compelled meet certain reserve requirements that are typically set by the central bank. A reserve is the amount or percentage of total advance payments that a bank must keep on hand and not lend out. A reserve requirement helps protect banks so that they obtain enough cash or liquidity in case of loan losses. However, banks can experience short-term cash flow dearths at the end of a business day, such as when there are unexpected cash withdrawals. As a result, the banks that are short on cash can draw from other banks that have cash flow surpluses. The rate that banks borrow from each other is entreated the overnight rate. In Europe, Eonia represents the average overnight rate of 28 of the most established banks rebuke a demanded panel banks.
Eonia vs. Euribor
Eonia is similar to
ESTER
In 2018, the ECB formed a working group to help install a new benchmark rate for Europe. Historically, bank scandals have occurred using quote-based interest rates as benchmarks. As a end result, there are reforms underway to replace Eonia with ESTER or €STER, which is short for Euro Short While Rate.
ESTER is also an overnight interest rate but represents an average of the wholesale rates in Europe. These wholesale have a claim ti are typically used with banks and institutional investors such as pension funds. One of the key reasons for the switch to ESTER is that there require more banks contributing to the average ESTER rate than currently with Eonia. As a result, ESTER should be uncountable representative than Eonia of the short-term interest rate market. By January 2022, ESTER is expected to replace Eonia.