Euro Overnight Index Average

Definition

The Euro Overnight Index Average (EONIA) is the average overnight benchmark interest rate at which European banks lend to each other in euros. It reflects the cost of short-term interbank borrowing and is a significant reference rate in financial markets.

Origin

EONIA was introduced in 1999 to provide a reliable short-term interest rate benchmark for the eurozone interbank market. Over time, it became a key indicator of the cost of overnight interbank loans. However, due to European regulatory reforms, EONIA was replaced by the Euro Short-Term Rate (ESTER) in January 2022.

Categories and Features

EONIA is an unsecured rate, meaning it does not require collateral. It is calculated based on actual transaction data reported daily by banks designated by the European Central Bank. The main features of EONIA are its transparency and market reflectiveness, although its unsecured nature can lead to higher volatility during market turmoil.

Case Studies

During the 2008 financial crisis, EONIA rates rose significantly, reflecting the credit crunch in the interbank market. Another example is during the 2011 Eurozone debt crisis, where EONIA's volatility increased, indicating market concerns about the stability of the eurozone banking system.

Common Issues

Investors might confuse EONIA with other rates like LIBOR. EONIA is unsecured, whereas LIBOR is typically secured. Additionally, with EONIA being replaced by ESTER, investors need to adapt to the new benchmark rate.