Euro Overnight Index Average
The Euro Overnight Index Average (EONIA) is the average overnight reference rate for which European banks lend to one another in euros. The EONIA is the interest rate for one-day loans between European banks and is considered an interbank rate. However, European regulatory reforms resulted in the EONIA rate being replaced by the ESTER (Euro Short-Term Rate) effective January 2022.
Definition:
The Euro Overnight Index Average (EONIA) is the average overnight benchmark interest rate at which European banks lend to each other in euros. EONIA represents the rate for one-day loans between European banks and is considered an interbank rate. However, due to European regulatory reforms, EONIA was replaced by the Euro Short-Term Rate (ESTER) from January 2022.
Origin:
EONIA was introduced on January 4, 1999, by the European Central Bank (ECB) and the European Banking Federation (FBE) to provide a reliable short-term interest rate benchmark for the euro area interbank market. Over time, EONIA became a crucial indicator for measuring the cost of overnight loans between banks.
Categories and Characteristics:
1. Benchmark Rate: EONIA, as a benchmark rate, reflects the liquidity and credit risk in the euro area interbank market.
2. Calculation Method: EONIA is calculated as a weighted average of actual transaction data reported by participating banks.
3. Replacement Rate: Due to regulatory reforms, EONIA was replaced by ESTER (Euro Short-Term Rate) from January 2022, which better reflects the actual market conditions.
Specific Cases:
1. Interbank Loans: Bank A needs to borrow funds overnight to meet liquidity requirements and can refer to EONIA to determine the borrowing cost.
2. Financial Product Pricing: A financial institution issues floating-rate bonds whose interest rates may be linked to EONIA to reflect changes in market rates.
Common Questions:
1. Why was EONIA replaced? EONIA's calculation method relied on actual interbank transaction data, and as market transaction volumes decreased, its representativeness and reliability were questioned, leading to its replacement by ESTER.
2. What is the difference between ESTER and EONIA? ESTER is based on a broader set of market data, covering more types of transactions, and thus more accurately reflects actual market conditions.
