Euribor fills panel gaps with Finland and Greece

Two banks are set to join the panel of Euribor contributors, taking the number of firms underpinning the eurozone’s key benchmark rate to 21 and filling regional gaps within the contributing group.

Finland’s OP Corporate Bank and the National Bank of Greece (NBG) will join the panel as Euribor’s administrator, the European Money Markets Institute, switches the rate to a revised methodology, which removes reliance on so-called “expert judgement”.

Jean-Louis Schirmann, chief executive of Emmi, says the addition of two new participants is an important step in the rate’s long-term viability.

“Applications from banks to rejoin the panel is a huge sign of trust in the benchmark,” Schirmann said in a statement, adding the enlargement would “contribute to the robustness and reliability” of the benchmark.

OP Corporate’s parent company, OP Financial, consists of over 100 co-operative bank members with combined assets of more than €160 billion ($171 billion). NBG is Greece’s largest banking group with assets of €74 billion.

The latest additions come after Austria’s Raiffeisen Bank International returned to the panel in 2022, reversing a two-decade exodus in which the number of contributor banks had more than halved from a peak of 57 to just 18.

A project aimed at attracting new contributors has seen Emmi take steps to reduce the operational burden on panel banks. The administrator began switching the first panel banks to an alternative methodology in May and aims to complete the transition in November. 

The new approach removes the bottom layer of the input waterfall – so-called Level 3 inputs – which sees contributors provide internal estimates of rates in the absence of adequate transactions. The cost of meeting regulatory requirements for making Level 3 submissions – including adequate internal processes and governance frameworks – can run to several million euros per annum and has been seen as a barrier for participation. 

The new-look rate will apply market-adjustment factors based on a term version of the euro short-term rate (€STR) to historic Euribor inputs.

Mind the gaps

The addition of the two banks fills a vital gap in panel representation. Prior to the latest addition, Euribor lacked representatives from 10 eurozone countries including Finland, Greece and Ireland – the latter remains a blind spot.

Italian and Spanish banks have historically been active supporters of Euribor, thanks to their regular use of the benchmark in retail products such as mortgages. The Euribor panel includes four banks from Spain and two from Italy.

Mikko Timonen, chief financial officer at OP Financial, notes the importance of the benchmark for the bank’s own clients.

“The Euribor benchmark is highly important to OP Financial Group and our customers, whose loans are largely tied to the Euribor,” he says in a statement.

France represents the largest cohort, with five banks represented.

A consultation on the methodology upgrade, launched last October, garnered 20 responses including from two non-panel banks – Italy’s Gruppo Banco BPM and Helsinki-based Nordea.

Emmi has previously noted underrepresentation in much of northern Europe, including Germany, where only Deutsche Bank and DZ Bank are panel members.

In another potential driver for wooing panel banks, the European Central bank next month will require an additional 24 banks to report money market statistics – including the same unsecured funding data used to calculate Euribor. It takes the total number of reporting banks to 70.

Euribor’s credibility has been under scrutiny following a widespread rate-rigging scandal that cost panel banks a combined $9 billion in fines. While other jurisdictions such as the US and UK chose to axe interbank rates in favour of risk-free alternatives, European regulators have opted to stick with Euribor alongside an overnight €STR rate.

The move to a hybrid methodology has tilted the rate to transaction-based data. Yet a dearth of unsecured interbank lending activity has left questions over the rate’s robustness.

While transaction data has been increasing as a portion of the rate in recent years, the latest data shows Level 3 accounted for more than half of submissions for the well-used six-month setting during April.

In March, the ECB announced revisions to its operational framework aimed in part at reviving unsecured bank lending activity. This will see the spread between the deposit financing rate and the main refinancing operations slashed to 15 basis points from the current 50bp, opening the door for lower-cost interbank funding.

Participants, however, aren’t convinced.

“Banks that have a retail base have become more professional at tapping retail markets. Why should you borrow from a bank if you can get it 50bp cheaper from your retail customer base and you can model those retail deposits? It makes a huge difference and is heavily limiting the interbank markets,” says a treasury official at one bank that is not part of the Euribor group.

Minutes of a March meeting of the euro money markets contact group – an industry committee convened by the ECB and comprising 14 Euribor panel banks – show participants did not expect any revival in unsecured interbank lending.

“The unsecured interbank market was not expected to be revived. Instead, the repo market had been fulfilling the function of reserve redistribution,” the minutes show.