EURO based buyers credit is currently funded by most of the banks using EURIBOR which is issued by European Banking Federation and ACI. A similar rate is issued by British Banking Association known as EUR Libor but is not often used by bankers for funding buyers credit transactions.
Reasons for specifying this are,
- Both are different rates
- Off late the spread between EURIBOR and EUR Libor has increased. For example, on 06 September 2012, 3 Month Eur Libor is 0.16643% whereas 3 Month Euribor is 0.269%.
Different Method used for Calculating EURIBOR & EURO LIBOR
Unlike BBA (British Banking Association) Euro LIBOR, EURIBOR, the complementary fixing which has been established by the European Banking Federation and ACI to benchmark in-zone rates, applies a concept of country quota. Each in-country has at least one bank represented on the Panel and smaller countries will rotate membership of the Panel amongst their leading commercial banks every 6 months. EURIBOR has a panel of 49 Reference banks from in-zone countries as well as international banks. Bank of Tokyo-Mitsubishi, Chase, Citibank, JP Morgan Bank of America and UBS have been selected to represent international banks. The averaging method of BBA LIBOR (wherein the top and bottom quartiles are discarded and the middle 50% averaged to produce the LIBOR fixing) is similar to EURIBOR although only the top and bottom 15% are rejected in the FBE/ACI process. This differential topping and tailing will result in there being a greater ratio of smaller banks to larger banks in EURIBOR.
Spread Between Euribor and EUR Libor
The spread between the Euro Libor rate and that of Euribor was negligible between 2006 to mid-2009, as the attached chart shows. Since then, however, it has been rising, reaching a peak in early 2012.
In theory there should be no disparity, because the same rate is being calculated, just in different geographical locations.
One of the reasons of the spread is differing samples and questions. “In the case of [Euro] Libor, the submission is based on the bank’s own experience. In the Euribor situation, the question is directed to ask what the respondent thinks other banks are achieving.” The European approach, they say, carries the risk that respondents are projecting their own problems on to other institutions.
The Euribor sample includes responses from banks at the sharper end of the euro crisis, including German Landesbanks, the National Bank of Greece, Ireland’s AIB Group and a number of Spanish and Italian banks. The 15 banks that are surveyed for the Libor calculation, however, are some of the most secure lenders in the eurozone – which may also help explain why the Euribor measure is higher.
Buyer's Credit & Supplier's Credit 