What it is:
Euro LIBOR is the interest rate at which banks borrow euros from other banks in the London interbank market.
How it works/Example:
Euro LIBOR is essentially LIBOR denominated in Euros. The Euro LIBOR is also somewhat similar to the Federal funds rate in the U.S.
LIBOR is an acronym that stands for London Interbank Offer Rate.
The Euro LIBOR is an average of interbank deposit rates offered by members of the British Bankers Association (BBA). The lending rate is set by 16 of the world's most creditworthy banks and fluctuates throughout the day.
The posted Euro LIBOR rate is available to the public through the BBA. It is often used as a basis for large Eurodollar loans made to less creditworthy corporations and governments.
For example, a country looking to borrow euros from a bank that is a member of the London interbank market may be granted a loan with an interest rate of 1% point above the Euro LIBOR.
Why it matters:
Euro LIBOR is essential to helping banks maintain liquidity requirements because they are able to borrow from other banks that have surpluses on hand quickly.
The Euro LIBOR offers a widely circulated reference rate for various financial instruments such as forward rate agreements, interest rate swaps, and inflation swaps that are denominated in euros.