HOW EURIBOR PLUS AFFECTS US

There is uncertainty in banks about application of Euribor Plus

EURIBOR PLUS

In previous posts we referred to Euribor Plus as a new benchmark for mortgages. The European Monetary Institute Markets (EMMI acronym in English) is the agency responsible for developing this new model. For EMMI Euribor Plus benchmark it is more reliable than the Euribor, therefore less manipulable .

FORMULA TO CALCULATE THE RATE

The first element to consider is that the number of entities that provide data is increased, in addition to changing the methodology, since it will take into account not only the deposits that banks make to each other (interbank lending) but also those of big companies and financial institutions, non-financial small and medium entrepreneurs, insurance companies, pension funds, etc. The current Euribor measures the average interest rate at which banks lend money in Europe and currently only 24 institutions are providing information. The problem is that banks do not provide accurate information on operations with real interest but on estimates of the interest that would be charged between them.

WHY EURIBOR PLUS

The various manipulations of Euribor (also from other indices such as Libor or Tibor) between 2005 and 2009 made the European Commission in 2013 to fine several entities. The new Euribor Plus calculation would be based on a more realistic rate which would mean that an application of a rate more realistic, although not until the test period to see if this is so. Among other things, they could hit the mortgagees referenced to the current Euribor. We should note that there are three consecutive months of negative Euribor in 2016: in February the rate was -0.008; in March -0.010 and in April -0.012 (according to the Bank of Spain) .

WILL IT AFFECT OUR MORTGAGE?

According to the EMMI, the Euribor Plus involves only a change of name for the purposes of the contract, in addition to the test period to be applied during the first six months of 2017. The new system will not assume, from the legal point of view, a change of reference index making it apply to mortgages signed from July and Euribor mortgages referenced to Euribor before 2017 without changing the contract. Some experts believe that with the entry into force on Euribor Plus the rate would not be negative any longer, with a consequent increase in mortgage instalments.

Evolution of Euribor - Source EMMI


With the experience that many banks have in relation to floor clauses, many banks fear a wave of lawsuits before a rate rise due to the implementation of Euribor Plus. The main obstacle to the Euribor Plus is to find an equivalent to the current one, with the disadvantage that there is no one-year interbank loans (yes there are interbank loans up to three months). In Spain a projection of one year applies because this way the banks could pocket a little more interest. This implies that the application of Euribor to one year is not real, which is difficult to find an exact equivalent to incorporate the Euribor Plus  which in case of a sudden rise in rates could lead claims against banks enforcing them to indemnifying customers (such as in cases of ground clauses), which is what many bankers fear .

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