March 9, 2021

The new Euribor opens with a drop in mortgages | Economy


In the midst of the crisis, back in 2013, the European authorities punished a group of banks with million dollar fines for manipulating the Euribor and other indexes that are used as a reference to fix the cost of the loans. According to the Brussels ruling, the Euribor was adulterated between September 2005 and May 2008, just five months before the bankruptcy of Lehman Brothers. The entities sanctioned were Deutsche Bank, Société Générale, Royal Bank of Scotland, JPMorgan and Citigroup. In exchange for denouncing the cartel, Barclays and UBS avoided the penalty by availing themselves of the European Commission's clemency program. Later, Crédit Agricole and HSBC would also be charged. Faced with such a scandal, the European Union approved a new regulation that forced to change the methodology of these indices.

The problem was that the model was based on surveys that could be easily altered. For that reason, the idea of ​​European legislators was to impose a new scheme supported by real transactions that were perfectly identifiable and, therefore, could not be manipulated.

Euribor current



And the search for a new methodology was commissioned European Money Market Institute (EMMI), the administrator institute of European banking indexes. The EMMI is a subsidiary of the European banking employers, so it was determined that their work would at all times be supervised by national regulators, including the Spanish CNMV (National Securities Market Commission). The Euribor tries to measure at what interest European banks lend without including guarantees. However, after tests carried out between 2016 and 2017, the EMMI concluded that it was not possible to form a new Euribor from real operations. Since the outbreak of the crisis, the banks don't trust each other and they do not lend without guarantees in between. Much less for a term as long as twelve months, which is the period required by the one-year Euribor. Consequently, there are hardly enough real transactions to configure the index. In fact, in the midst of fear of litigation for participating in the elaboration of the new scale, many entities withdrew from the panel offering the data. There are only 18 left, including Spain's Banco Santander, BBVA, Caixabank and Cecabank.

In such circumstances, the EMMI administrator decided to discard a method only formulated with existing operations. The legislation states that real transactions will be used when possible. So a new hybrid scheme was devised that combined real credits with extrapolations of historical averages and other loans that can be comparable.

Under this new methodology, tests were considered last year that were considered a success. And the new Euribor formula has just been approved by the authorities. As the EMMI is based in Belgium, the competent body for approval has been the Belgian authority for financial services and markets. This was approved on July 2. And on July 4 it was registered in the European Securities and Markets Authority (ESMA) registry. It is foreseen in the law that the supervision of the Euribor passes to ESMA in 2022.

As reported by the EMMI, the gradual implementation began in the second quarter of 2019, and is expected to be completed by the end of 2019 to enter into force on January 1, 2020. That is, although in combination with the previous one, at the moment The new formula is already influencing the price of mortgages. The Euribor now marks historical lows at -0.3%. And to a large extent it has been collapsing because the ECB has announced that in September it could undertake further rate reductions and debt purchases. However, market sources point out that it may also be affecting the new composition of the index: in order to try to have the largest number of operations to build it, the system also includes loans between entities that are not banks. For example, insurers, pension funds, multinationals or financial institutions. These now handle so much liquidity that when an investment expires they do not know where to place it. And in the short term they lend it to very negative rates. Or what is the same: they pay a lot to be able to keep those treasury tips. While banks can always leave it at the ECB with a 0.4% penalty, these entities do not even have that land. Hence, they are buying German treasury bills that trade at -0.8%. That is, they lend themselves to even more negative rates. And its inclusion in the Euribor could contribute to lowering something else, according to bank sources.

A few months ago the EMMI published the result of tests that already gave slightly lower rates than the current Euribor. The CNMV notes that the incorporation into the calculation of operations with non-bank entities could partially explain the evolution. But this is mainly due to the index moving according to the reality of the market that is being measured. And in recent months the rates have reflected expectations about the ECB's monetary policy, he adds.

One billion in mortgages

According to EMMI figures, the Euribor serves as a reference for more than 180 billion euros in contracts and one billion euros in mortgages. It is estimated that in Spain there are about 400,000 million euros in mortgage loans linked to this reference.

The document in which the new operation is established explains that banks have to communicate data on the types at which they can obtain financing from other entities. And there are three different levels to make it: in the first one, the banks send the prices of the credits of the previous day. In the second, they try to approximate these loans by looking at operations of other days or similar terms. And in the third, data from other transactions are added. The regulations on this last point speak of “executable quotes, indicative prices, non-firm rates or quotes and data based on the expert judgment of the entity”.

All levels have the same validity and the highest and lowest contributions are eliminated from the average. Although entities maintain their criteria as to what to include in the third level, they have to justify why they do so and EMMI supervises it. It is precisely at this third level where greater subjectivity would fit and could cause problems. In addition, up to three layers of controls and channels have been launched to report problems and manipulations. In any case, EMMI explains that it conducts a monthly analysis of the data to discover unusual patterns.

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