The euro zone's top lenders decided on Thursday to adopt the European Central Bank's interest rate of overnight inter-bank lending as their new benchmark, in a first move to reform a crucial market compromised by manipulation scandals. The ECB's euro short-term rate (Ester) will replace Eonia as the gauge of how much banks charge for lending to each other for a day, a key metric of the health of the banking system and the basis for pricing trillions of euros worth of financial contracts.
The decision by a panel of 23 institutions, organised by the ECB and mostly comprising large commercial banks, marked the first concrete move away from the Euribor series of interest rates after manipulation scandals in 2012 undermined market faith in them. "Ester will also provide a basis for developing fallbacks for contracts referencing the Euribor," the working group said in a press release published by the ECB.
Once banks' lifeblood, unsecured wholesale funding has steadily lost prominence since the financial crisis as banks switched to safer ways of financing themselves, such as borrowing against collateral or directly tapping the central bank for cheap cash.
This has eroded the relevance and reliability of Eonia - the Euro Overnight Index Average which, like the Euribor series of longer-term rates, is provided by industry organisation the European Money Markets Institute (EMMI). In addition, the rigging scandals that hit Euribor and its UK counterpart, Libor, meant that many banks became reluctant to provide data.
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