Paris Interbank Offered Rate (PIBOR)
An average interest rate for interbank transactions in France. It is also a deposit rate for the Eurocurrency market.
Paris Interbank Offered Rate (PIBOR) Details
The Paris Interbank Offered Rate (PIBOR) is the average interest rate French banks use for interbank transactions. PIBOR determines the rates domestic banks use for unsecured lending of French francs. It is also the deposit rate quoted in Paris for the Eurocurrency market. A Euro currency is a certificate of deposit issued outside your country but denominated in your currency. So, a Euro euro is a deposit in the euro currency held in a bank outside the Eurozone.
As of January 1st, 1999, domestic European rates like PIBOR and the Frankfurt Interbank Offered Rate (FIBOR) merged to become EURIBOR. While PIBOR no longer exists, the EURIBOR represents rates quoted from banks within the European Union, including France. As of April 2014, the French Banks on the panel of EURIBOR are:
- HSBC France
- Crédit Agricole
- Société Générale
Examples of The Paris Interbank Offered Rate (PIBOR)
Interbank transactions using the Paris Interbank Offered Rate (PIBOR) are often for unsecured loans. Banks can also use it for interest rate swaps and forward rate agreements. An interest rate swap is an agreement between two banks over a set period to exchange one stream of interest payments for another. A forward rate agreement is a cash contract to borrow or sell a sum at a fixed interest rate.
The EURIBOR is calculated based on a 360-day convention, and the highest and lowest 15 percent of interest rate quotes collected are eliminated. The remaining rates are then averaged.
A bank would use the PIBOR to engage in interbank transactions of unsecured loans to manage their assets. Banks are required to have enough cash for customers to withdraw. If they are low in funds, they can borrow from another French bank. A French bank with too many assets is incentivized to lend to banks in need as well. By lending the money, they can make interest on their excess assets.
History Of The Paris Interbank Offered Rate (PIBOR)
The Paris Interbank Offered Rate (PIBOR) existed until January 1st, 1999, when the EURIBOR was first published. Before establishing the EURIBOR, each European country in the Eurozone had its interbank rate, such as PIBOR. Interbank lending was crucial in France, especially during the late 1920s and early 1930s when the world experienced the Great Depression. During this time, the central bank helped lend assets to banks that were affected by the crisis. Although PIBOR doesn't exist, having an interbank offered rate is still important today.
Significance of The Paris Interbank Offered Rate (PIBOR)
Banks that engaged in futures and options trading on Euronext Paris use to base their rates on the Paris Interbank Offered Rate (PIBOR). Interbank lending is significant because all banks must have a specific amount of liquid assets, such as cash, to manage day-to-day customer activities. A bank can borrow money in the interbank market to help meet liquidity requirements.
The PIBOR was not as prominent as the London Interbank Offered Rate (LIBOR) or the Euro Interbank Offered Rate (EURIBOR). However, it was still used as a benchmark for euro-dominated interest rate swaps and forward rate agreements.