What is a Panel Bank?

In the financial world, a panel bank commonly refers to one of several banks that contribute to the EURIBOR or a similar collective interest rate setting process. The establishment of interest rates based on what banks lend to one another helps to define some popular and active daily markets. A panel bank, therefore, has a huge influence on a current state of financial activities.

The EURIBOR or European Interbank Offered Rate represents the interest rate at which a panel bank, or other banks, will generally lend to each other at a given point in time. A dollar-based American system uses a LIBOR or London Interbank Offered Rate for the same purposes. These rates help fix the prices of various equity derivatives, and otherwise shore up lending and trading.

A panel bank reports its estimates of the lending interest rate every day that the EURIBOR or LIBOR is open. After a deadline when each panel bank has offered their rate, all of the rates are collected and made into a single IBOR rate based on a “truncated mean” of the series of figures. These figures support different kinds of long term and short term investment.

One of the financial products supported by the estimates of each panel bank in the EURIBOR or LIBOR is interest rate swaps. In these financial agreements, one party receives interest rate payments on a loan made with attention to the state of the interbank offered rate. Various kinds of interest rate swaps, and related speculative agreements, are available to companies for complicated money and asset management that can pay off for knowledgeable managers. Hedge fund managers frequently take advantage of knowledge of the EURIBOR or LIBOR when getting involved in these types of financial deals.

Using the EURIBOR or LIBOR relates to the idea of putting money into foreign banks as opposed to keeping it in domestic banks. The practice of removing money to a foreign banking system is also common. For example, when dollars are moved to European banks (subject to the aegis of the EURIBOR) they are called “Eurodollars.”

Besides the EURIBOR, which represents the daily interest rate, there is another immediate measure of the interbank offered rate. The EONIA or Euro OverNight Index Average represents the overnight rate for the same lending practices. Financial managers can use both the EURIBOR and the EONIA to craft monetary policy for their employers based on current interest rates.