ESTER

The ESTER (Euro Short-Term Rate) is a benchmark interest rate that measures the cost of overnight unsecured borrowing in euros. Published by the European Central Bank and based on actual, observed overnight lending transactions, ESTER is the transaction-based successor to EURIBOR and LIBOR in euro denominations.

Introduction and development

The European Central Bank introduced ESTER in late 2019 as a transaction-based benchmark to eventually replace both EURIBOR and the eurozone’s share of LIBOR. The ECB designed ESTER to be calculated from actual observed overnight unsecured euro lending transactions, making it manipulation-proof and transparent.

ESTER is calculated by aggregating all eligible overnight unsecured euro lending transactions reported to the ECB, then publishing the volume-weighted median rate. The ECB publishes ESTER daily before 9 a.m. CET.

The eurozone overnight market

The eurozone’s overnight unsecured lending market is where major financial institutions lend and borrow euros on a short-term basis. The market is active and liquid, particularly among eurozone banks, providing a reliable data source for ESTER.

The overnight rate reflects credit conditions in the eurozone, interest-rate expectations, and the ECB’s monetary-policy stance. ESTER captures all of this in a single, transparent number published daily.

Replacing EURIBOR and EUR LIBOR

The eurozone had two parallel benchmarks for euro lending: EURIBOR (panel-based estimates of unsecured interbank borrowing) and EUR LIBOR (part of the global LIBOR panel). Both faced credibility issues after the LIBOR manipulation scandal and realizations that they no longer reflected real borrowing.

The ECB designated ESTER as the successor to both. The transition began in earnest in 2021, with:

• New floating-rate instruments written in ESTER rather than EURIBOR or LIBOR.
• Legacy contracts being gradually amended to reference ESTER.
• Financial institutions building operational infrastructure to handle ESTER term rates (derived from rolling overnight ESTER data).

Term rates

Like SOFR, ESTER is initially published as an overnight rate. But many financial instruments require reference rates with longer maturities (3-month, 6-month). The ECB and private providers offer ESTER term rates, calculated as rolling averages of overnight ESTER over specified periods.

These term rates allow mortgages, bonds, and derivatives in the eurozone to transition from EURIBOR and LIBOR to ESTER while maintaining the ability to reference rates of appropriate duration.

Adoption and market impact

ESTER adoption has been steady. New instruments are regularly priced in ESTER. The spread between ESTER and the old EURIBOR and EUR LIBOR rates reflects the credit-risk premium that was embedded in the older benchmarks. As the market transitions, understanding this spread relationship is crucial for pricing legacy instruments.

The transition from EURIBOR to ESTER is less abrupt than the LIBOR-to-SOFR transition was in the US, partly because the eurozone has been more gradual in its approach and partly because EURIBOR continued to be published (on a reformed, transaction-based basis) alongside ESTER for several years.

See also