What Is Eonia and Why Is It Worrying Traders?

Two sudden spikes in the interest rate for overnight loans between European banks, known as Eonia, got markets fretting and speculating about the reasons for the moves. Markets abhor uncertainty, particularly when the possible explanations include some scary scenarios. Some of that anxiety eased on Friday, as the benchmark interest rate moved back toward more normal range.

It’s the weighted average of the overnight cost of lending by euro-area banks. Eonia is computed by the European Money Markets Institute, which is also responsible for the more widely known Euribor -- the rate at which prime European banks lend to one another over a longer term. As EMMI defines it, Eonia is a weighted average of all overnight unsecured lending transactions in the interbank market undertaken in the European Union and European Free Trade Association countries. Eonia is based on actual transactions and Euribor is based on submissions by the banks.