# How can the Euribor 1-week rate be less than the ECB deposit rate?

Here is my understanding:

The European Central Bank (ECB) deposit rate is the interest rate the ECB gives a bank for holding a deposit with them.

Currently this rate is -0.5%. Which means that it costs the bank money to put a deposit with the ECB. This is presumably to encourage lending.

Additionally any “excess liquidity” is treated the same as a deposit to the ECB. Excess liquidity is any amount of money a bank has on its balance sheets above the reserve requirements.

Therefore… if a bank could lend someone money at 0.0% interest rate, then they should, because otherwise the bank is paying the ECB essentially a penalty of 0.5% .

This all makes sense so far. Now comes the EURIBOR 1-week rate. As I understand it, this is a rate that essentially summarizes the interest rates that bank charge to lend money to one another. So far so good. But… the Euribor 1-week rate is currently -0.563% — which is lower than the deposit rate!!

I just can’t understand this. That means if a bank does nothing it loses -0.5% for holding a deposit, but if it lends the money out it loses -0.563%, which is more. Why would this ever happen?

EDIT: Not only that but the ESTER rate - the overnight interbank rate - is -0.579% !

• An educated guess: there is a wider set of participants in the ESTR market compared to the deposit facility.
– dm63
Commented Jul 12, 2022 at 11:04
• @dm63: I have heard that as an explanation also, but could you develop the thought a bit more? It still doesn't make sense to me. The deposit facility sounds like a penalty currently -- if the bank didn't have to use it, they wouldn't, they would just leave their funds in their 'own' account with 0% interest. So if someone doesn't have deposit facility requirements, they wouldn't need to lend money at all, let alone at -0.58%... Commented Jul 13, 2022 at 12:16
• (unless there is some other aspect of the system penalizing them for holding money, more than the -0.58%?) Commented Jul 13, 2022 at 12:17
• Ohh I guess a bank could charge an entity -1% for storing funds. Then that participant would indeed want to lend it out at between -1% and -0.5% ... does this happen? Commented Jul 13, 2022 at 12:18

Update: today we have ESTR overnight bank rate =1.40% Euro deposit facility rate =1.50% 1week Euribor =1.39% So the situation persists even though rates are much higher. The reason that ESTR can be lower than the deposit facility rate is that the participants in ESTR cannot all access the deposit facility. Thus, some participants make deposits at 1.40%, and some banks are able to take those deposits and rede posit them at the ECB for a 10bp profit. This is explained on the ECB website

https://www.ecb.europa.eu/stats/financial_markets_and_interest_rates/euro_short-term_rate/html/eurostr_qa.en.html

• It makes sense for positive interest rate. But not for negative interest rate. A bank’s excess liquidity is considered as a deposit when the rates are negative. So if deposit rate is -0.5% and the bank doesn’t lend it out they lose -0.5% on the money. If a participant doesn’t have access to deposit facility, and they don’t do anything with it, then they would keep it at 0% instead of losing it at -0.57% — right? Commented Nov 12, 2022 at 10:26
• Hmmm UNLESS the non-participant has an even lower negative rate in their country. If they would lose -1% then better they deposit it at -0.57% . Was this the case? Commented Nov 12, 2022 at 10:28
• stats.bis.org/statx/srs/table/l1 YES Switzerland and Denmark had even lower rates. OMG it all makes sense now Commented Nov 12, 2022 at 10:32
• Hate to rain on your happiness, but: comparing to countries outside the Eurozone doesn’t make sense - you would have foreign exchange risk if you switched to a different currency.
– dm63
Commented Nov 12, 2022 at 12:33
• Aha yes, it’s true that retail money was able to get zero in banks. That because banks didn’t want to enrage the small guy. I believe this was not true for institutional money . I see why this is confusing.
– dm63
Commented Nov 14, 2022 at 14:07