What Was the London Interbank Bid Rate (LIBID)?
The London Interbank Bid Rate (LIBID) was the average interest rate at which major London banks bid for eurocurrency deposits from other banks in the interbank market. It represented the bid rate banks were willing to pay for eurocurrency deposits and other banks’ unsecured funds in the London interbank market. On the other hand, the more popular LIBOR was the offered rate.
Eurocurrency deposits refer to money in the form of bank deposits of a currency outside that currency’s issuing country, executable with any currency in any geographical location.
As a result of LIBOR rate fixing scandals, LIBID was phased out along with LIBOR, beginning in 2021.
Key Takeaways
- LIBID: Reflected the rate at which banks were willing to borrow eurocurrency deposits.
- LIBOR: The offered rate at which banks were willing to lend to each other.
- Dominant Currency: The U.S. dollar was the most deposited currency in accounts deemed eurocurrency.
- Phasing Out: Due to scandals, both LIBOR and LIBID were progressively phased out starting in 2021.
Grasping the Essence of LIBID
LIBID was the counterpart to the more well-known London Interbank Offered Rate (LIBOR). While LIBOR illustrated the ‘ask’ rate at a bank’s willingness to lend eurocurrency deposits to another bank, LIBID showcased the ‘bid’ rate for borrowing.
The difference between the two is the bid-ask spread on these transactions, where a higher LIBID indicated a rising demand for borrowing funds.
Moreover, while LIBOR became a globally acknowledged benchmark interest rate calculated and published by Intercontinental Exchange (ICE), LIBID was neither standardized nor publicly visible outside the interbank lending market. Notably, the most frequent eurocurrency deposited was the U.S. dollar, defined as eurodollars outside the U.S.
Contrasting LIBID and LIBOR
Both LIBID and LIBOR served as reference rates originated from banks in the London interbank market—a wholesale money market where banks exchanged currencies electronically or directly.
Introduced in the 1970s, LIBOR became the benchmark rate for interbank lending, calculated for seven maturities across five currencies: Swiss franc, euro, pound sterling, U.S. dollar, and Japanese yen. Before being decommissioned, 35 distinct LIBOR rates were aggregated daily.
LIBOR’s decline stemmed from scandals and questions about its validity, leading to most LIBOR rates ceasing publication on June 30, 2023, replaced by the Secured Overnight Financing Rate (SOFR). Interim LIBOR for one-week and two-month USD ceased on December 31, 2021.
Use of LIBID Rates
Before their phase-out, both LIBOR and LIBID rates functioned as premier global reference points for short-term interest rates covering several financial instruments, like interest futures contracts, forward rate agreements, interest rate swaps, and currency options.
LIBOR also played a pivotal role in the eurodollar market and retail financial products, including mortgages and student loans.
The London Interbank Mean Rate (LIMEAN) computed the mid-point between LIBOR and LIBID, thereby identifying the spread, utilized by institutional players in borrowing and lending within the interbank market.
Current Status of LIBID and LIBOR
Following the final publication on June 30, 2023, contracts tied to LIBOR are now referenced against alternate rates, such as SOFR. UK regulators, nonetheless, called for the temporary publication of synthetic U.S. Dollar LIBOR to ease this transition.
Reasons for Phasing Out LIBID and LIBOR
The elimination of the London Interbank Offer Rate (LIBOR) alongside the Bid Rate (LIBID) resulted from the 2012 rate-fixing scandal revealing banks’ manipulation of these benchmarks. This revelation initiated their gradual phase-out starting in 2021, concluding in 2023.
What’s Next After LIBOR and LIBID?
The Secured Overnight Financing Rate (SOFR) now serves as the key reference rate, replacing LIBOR. Nonetheless, a synthetic U.S. Dollar LIBOR remains in circulation to help manage the transition process.
Conclusion
LIBID served as a critical reference rate gauging interbank borrowing costs. Together with LIBOR, it informed variable-rate financial products, including mortgages. However, the fallout from rate-fixing scandals necessitated their replacement by the Secured Overnight Financing Rate (SOFR) post-2021.
Related Terms: LIBOR, LIMEAN, SOFR, eurocurrency, bid-ask spread, rate fixing scandal.
References
- The Intercontinental Exchange (ICE). “LIBOR”.
- Securities and Exchange Commission. “What You Need to Know About the End of LIBOR”.
