The London Interbank Bid Rate (LIBID) played a crucial role in the international banking system as it represented the average interest rate at which major London banks were willing to borrow eurocurrency deposits from one another in the interbank market. Though it was less widely recognized than its counterpart, the London Interbank Offered Rate (LIBOR), LIBID served as a vital reference for understanding borrowing costs in the financial ecosystem.
Understanding LIBID
LIBID is best described as the bid rate that banks were willing to offer for eurocurrency deposits. This rate reflected the demand for liquidity among banks, with higher LIBID values indicating stronger demand to borrow funds in the interbank market. The dollar has been the most commonly deposited currency in this manner, and deposits across international borders that are not kept in their respective issuing countries are known as eurocurrency deposits. For example, dollar deposits held outside the U.S., especially in banks across London or other jurisdictions, are referred to as eurodollars.
The publication of LIBID rates was not standardized and was not as widely available as LIBOR rates, which were published by the Intercontinental Exchange (ICE). Additionally, LIBID was utilized predominantly within the interbank lending market, differentiating it from more broadly used rates like LIBOR.
The Connection Between LIBID and LIBOR
LIBID should be viewed in tandem with LIBOR to gain a clear perspective of interbank lending dynamics. While LIBOR is the offered rate—the rate at which banks are willing to lend eurocurrency—LIBID signifies their willingness to borrow. The difference between the two rates constitutes the bid-ask spread, providing insight into market conditions.
Historically, LIBOR had been established as the benchmark rate for interbank lending since the 1970s. It was calculated for various currencies—including Swiss francs, euros, pounds sterling, U.S. dollars, and Japanese yen—and multiple maturities, which facilitated a wide array of financial transactions and derivatives.
Enter the Scandals: The Demise of LIBID and LIBOR
The LIBID and LIBOR rates were phased out following scandals tied to rate manipulation that surfaced in 2012. Regulatory investigations unveiled collusion among banks, raising severe doubts about the integrity of these rates. Consequently, regulators began transitioning towards more reliable benchmarks.
In 2021, both LIBID and LIBOR began their phased withdrawal from market use, culminating in the termination of LIBOR publications on June 30, 2023. This sweeping change was largely driven by the need to restore confidence in financial markets and provide a more transparent methodology for benchmarking interest rates.
Mechanisms and Usage of LIBID
Before their phase-out, LIBID and LIBOR were widely utilized in the pricing of various financial instruments, including:
- Interest Rate Swaps: A financial derivative where two parties swap cash flows based on different interest rate indices.
- Forward Rate Agreements: Contracts to buy or sell interest rate exposure in the future.
- Short-Term Interest Futures: Futures contracts tied to short-term interest rates.
The London Interbank Mean Rate (LIMEAN) provided a calculated average between LIBOR and LIBID, serving as a useful midpoint reference for institutions engaged in borrowing and lending in the interbank market.
Transition to Alternative Reference Rates
As LIBID and LIBOR have been relegated to history, the finance sector has adapted by transitioning to new benchmarks such as the Secured Overnight Financing Rate (SOFR). SOFR is considered a more robust alternative, grounded in the actual transactions of the U.S. Treasury repurchase market, enhancing the transparency and reliability of interest rate benchmarks.
Despite the challenges associated with this transition, U.K. regulators have mandated the ongoing publication of synthetic U.S. Dollar LIBOR for a temporary period to alleviate the potential disruptions experienced by the financial sectors reliant on these rates.
Conclusion
Ultimately, LIBID served as a foundational element of the interbank lending environment, reflecting banks' willingness to borrow eurocurrency deposits. Its phasing out, alongside LIBOR, marked a significant shift in global financial practices and the metrification of interest rates. The emergence of reference rates like SOFR is indicative of a commitment towards greater transparency and a more resilient financial framework for the future.