LIBID vs. LIBOR: An Overview
Let me explain LIBID and LIBOR to you directly—these were once crucial reference rates in the London interbank market, where banks traded funds either face-to-face or via electronic platforms. LIBOR, or the London Interbank Offered Rate, was the rate at which banks lent money to each other. On the other hand, LIBID, the London Interbank Bid Rate, was the rate banks were prepared to pay to borrow those funds.
Both played significant roles in global finance, with LIBOR being especially prominent. They acted as benchmarks for various financial tools, including short-term interest futures, forward rate agreements, interest rate swaps, and currency options.
LIBOR was central to the eurodollar market and influenced pricing for everyday products like mortgages, student loans, and credit cards, holding a key position in financial markets for many years.
But that ended when LIBOR was officially discontinued on June 30, 2023, driven by issues with its reliability, transparency, and susceptibility to manipulation. LIBID faced the same fate, viewed as equally unreliable, and its use had already been fading well before the official end.
With LIBOR gone, institutions have shifted to alternatives like the Secured Overnight Financing Rate (SOFR) in the U.S. and the Sterling Overnight Index Average (SONIA) in the U.K.
Key Takeaways
- LIBID and LIBOR were interest rate benchmarks for short-term rates in the London interbank market, but they've both been discontinued.
- LIBID indicated the rate banks were willing to pay for eurocurrency deposits, while LIBOR showed the rate for lending.
- Both have been supplanted by more transparent, transaction-based benchmarks like SOFR and SONIA.
LIBID
The London Interbank Bid Rate, or LIBID, was what banks offered to pay for eurocurrency deposits and other funds in the London interbank market. Eurocurrency deposits are funds in a currency held outside its home country—for instance, U.S. dollars in a non-U.S. bank are eurodollars.
LIBID typically sat below LIBOR, representing the bid side of the market. Some institutions used it, but it wasn't as widely adopted or regulated as LIBOR.
As LIBOR's phase-out began, LIBID lost relevance too, mainly because interbank lending volumes dropped and there was no formal calculation method.
LIBOR
The London Interbank Offered Rate, LIBOR, was the rate at which global banks lent unsecured funds to each other, covering various maturities and currencies. It was computed daily for five currencies—the Swiss franc, euro, pound sterling, U.S. dollar, and Japanese yen—across seven maturities from overnight to one year.
Despite its broad use in financial markets, declining transaction volumes and manipulation scandals led to its end.
Cessation of LIBOR and Transition to Alternative Rates
LIBOR's discontinuation stemmed from doubts about its reliability and ease of manipulation. It relied on banks' daily estimates, not real transactions, which opened the door to abuse.
This issue blew up in the 2012 LIBOR scandal, where banks were found submitting false rates to boost their trading profits, eroding trust worldwide.
Post-2008 financial crisis, the unsecured interbank lending market shrank, making LIBOR more reliant on judgments than actual data.
Once it was clear LIBOR couldn't be trusted, regulators opted for benchmarks grounded in observable data to minimize manipulation risks.
In the U.S., that's the Secured Overnight Financing Rate (SOFR), based on overnight Treasury repo agreements. The U.K. went with the Sterling Overnight Index Average (SONIA).
These new rates are more transparent, harder to manipulate, and better aligned with real market conditions.
Fast Fact
The U.S. dollar LIBOR ceased publication on June 30, 2023.
What Is SOFR?
SOFR, the Secured Overnight Financing Rate, is a U.S. benchmark reflecting the cost of overnight borrowing backed by U.S. Treasuries in the repo market. It affects short-term rates for loans and contracts. SOFR took over from LIBOR after its flaws, like manipulation risks from bank estimates, became apparent. Unlike LIBOR, SOFR draws from actual transactions, enhancing transparency.
Why Was LIBOR Discontinued?
LIBOR ended because it used bank-submitted estimates instead of real transactions, making manipulation easy. The 2012 revelations showed banks faking rates for personal gain. After 2008, fewer interbank transactions meant even more dependence on estimates, worsening the problems.
Who Decides Interest Rates?
Central banks set interest rates in most countries. In the U.S., that's the Federal Reserve's job, with the Federal Open Market Committee (FOMC) meeting to adjust rates for inflation control, employment, and growth. This benchmark then guides banks in setting rates for their loans and products.
The Bottom Line
LIBID and LIBOR were vital benchmarks in global finance, each with distinct roles. LIBOR influenced many short-term rates, including those for mortgages and credit cards.
Credibility problems led to LIBOR's full phase-out in 2023, with LIBID ending earlier. Now, more reliable options like SOFR and SONIA have taken their place.
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