London Interbank Bid Rate (LIBID) Explained: Definition, Function, and Transition to Alternative Benchmarks

The London interbank bid rate (LIBID) played a crucial role in the global financial system as a benchmark interest rate indicating the average rate at which major London banks bid for eurocurrency deposits from other financial institutions. While it operated in tandem with the London interbank offered rate (LIBOR), LIBID provided essential insights into interbank borrowing costs and market dynamics. However, due to rate-fixing scandals and regulatory scrutiny, both LIBID and LIBOR were phased out, leading to the adoption of alternative benchmarks. This article explores the intricacies of LIBID, its significance in the financial landscape, and the transition to alternative benchmarks.

The london interbank bid rate (LIBID) represented the bid rate at which banks were willing to borrow eurocurrency deposits, contrasting with the offered rate presented by LIBOR. It was an essential metric in the interbank lending market, reflecting the demand for borrowing funds among financial institutions. Unlike LIBOR, which was widely recognized and published by Intercontinental Exchange (ICE), LIBID lacked standardization and public availability, primarily confined to interbank transactions.

LIBID and LIBOR were both pivotal reference rates in the London interbank market, with LIBID indicating the borrowing interest rate and LIBOR representing the lending interest rate. While LIBOR served as a benchmark for various financial instruments and retail products, LIBID primarily influenced interbank transactions. The distinction between the bid and offered rates facilitated efficient price discovery and liquidity management in the interbank market.

LIBID, along with LIBOR, played a crucial role in determining borrowing costs for financial institutions, influencing the pricing of diverse financial products such as interest rate swaps, futures contracts, and currency options. These rates provided a reliable basis for assessing short-term borrowing expenses and shaping investment decisions in the financial markets. Additionally, the london interbank mean rate (LIMEAN) offered insights into the spread between LIBID and LIBOR, aiding market participants in risk assessment and decision-making.

Following the rate-fixing scandals and regulatory scrutiny, LIBID and LIBOR were phased out, with the final LIBOR rate published in 2023. Contracts referencing these rates transitioned to alternative reference rates such as the secured overnight financing rate (SOFR). However, synthetic U.S. dollar LIBOR continued to be published temporarily to facilitate the transition process.

The validity of LIBID and LIBOR was marred by the rate-fixing scandal, raising concerns about the integrity and reliability of these benchmark rates. As a result, regulatory authorities initiated the phase-out process to transition to more robust and transparent reference rates. The replacement of LIBID and LIBOR aimed to enhance the integrity and efficiency of financial markets, mitigating the risks associated with benchmark rate manipulation.

In response to the phase-out of LIBID and LIBOR, alternative reference rates such as the secured overnight financing rate (SOFR) emerged as replacements. These rates offer enhanced transparency, resilience, and regulatory oversight, addressing the shortcomings of the previous benchmark rates. While the transition from LIBID and LIBOR posed challenges for market participants, the adoption of alternative reference rates promotes greater stability and credibility in the financial system.

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.

LIBID and LIBOR were phased out due to rate-fixing scandals and concerns about their integrity as benchmark rates, prompting regulatory authorities to transition to more robust and transparent reference rates.

LIBID and LIBOR were replaced by alternative reference rates such as the secured overnight financing rate (SOFR), which offer enhanced transparency, resilience, and regulatory oversight in the financial markets.