London Interbank Bid Rate (LIBID)

October 3, 2023 3 min read Finance Banking Economic History LIBID Interest Rates Banking History Financial Markets Rate Fixing Scandals

Understand the fundamentals and historical context of the London Interbank Bid Rate (LIBID), its relationship with LIBOR, and reasons for its phase-out.

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Introduction to London Interbank Bid Rate (LIBID)

The London Interbank Bid Rate (LIBID) historically served as a crucial financial benchmark in the illustrious corridors of international banking. Essentially, it was the less flamboyant cousin of the London Interbank Offered Rate (LIBOR), representing the average interest rate at which major London banks were prepared to borrow eurocurrency deposits from peer institutions within the vibrant interbank market.

Contrary to its counterpart LIBOR, which was the rate banks charged others, LIBID was indicative of the rates banks were prepared to pay to attract deposits. Such distinctions might seem trivial to the uninitiated, but in the dizzying world of finance, they’re as significant as the difference between shaken and stirred in a James Bond martini!

The Technical Merits of LIBID

LIBID played a pivotal role, not just as a number that bankers whispered passionately to one another across polished desks, but as a veritable pulsometer of the short-term liquidity needs within the banking sector. At times of high LIBID rates, it indicated a burgeoning demand for borrowing amongst banks—a veritable ‘Bankers’ Hunger Games’, if you will.

Comparison with LIBOR

While LIBOR basked in the global limelight, LIBID was akin to the stagehand who ensured the show went smoothly, by helping manage the ebbs and flows of banking liquidity. LIBOR and LIBID together illustrated the bid-ask spread in the interbank market, a critical indicator for financial professionals who deciphered these signals as deftly as Morse code enthusiasts unraveled dots and dashes.

Phasing Out of LIBID

Aligned with the tragic fall of LIBOR following the infamous rigging scandals—a saga worthy of a finance-themed soap opera—LIBID too receded into the annals of banking history. Post-2021, the financial world turned its eye to alternative, less scandal-prone benchmarks, thus closing the chapter on an era defined as much by innovation as by its susceptibility to manipulation.

Why Does LIBID Matter?

In the grand tapestry of financial benchmarks, LIBID might appear a minor thread. Yet, understanding its function and mechanisms provides valuable insights into the intricacies of interbank dynamics and liquidity management. For historians and economists, LIBID serves as a testament to an era where the interbank market was less transparent, offering lessons in both financial innovation and the paramount importance of integrity in market practices.

Eurocurrency Markets: These markets deal with currencies deposited outside their home country, crucial in understanding the context of LIBID.
Bid-Ask Spread: The difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept.
Financial Scandals: Understanding the LIBOR scandal helps grasp why LIBID was also phased out.
Alternate Reference Rates: Post-LIBOR/LIBID, rates like the Secured Overnight Financing Rate (SOFR) have gained prominence.