Definition
The London Inter Bank Bid Rate (LIBID) is the rate at which banks in the London interbank market are willing to borrow funds from each other. This rate is critical for the functioning of the financial system as it helps establish the cost of borrowing for banks, which in turn influences the interest rates that banks charge on loans to customers, ranging from personal loans to mortgages.
Examples
Example 1:
A bank in London has excess liquidity and is looking to loan out its surplus funds to another bank. The rate at which it is willing to offer these funds is pegged against the LIBID.
Example 2:
The LIBID rate often serves as a benchmark for other interest rates in the economy. For instance, a corporate bond might pay interest at a rate of “LIBID + 150 basis points,” where the interest rate would adjust according to the prevailing LIBID rate.
Frequently Asked Questions
Q1: How is the LIBID rate determined?
- The LIBID rate is derived from the average bid rates of multiple contributing banks in the London interbank market.
Q2: How does LIBID differ from LIBOR?
- LIBID represents the rate at which banks are willing to bid for deposits, whereas LIBOR (London Interbank Offered Rate) refers to the rate at which banks are willing to lend. Essentially, LIBID is the buying rate, and LIBOR is the selling rate.
Q3: Why is the LIBID rate important?
- LIBID is important because it provides a benchmark for various financial instruments and helps in assessing the liquidity and credit risk of banks within the interbank market.
Q4: Has the transition from LIBOR affected LIBID?
- Yes, the transition away from LIBOR to other reference rates in financial markets has also necessitated changes in how interbank bid rates, like LIBID, are determined and used.
LIBOR (London Interbank Offered Rate): The rate at which banks lend funds to each other in the international interbank market for short-term loans.
IBOR (Interbank Offered Rate): A general term for the rates charged by banks on short-term loans to each other in different financial centers.
Basis Point: One hundredth of a percentage point (0.01%), used to denote changes in interest rates or yield spreads in financial markets.
SOFR (Secured Overnight Financing Rate): A new reference rate replacing LIBOR in the United States, calculated based on transactions in the Treasury repurchase market.
Online References
Suggested Books for Further Studies
- “Interest Rate Markets: A Practical Approach to Fixed Income” by Siddhartha Jha
- “The Handbook of Fixed Income Securities” by Frank J. Fabozzi
- “Financial Markets and Institutions” by Frederic S. Mishkin and Stanley G. Eakins
Accounting Basics: “LIBID” Fundamentals Quiz
### What does LIBID stand for?
- [x] London Inter Bank Bid Rate
- [ ] London Inter Bank Interest Deposit
- [ ] Lease Installment Bank Interest Deposit
- [ ] Long-term Interest Bond Indexed Deposit
> **Explanation:** LIBID stands for London Inter Bank Bid Rate, which is the rate at which banks agree to borrow from each other in the London interbank market.
### How does LIBID compare to LIBOR?
- [ ] LIBID is always higher than LIBOR.
- [ ] LIBID and LIBOR are the same.
- [x] LIBID is typically lower than LIBOR.
- [ ] LIBID does not affect LIBOR.
> **Explanation:** LIBID is generally lower than LIBOR because it represents the interest rate at which banks are willing to borrow, whereas LIBOR is the rate at which banks are willing to lend.
### Which market uses the LIBID rate?
- [ ] Stock Market
- [x] Interbank Market
- [ ] Real Estate Market
- [ ] Commodity Market
> **Explanation:** LIBID is used in the interbank market, specifically in the London interbank market where banks lend and borrow from one another.
### Why is the LIBID rate important?
- [ ] It determines stock prices.
- [ ] It affects consumer savings rates.
- [x] It serves as a benchmark for various financial instruments.
- [ ] It determines government bond yields.
> **Explanation:** LIBID is important as it serves as a benchmark for various financial instruments and helps in assessing liquidity and credit risk within the interbank market.
### What happens to the LIBID rate if there is increased uncertainty in the financial markets?
- [ ] It decreases.
- [x] It increases.
- [ ] It remains stable.
- [ ] It becomes negative.
> **Explanation:** The LIBID rate would typically increase during periods of financial uncertainty as banks become more cautious about lending and demand higher rates for lending their money.
### How frequently can the LIBID rate change?
- [x] Daily
- [ ] Weekly
- [ ] Monthly
- [ ] Annually
> **Explanation:** The LIBID rate is a dynamic rate that can change daily based on the conditions and transactions occurring within the interbank market.
### What is one possible replacement for LIBID in the future?
- [ ] EURIBOR
- [ ] Amortized Cost Method
- [ ] Balance Sheet Depreciation
- [x] Alternative Reference Rates such as SOFR
> **Explanation:** In the context of moving away from LIBOR, alternative reference rates like SOFR are being considered to replace traditional rates including LIBID.
### Which organization is liable for determining LIBID?
- [ ] London Stock Exchange
- [ ] Financial Conduct Authority (FCA)
- [x] Averages of contributing banks in the London interbank market
- [ ] The European Central Bank
> **Explanation:** The LIBID rate is generally determined by the averages derived from the bid rates offered by major banks operating in the London interbank market.
### How does a higher LIBID rate affect borrowers?
- [x] It increases the cost of borrowing.
- [ ] It has no effect.
- [ ] It decreases the cost of borrowing.
- [ ] It stabilizes borrowing costs.
> **Explanation:** A higher LIBID rate increases the cost of borrowing for banks, which can then lead to higher interest rates on loans to consumers and businesses.
### What role does LIBID play in the context of corporate bonds?
- [x] It serves as a benchmark.
- [ ] It determines stock options.
- [ ] It calculates depreciation.
- [ ] It assesses credit ratings.
> **Explanation:** LIBID often serves as a benchmark for corporate bonds, influencing the interest rates that companies pay when issuing bonds referenced to this rate.
Thank you for exploring our detailed guide on the London Inter Bank Bid Rate (LIBID) and testing your knowledge with our quiz. Continue to expand your financial acumen!
