The London Inter-Bank Offered Rate (LIBOR) is the interest rate applied when banks borrow from one another. A lending bank can expect to be paid this rate by a borrowing bank. The London Inter-Bank Bid Rate (LIBID and LIBID full form) is the interest rate that a borrowing bank is prepared to pay. This is a simple explanation of LIBID vs LIBOR.
These rates are set every day in London by the British Bankers' Association (BBA). You can explain and define LIBID as applying to the Inter-Bank market, while LIBOR is widely used as a major reference rate for multiple additional rates. These other rates may be applied to adjustable-rate mortgages, small business loans or student loans in some countries.
Read More: The Advantages of Libor
Setting These Two Rates Daily
Each day, a group consisting of major world banks notifies the BBA of data concerning LIBOR and LIBID. The banks relay the rates that they expect to be required to pay and are willing to pay for loans received or issued. The BBA then disregards the top four and bottom four of these rates to arrive at two averages. These two averages (rates) are published at 11 a.m. London time (6 a.m. EST) every day.
The BBA website provides a listing of a group of 26 participating banks. This list includes Bank of America, Citibank, JP Morgan Chase and Barclays. The rates are listed for 10 major currencies, and the list limits each currency group or panel to 16 different banks.
Benefit of Two Different Rates
When first considering how to understand and define LIBID vs LIBOR, it may seem strange to many consumers that these two different rates are used by banks. In other lending and borrowing agreements, one rate is used by both the lender and the borrower. Yet banks that participate in the London Inter-Bank market use the two different rates to enable them to make profits by receiving deposits and re-lending them.
When banks request a higher rate on interest to be received (LIBOR) than on interest to be paid for amounts borrowed (LIBID or LIBID full form), the banks can anticipate making profits on lending or re-lending.
Read More: Why Do Banks Borrow Money From Each Other?
Average of LIBOR and LIBID
Due to the difference between LIBOR and LIBID, banks frequently use another reference in their financial transactions. This reference is LIMEAN, which is the average of LIBOR and LIBID. LIMEAN serves as a dependable reference to the interest rate that is used by the Inter-Bank market. The typical difference between LIBOR and LIBID equals one-eighth of one percent (12.5 basis points), which fluctuates somewhat throughout each day.
Daily Activity of the Inter-Bank Market
At the start of every business day and whenever they receive customer orders, banks determine what amounts they need to borrow. They also decide their lending limits for the day. Afterward, they enter the market and attempt to acquire funds at the best possible rate.
According to their needs, the banks offer or accept the rates of either LIBOR or LIBID and LIBID full form. The majority of this activity takes place before 11 a.m. Afterward, the banks begin to withdraw from the market since they have completed their desired daily borrowing or lending activity.
The Full Form of LIBOR
The London Inter-Bank Offered Rate is the full form of LIBOR. Defined as an average interest rate, it is intended only for use by a panel of international banks. These banks can lend short-term loans, or unsecured funds, to each other using the full form of LIBOR.
This rate is computed, published and administered by the Intercontinental Exchange (ICE). It is calculated for use in five currencies: the Euro, Swiss Franc, Pound Sterling, US Dollar and Japanese Yen.
Read More: What Is a LIBOR Loan?
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.