London Interbank Mean Rate (LIMEAN)

What Is the London Interbank Mean Rate (LIMEAN)?

The London Interbank Mean Rate (LIMEAN) is the midmarket rate in the London interbank market, which is calculated by averaging the offer rate (LIBOR) and the bid rate (LIBID). The LIBOR is the rate at which funds are sold in the market, while the LIBID is the rate at which the funds are purchased in the market. LIMEAN represents the midmarket value of the two rates. However, the entire LIBOR system is scheduled to be phased out by 2023 and replaced with other benchmarks, such as the Sterling Overnight Index Average (SONIA).

Understanding LIMEAN

The LIMEAN rate can be used by institutions borrowing and lending money in the interbank market, instead of relying on the LIBID or LIBOR rates in any lending agreements. It can also be used to gain insight into the average rate at which money is being borrowed and lent in the interbank market. Because there is a bid-offer spread between LIBID and LIBOR, LIMEAN is a reference rate that can be useful when a single averaged rate is appropriate.

The acronym LIBID represents the bid rate that banks are willing to pay for eurocurrency deposits and other banks' unsecured funds in the London interbank market. Eurocurrency deposits refer to money in the form of bank deposits of a currency outside that currency's issuing country. They may be of any currency in any country. The most common currency deposited as eurocurrency is the U.S. dollar. For example, suppose U.S. dollars are deposited in any bank outside the United States. In that case, the deposit is referred to as a eurocurrency.

LIBOR and LIBID are both calculated and published daily. However, unlike LIBID, which has no formal correspondent responsible for fixing it, LIBOR is set and published daily by 6:55 a.m. Eastern Time (11:55 a.m. in London) by the ICE Benchmark Administration (IBA).

Some of the products using LIBOR are adjustable-rate mortgages (ARMs). In periods of stable or declining interest rates, LIBOR ARMs can be attractive options for homebuyers. These mortgages have no negative amortization and, in many cases, offer fair rates for prepayment. The typical LIBOR ARM is indexed to the six-month LIBOR rate plus 2% to 3%.

Limitations of the LIMEAN Rate: The LIBOR Scandal

In 2008, financial institutions were accused of fixing the London Interbank Offered Rate. The LIBOR scandal involved bankers from various financial institutions providing information on the interest rates they would use to calculate LIBOR. Evidence suggests that this collusion had been active since at least 2005, potentially earlier than 2003.

Evidence allegedly showed traders openly asking others to set rates at a specific amount so that a position would be profitable. Regulators in both the United States and the United Kingdom levied some $9 billion in fines on banks involved in the scandal and brought criminal charges.