What Is the London Interbank Mean Rate – LIMEAN?
The London Interbank Mean Rate (LIMEAN) is the mid-market 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 mid-market value of the two rates.
What Does the LIMEAN Tell You?
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 or to determine the market spread between the interbank lending bid and ask rates.
How the LIMEAN Is Used
The acronym LIBID is 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, if U.S. dollars are deposited in any bank outside the U.S – Europe, the U.K., anywhere – then 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 around 6:45 a.m. EST (11:45 a.m. in London) by the ICE Benchmark Administration (IBA).
LIBOR is set by 16 international member banks and, by some estimates, places rates on a staggering $360 trillion of financial products across the globe. Included in those products are adjustable rate mortgages (ARMs). In periods of stable 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 ARM is indexed to the six-month LIBOR rate plus 2%-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.