London Interbank Mean Rate LIMEAN
London Interbank Mean Rate (LIMEAN) is the midmarket rate in the London interbank market, calculated by averaging the offer rate (LIBOR) and the bid rate (LIBID). LIMEAN represents the midmarket value of the two rates. However, the entire LIBOR system will be phased out by 2023 and replaced with other benchmarks, such as the Sterling Overnight Index Average (SONIA).
Key Takeaways:
– LIMEAN is a benchmark reference for interest rates in the London interbank market.
– LIMEAN is calculated as the average of LIBOR and LIBID, the offer and bid rates on short-term funds in the London interbank market.
– The entire LIBOR system, including LIMEAN, will be phased out by 2023 and replaced with other benchmarks.
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 provide insight into the average rate at which money is borrowed and lent in the interbank market. LIMEAN is a useful reference rate 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 bank deposits of a currency outside its issuing country. LIBOR and LIBID are both calculated and published daily. Unlike LIBID, 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 products using LIBOR include adjustable-rate mortgages (ARMs). During periods of stable or declining interest rates, LIBOR ARMs can be attractive options for homebuyers. These mortgages have no negative amortization and often offer fair prepayment rates. 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.
Regulators in the United States and United Kingdom levied approximately $9 billion in fines on banks involved in the scandal and brought criminal charges.
