Inter-Bank Offer Rate
When a bank offers loan to other banks (or any other financial institutions), then it charges interest on that loan. The interest rates charged on the loans vary from bank to bank. But these rates need to follow a benchmark, so that interest rates does not differ too much among them (meaning, it should not happen, that an X bank charges 10 % interest per annum on a loan, whereas, Y bank charges 20 % on the same type of loan, it should be at par)
Generally, Inter-bank offer rate is of short-term nature (overnight to 1 year), and is followed for deciding interest rates to be charged on the loans offered to other banks (refer Call / Notice / Term Money) (inter-bank market). It acts like a benchmark for deciding interest rates.
Several financial markets follow different Inter-bank offer rates, like –
- London Inter-Bank Offer Rate (LIBOR)
- Mumbai Inter-Bank Offer Rate (MIBOR)
- Tokyo Inter-Bank Offer Rate (TIBOR)
- Singapore Inter-Bank Offer Rate (SIBOR)
- Hong Kong Inter-Bank Offer Rate (HIBOR), etc.
LIBOR was first published in 1986 for three currencies – USD, GBP (Great Britain Pound) and JPY (Japanese Yen). Later on several other currencies were added in the list (currently 10 currencies). It is published daily at 11:30 A.M (London time) by Thomson Reuters, and Libor rates are determined for 15 borrowing periods (e.g., overnight, 1 week, 2 weeks, 1 month, etc. up to 1 year).
Formerly the Libor was maintained by British Bankers’ Association (BBA), but the responsibility is now transferred to Intercontinental Exchange.
# Reader’s Question
How is Libor rate calculated?
At 11:00 AM, major banks (18 major global banks for the USD Libor) are called to participate on the survey asking for the inter-bank offer rates. The highest four and the lowest four interest rates (on the survey) are trimmed out (not used for calculation). Then the remaining (remaining 10 for USD Libor) interest rates are averaged, and makes the Libor rate.
Libor rate is published at 11:30 A.M. This happens for all the 10 currencies, taking major banks for each currency.
MIBOR rate is for Indian inter-bank market, and is calculated on daily basis by National Stock Exchange (NSE), along with Fixed Income Money Market and Derivative Association of India (FIMMDA).
It is a weighted average of lending rates of a group of banks (including Public Sector banks, Private Sector Banks, Primary Dealers, Foreign Banks in India, etc.), on funds lent to first-class borrowers (well rated borrowers)
MIBOR is published on different timings (e.g., 9:40 A.M., 11:30 A.M. etc), and for several maturity periods (e.g., overnight, 3 days, 2 weeks, 1 month, etc.)
Mumbai Inter-Bank Bid Rate (MIBID) is the opposite of MIBOR. While MIBOR is the benchmark rate at which banks are willing to offer loans to other bank, MIBID is the benchmark rate at which banks are willing to take loans (paying the MIBID interest rate) from other banks.
Note that MIBID rate is always less than MIBOR rate, because, banks will try to pay less interest after taking loans, and will try to get more interest while offering loans. It is also the weighted average of interest rates at which several banks (taken as survey) are willing to pay.
Currently FIMMDA and NSE came with a new product, named as ‘FIMMDA-NSE MIBID/MIBOR’ which acts like the benchmark for the inter-bank market in India (taking both MIBOR and MIBID together)
Products linked with LIBOR/MIBOR
- Call, Notice, Term Money
- Forward Rate Agreements
- Future Interest Rate
- Interest Rate Swaps (IRS)
- Swap Options
- Overnight Index Swaps, etc.