This Felix Salmon article says that while the purpose of LIBOR used to be its use in loan agreements as a floating indicator of the bank lender’s cost of funding on the interbank market, but “today, banks don’t fund on the interbank market any more”. Don’t they? How do banks fund themselves beyond their deposits, if not the interbank market?
LIBOR and LIBID are the bid and ask of the same item (rate of borrowing). The LIBID is the bid as its name suggests, which means it is the rate that the bank is willing to borrow at. LIBOR is the ask (the OR stands for offered rate, which is the same as an ask) or how much the bank is willing to lend at. This is how all market traded items work (their is a bid and an ask, the difference is called the spread, deals tend to happen in between).
All of this is done by the banks submitting their bids and offers - Thomas Reuters calculates a LIBOR rate on the basis of the submissions and publishes on behalf of the British Bankers’ Association, but no equivalent publication exists for LIBID.
OK, I think I get it. What threw me is that banks don’t submit what they offer for LIBOR - they submit what they *get *offered. But I guess if you take those figures from all the major banks you’ll wind up with an aggregate of what all the banks are offering to each other, just in a slightly roundabout way.
Any idea where banks fund themselves if not on the interbank market any more?