What Is the Hong Kong Interbank Offered Rate (HIBOR)?
In Hong Kong, the Hong Kong Interbank Offered Rate (HIBOR) is the benchmark interest rate for lending between banks in Hong Kong dollars. The HIBOR is a reference rate for financiers and borrowers in the Asian economy. Plans were underway to switch from HIBOR to the Hong Kong Overnight Index Average by December 2020.
Hong Kong Interbank Offered Rate
Banks utilize interbank markets for moving cash and currencies and maintaining liquidity. A Hong Kong bank will borrow at the Hong Kong Interbank Offered Rate if withdrawals come close to depleting short-term cash reserves. Loan periods range from overnight to one year. The UK’s London Interbank Offered Rate (LIBOR) works similarly to the Hibor.
Daily rate releases are at 11:00 a.m. local time. The Hong Kong Association of Banks (HKAB) decided on the 20 contributing quotations. The HKAB functions as a central bank for Hong Kong. Discarding the greatest and lowest three contributions leaves 14 contributions in the computation.
In Asian debt markets, HIBOR is the benchmark reference rate. This function supports government and corporate bonds, mortgages, derivatives, and other financial instruments. In an interest rate exchange between two parties with high credit ratings and Hong Kong dollar bonds, the quotation is typically HIBOR plus a percentage.
Alternatively, a Hong Kong dollar-denominated floating-rate note (FRN) pays coupons based on HIBOR plus a 35 basis point (0.35%) yearly margin. This rate is a one-year HIBOR plus a 35 basis point spread. Annually, the coupon rate adapts to the current Hong Kong dollar one-year HIBOR and preset spread.
If the one-year HIBOR is 4% at the start, the bond will return 4.35% of its par value at year’s end. The spread fluctuates with the loan issuer’s creditworthiness.
HIBOR criticism
The 1997 Asian currency crisis raised worries about volatility and liquidity, leading to questions about HIBOR’s utility as a benchmark. Since the 2012 LIBOR manipulation scandal, even the global benchmark has been under assault. It is planned to replace LIBOR with alternative standards like SONIA by 2023, as of December 2020.SONIA uses contributing banks’ bids and offers, not levels. The contributing bank can manipulate it if it wishes to hide or boost its capital.
The city’s 2013 HIBOR market controversy involved suspected manipulation of this critical interest rate. Despite the effectiveness of the HIBOR fixing mechanism, comparable issues in other interbank markets are driving the need for substitutes.
The globally acknowledged LIBOR standard drives the replacement push. The U.S. Federal Reserve and Treasury Department’s Office of Financial Research released the secured overnight financing rate (SOFR) as a new reference rate.
