Hong Kong Interbank Offered Rate

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Blog Author :

Prakhar Gajendrakar

Edited by :

Shreya Bansal

Reviewed by :

Dheeraj Vaidya, CFA, FRM

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What Is Hong Kong Interbank Offered Rate (HIBOR)?

The Hong Kong Interbank Offered Rate (HIBOR) is the designated benchmark interest rate utilized in the regional capital markets of Hong Kong for lending and borrowing funds over short periods, ranging from overnight to one year. This interest rate is denominated explicitly in Hong Kong dollars.

Hong Kong Interbank Offered Rate (HIBOR)

The Asian economy participants study it to understand the economic shift and changing market conditions. Banks are required to maintain sufficient funds in liquid form. The liquid cash availability can vary depending on the daily operations, services, and withdrawals. The bank can visit the interbank market in a funds deficit and borrow funds at a specific HIBOR rate.

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  • Hong Kong banks use the Hong Kong Interbank Offered Rate (HIBOR) for overnight lending and borrowing funds.
  • When a bank has a deficit in liquid funds, it can use the Hong Kong interbank market to borrow funds to maintain liquidity.
  • The banks receive the HIBOR value daily from the Hong Kong Association of Banks (HKAB), which also functions similarly to Hong Kong's central bank.
  • Amidst criticism and other alternative benchmark interest rates present to replace it, HIBOR is widely considered the best to follow.

How Does Hong Kong Interbank Offered Rate Work?

The Hong Kong Interbank Offered Rate (HIBOR) is the benchmark interest rate for lending funds between banks in Hong Kong's markets. The HKAB banking industry releases it daily. The HIBOR value is a reference rate for debt instruments, particularly in Hong Kong and the Asian markets. The application of HIBOR can be observed in many financial instruments like forward rate agreements, interest rate swaps, mortgage loan contracts, and other loan agreements.

The most effective use of HIBOR is to let banks borrow money from each other, keeping the HIBOR value as the standard interest rate. The HIBOR is often compared and linked with the LIBOR, although both serve the same purpose but are very distinct in terms of location, authority, and value determination mechanism technique. At the same time, LIBOR is more used than HIBOR as it is mainly limited to Asian markets and the Hong Kong banking system. HIBOR has been in the Hong Kong markets for more than three decades, and contrary to criticism, it is one of the best interest rate benchmarks to follow.

For instance, if a Hong Kong floating rate note pays a coupon dependent on HIBOR, it includes a yearly margin of 0.45%. A one-year HIBOR rate is used in such cases, adding a spread of 45 basis points. The coupon rate is adjusted to align with the one-year HIBOR rate, incorporating the predetermined spread. For example, if the initial one-year HIBOR is 3.15%, the bond would offer a coupon rate of 3.15% + 0.45% = 3.6% of its par value. The spread can vary, depending on the creditworthiness of the issuing bank, both positively and negatively.

History

The history of the Hong Kong Interbank Offered Rate can be traced back several decades, as it has been an essential reference rate since its establishment. Initially introduced in the 1980s, HIBOR was designed to provide a transparent and standardized rate for interbank borrowing and lending activities within Hong Kong's financial system. As a result, it has played a pivotal role in the interbank lending market, serving as a vital benchmark interest rate.

However, there have been times of heightened volatility, particularly during financial crises or significant market disruptions. These events have challenged the HIBOR and prompted evaluations and refinements to strengthen its robustness and resilience.

Throughout its history, the HIBOR has undergone various developments and adaptations to meet the changing needs of the financial industry. As a result, the calculation methodology has been refined over time, considering market dynamics and regulatory requirements.

How To Calculate?

The HIBOR calculation follows a step-by-step process -

  • Quotations from 20 designated banks are collected
  • Every two years, the banks are selected by the Hong Kong Association of Banks (HKAB) following the recommendation of the Treasury Market Association.
  • The rates are determined daily at 11 am but not on Saturdays. Each bank submits an estimated offer rate in the interbank market.
  • The highest quotations and the lowest three contributed values are eliminated, and the remaining 14 quotations are considered to determine the HIBOR.
  • The average mean is calculated, and the result is regulated to the fifth decimal place where appropriate.
  • The banks are selected based on their market reputation, FOREX activity, and credit standings.

Criticism

  • The HIBOR value as a benchmark is often criticized due to liquidity and volatility issues.
  • The criticism was not limited to HIBOR; LIBOR, treated as a global rate index, also faced the same accusations more concretely after the 1997 Asian currency crisis.
  • The HIBOR criticism grew when more and more related scandals came to light, especially after the speculations of interest rate manipulation.
  • Market analysts and experts have suggested that the mechanism used to fix HIBOR rates may have been flawed or subject to manipulation.

Hong Kong Interbank Offered Rate vs LIBOR vs Prime Rate

The HIBOR, LIBOR, and Prime Rate are three benchmark interest rates with specific applications in the financial industry. Let's understand them:

  • HIBOR is a benchmark rate specific to Hong Kong, while LIBOR is specific to London. Banks typically offer prime rates only to long-term corporate clients.
  • Banks use HIBOR and LIBOR for lending and borrowing between banks, but a prime rate is offered for loans to corporate clients and high-valued businesses.
  • HIBOR is determined by the average of 14 out of twenty banks. LIBOR is calculated from the mean value submitted by six of the eighteen banks. The prime rate depends on the bank management and is subject to the corporate client's reputation and relations with the bank.
  • Depending on their location, a group of banks has to follow the LIBOR and HIBOR rates, but they can offer different prime rates to their clients as per their choice.

Frequently Asked Questions (FAQs)

1. Is HIBOR linked to LIBOR?

No, the HIBOR and LIBOR are not linked to each other. The only point of similarity is that both HIBOR and LIBOR represent the interbank interest rate of their respective regions—the former for Hong Kong and the latter for London. Therefore, the rate of Hong Kong will not be applicable in London and, similarly, vice versa.

2. Is HIBOR being phased out?

No, the HIBOR is observed as an introductory interest rate in the financial market. Another rate is referred to as the Hong Kong Dollar Overnight Index Average (HONIA) as an alternative to the Hong Kong Interbank Offered Rate. Still, most institutions use a multi-rate approach in their operations; hence, both rates are equally important.

3. What is HIBOR used for?

When Hong Kong commercial banks borrow money for overnight or short-term periods of one year or less, they refer to the Hong Kong Interbank Offered Rate. Therefore, it is treated as the benchmark rate for lenders and borrowers in the Hong Kong Dollar-denominated financial instruments.