What Is the Hong Kong Interbank Offered Rate (HIBOR)?
Let me explain what HIBOR is directly to you: the Hong Kong Interbank Offered Rate, or HIBOR, stands as the benchmark interest rate in Hong Kong dollars for lending between banks in the Hong Kong market. You should know it's a reference rate for lenders and borrowers involved directly or indirectly in the Asian economy. As of December 2020, there were plans to shift away from HIBOR toward the Hong Kong Overnight Index Average (HONIA).
Understanding the Hong Kong Interbank Offered Rate (HIBOR)
In the banking world, we use an interbank market to transfer funds, currency, and manage liquidity. If a Hong Kong bank approaches the point where withdrawals nearly deplete its short-term cash reserves, that bank enters the Hong Kong interbank market to borrow at the HIBOR rate. These loans range from overnight to one year. It's similar to the UK's London Interbank Offered Rate (LIBOR).
The rate comes out each day at 11:00 a.m. local time, based on quotes from 20 banks selected by the Hong Kong Association of Banks (HKAB), which functions like a central bank for Hong Kong. They discard the top three and bottom three quotes, using the remaining 14 for the calculation.
HIBOR's main role is as the benchmark reference rate in Asian markets for debt instruments. This helps with government and corporate bonds, mortgages, and derivatives like currency and interest rate swaps, plus many other financial products. For instance, an interest rate swap between two counterparties with strong credit ratings, both issuing bonds in Hong Kong dollars, would typically be quoted as HIBOR plus a certain percentage.
Take another example: a Hong Kong dollar-denominated floating-rate note (FRN), or floater, that pays coupons based on HIBOR plus a 35 basis point margin (0.35%) each year. Here, the rate used is the one-year HIBOR plus that 35 basis point spread. Annually, the coupon resets to the current Hong Kong dollar one-year HIBOR plus the fixed spread.
If the one-year HIBOR starts at 4% for the year, the bond returns 4.35% of its par value at year's end. That spread adjusts up or down based on the issuing institution's creditworthiness.
Criticism of HIBOR
Since the 1997 Asian currency crisis, I've seen growing concerns about HIBOR's volatility and liquidity, leading many to question its reliability as a benchmark. Even LIBOR, a global standard, has come under scrutiny, especially after the 2012 fixing scandal. By December 2020, plans were set to phase out LIBOR by 2023, replacing it with benchmarks like the Sterling Overnight Index Average (SONIA). SONIA relies on actual bids and offers from banks, not indicated levels that could be manipulated to hide or boost capital positions.
In 2013, Hong Kong expanded its probe into possible HIBOR manipulation, but the fixing mechanism was ultimately deemed sound. Still, with similar issues in other interbank markets, the push for replacements continues. The focus is on LIBOR as the global standard, and the U.S. Federal Reserve introduced the secured overnight financing rate (SOFR), developed with the U.S. Treasury Department’s Office of Financial Research.
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