Hong kong interbank offered rate hibor: Meaning, Criticisms & Real-World Uses

What Is Hong Kong Interbank Offered Rate (HIBOR)?

The Hong Kong Interbank Offered Rate (HIBOR) is a crucial benchmark interest rate for Hong Kong dollar (HKD) denominated transactions within the Hong Kong interbank market. It represents the annualized interest rate at which banks in Hong Kong lend unsecured funds to one another for various specified periods, ranging from overnight to one year. HIBOR falls under the broader financial category of Money Market Rates. This rate is vital for managing liquidity among financial institutions and serves as a reference point for a wide array of financial products.

When a bank faces a temporary shortfall in its short-term cash reserves, it may borrow from other banks in the Hong Kong interbank market at the prevailing HIBOR rate. This mechanism helps maintain stability in the banking system by facilitating the efficient flow of funds. HIBOR rates are quoted for different maturities, offering insights into the short-term cost of borrowing within the local banking sector.

History and Origin

The Hong Kong Interbank Offered Rate (HIBOR) has been a cornerstone of Hong Kong's financial system for decades, officially known as the "Hong Kong Dollar Interest Settlement Rates". It is determined and published daily by the Hong Kong Association of Banks (HKAB).⁴¹ The methodology for setting HIBOR has evolved to ensure its accuracy and integrity, adapting to market dynamics and regulatory standards. For instance, an additional fixing for offshore Chinese renminbi (CNH) was launched in June 2013, known as CNH HIBOR, reflecting the growing importance of the renminbi in global finance. The rates are fixed each business day, excluding Saturdays, providing a consistent reference for market participants. The official HIBOR rates are typically released on the HKAB website.⁴⁰

Key Takeaways

HIBOR is the benchmark interest rate for interbank lending in Hong Kong dollars, influencing a broad range of financial products.
It is calculated daily by the Hong Kong Association of Banks (HKAB) based on submissions from a panel of 20 contributing banks, using a trimmed mean approach.³⁹
HIBOR rates are available for various tenors, from overnight to one year, reflecting different short-term borrowing costs.³⁸
Movements in HIBOR are influenced by factors such as market liquidity, capital flows, and the monetary policy actions of the Hong Kong Monetary Authority (HKMA).³⁷
Despite its importance, HIBOR, like other interbank offered rates, has faced scrutiny, leading to discussions and transitions towards more transaction-based benchmarks like HONIA.³⁶

Formula and Calculation

The Hong Kong Interbank Offered Rate (HIBOR) is determined using a "trimmed mean" methodology, designed to ensure a representative rate by excluding outlier submissions.³⁵ Each business day at 11:00 a.m. local time, a panel of 20 designated banks, selected by the Hong Kong Association of Banks (HKAB), submits their estimated offer rates at which they are willing to lend Hong Kong dollars to other prime banks in the money market.³⁴,

The calculation process involves:

Collecting quotes from the 20 contributing banks for various tenors (e.g., overnight, 1-month, 3-month, 12-month).³³
Discarding the highest three and the lowest three quotes.³²,
Averaging the remaining 14 quotes to arrive at the official HIBOR rate for each tenor.³¹,³⁰

This method aims to provide a reliable and transparent benchmark interest rate that reflects the prevailing interbank lending conditions.

Mathematically, the HIBOR calculation for a specific tenor can be represented as:

\text{HIBOR} = \frac{\sum_{i=4}^{17} R_i}{14}

Where:

(R_i) represents the submitted interest rate from the (i)-th bank after the highest three and lowest three rates have been excluded.
The summation runs from the 4th lowest rate to the 17th rate (after sorting), covering the middle 14 quotes.

Interpreting the HIBOR

Interpreting HIBOR involves understanding its implications for borrowing costs, investment returns, and the overall liquidity within Hong Kong's financial system. A rising HIBOR generally indicates tighter liquidity in the interbank market, suggesting that banks are less willing to lend to each other or are facing higher funding costs. This can happen due to capital outflows or increased demand for Hong Kong dollars. Conversely, a falling HIBOR typically signifies ample liquidity, making it cheaper for banks to borrow funds.²⁹

For individuals and businesses, HIBOR directly influences the interest rate on various loans, including mortgage loans and business loans.²⁸ When HIBOR rises, the cost of borrowing for new loans or existing floating-rate loans increases. Conversely, a decline in HIBOR can lead to lower borrowing costs, which may stimulate economic activity. The spreads or margins added to HIBOR by lenders typically reflect the borrower's credit risk and the lender's desired profit margin.

Hypothetical Example

Consider a hypothetical scenario involving a mortgage loan in Hong Kong. Sarah secures a mortgage with an interest rate tied to the one-month HIBOR plus a margin of 1.5%. This is a common structure for mortgage loans in Hong Kong.

Let's assume the following:

Initial loan amount: HK$5,000,000
Mortgage margin: 1.5% (or 150 basis points)

Month 1: The one-month HIBOR is quoted at 0.85%.
Sarah's effective mortgage interest rate for the first month would be:
(0.85% \text{ (HIBOR)} + 1.5% \text{ (Margin)} = 2.35%) per annum.

Month 2: Due to tighter liquidity in the interbank market, the one-month HIBOR rises to 1.10%.
Sarah's effective mortgage interest rate for the second month would be:
(1.10% \text{ (HIBOR)} + 1.5% \text{ (Margin)} = 2.60%) per annum.

This example illustrates how changes in HIBOR directly impact the floating interest rate on a mortgage, leading to fluctuations in monthly repayment amounts for the borrower.

Practical Applications

HIBOR serves as a critical reference rate across numerous financial products and markets in Hong Kong. Its primary function is to price debt instruments and financial contracts.²⁷

Mortgages and Loans: A significant portion of residential mortgage loans in Hong Kong are priced with reference to HIBOR, typically as HIBOR plus a fixed spread.²⁶ This means that borrowers' interest payments adjust regularly based on the prevailing HIBOR rates. Similarly, corporate and personal loans may also be linked to HIBOR. Recent fluctuations in HIBOR have directly impacted the affordability of borrowing, particularly for property owners.²⁵,²⁴,²³,²² Higher HIBOR rates can lead to increased mortgage repayments, affecting the property market.²¹
Derivative products: HIBOR is widely used in the pricing of various derivatives, such as interest rate swaps and futures contracts. Financial institutions use these instruments for hedging against interest rate fluctuations or for speculative purposes.²⁰
Floating-Rate Notes (FRNs): Bonds and other debt securities with variable interest payments often use HIBOR as their underlying benchmark. The coupon payments on these floating-rate notes are reset periodically based on the current HIBOR rate plus a predetermined margin, reflecting the issuer's credit risk.¹⁹
Fixed Deposits: While primarily a lending rate benchmark, HIBOR can also indirectly influence the rates offered on fixed deposits and other savings products, as banks adjust their deposit rates in response to their funding costs.¹⁸
Monetary Policy Indicators: The Hong Kong Monetary Authority (HKMA), acting as the de facto central bank for Hong Kong, closely monitors HIBOR as an indicator of interbank liquidity and market conditions. Its interventions in the currency market, designed to defend the Hong Kong dollar's peg to the U.S. dollar, often have a direct impact on HIBOR rates by affecting market liquidity.¹⁷,¹⁶ Recent interventions by the HKMA have caused interbank rates to fluctuate, underscoring the authority's influence on the money market.¹⁵ The tight correlation between HIBOR and the property market is also a significant consideration for policymakers.¹⁴

Limitations and Criticisms

Despite its widespread use, HIBOR, like other interbank offered rates, has faced limitations and criticisms, particularly concerning its susceptibility to manipulation and its reliance on indicative quotes rather than actual transactions.

One primary criticism stems from its calculation methodology, which relies on submissions from a panel of banks. These submissions represent the rates at which banks believe they could lend to other banks, rather than actual executed transactions.¹³ This "expert judgment" approach can make the rate vulnerable to manipulation, as was famously highlighted by the London Interbank Offered Rate (LIBOR) scandal. While HIBOR has not been implicated in a scandal of the same magnitude, concerns about transparency and robustness persist.

Another limitation is its potential for volatility, especially during periods of financial stress or significant capital flows. Changes in global interest rates, the Hong Kong dollar's peg to the U.S. dollar, and capital movements can lead to sharp fluctuations in HIBOR, impacting borrowers and lenders.,¹² The Exchange rate peg, in particular, means that the HKMA sometimes has to intervene in the market, which can cause significant shifts in HIBOR.¹¹

In response to these concerns and global efforts to reform benchmark rates following the LIBOR scandal, Hong Kong's financial authorities have explored alternative, more robust benchmarks. The Hong Kong Monetary Authority (HKMA) has been actively promoting the adoption of the Hong Kong Overnight Index Average (HONIA), which is based on actual overnight unsecured interbank lending transactions.¹⁰ This transition aims to enhance the reliability and transparency of interest rate benchmarks in Hong Kong, moving away from reliance on indicative submissions towards a transaction-based rate.⁹,⁸

HIBOR vs. London Interbank Offered Rate (LIBOR)

Both the Hong Kong Interbank Offered Rate (HIBOR) and the London Interbank Offered Rate (LIBOR) served as crucial benchmark interest rates for their respective regions, reflecting the cost of unsecured borrowing between banks. While similar in purpose and calculation methodology (both used a "trimmed mean" of bank submissions), their primary distinction lies in the currency and geographical market they represent. HIBOR specifically reflects the cost of borrowing Hong Kong dollars in the Hong Kong interbank market, whereas LIBOR represented the cost of borrowing various major currencies (e.g., USD, GBP, EUR, JPY, CHF) in the London interbank market. A key difference also emerged in their fate: LIBOR has largely been phased out and replaced by alternative reference rates (ARRs) like SOFR and SONIA due to widespread manipulation scandals, pushing global financial markets to transition to more robust, transaction-based benchmarks. While HIBOR has faced similar criticisms regarding its indicative nature, it has not undergone a complete discontinuation in the same manner as LIBOR, though Hong Kong authorities are encouraging the adoption of transaction-based alternatives like HONIA.

FAQs

Q1: Who calculates and publishes HIBOR?
A1: The Hong Kong Interbank Offered Rate (HIBOR) is calculated and published daily by the Hong Kong Association of Banks (HKAB), based on submissions from a panel of 20 designated banks.⁷,⁶

Q2: How often does HIBOR change?
A2: HIBOR is calculated and fixed daily on each business day, excluding Saturdays, at 11:00 a.m. Hong Kong time.⁵, Therefore, its rates can change daily based on market conditions and bank submissions.

Q3: What factors influence HIBOR rates?
A3: HIBOR rates are influenced by various factors, including the overall liquidity in the Hong Kong interbank market, capital inflows and outflows, the Hong Kong Monetary Authority's (HKMA) monetary policy actions (such as foreign exchange interventions), and broader economic conditions.⁴,³

Q4: Is HIBOR being phased out like LIBOR?
A4: While HIBOR has faced similar criticisms regarding its indicative nature, it has not been fully phased out in the same way as the London Interbank Offered Rate. However, the Hong Kong Monetary Authority (HKMA) is actively encouraging the use of the Hong Kong Overnight Index Average (HONIA), a transaction-based rate, as an alternative benchmark for certain financial products, aiming for greater transparency and robustness.²

Q5: How does HIBOR affect mortgage rates in Hong Kong?
A5: Many mortgage loans in Hong Kong are priced using HIBOR as a reference. The mortgage rate for borrowers is often expressed as HIBOR plus a fixed margin. This means that as HIBOR fluctuates, the interest payments on these floating-rate mortgages will also change.¹