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"HIBOR is the average interest rate at which a panel of major banks in Hong Kong is willing to lend to one another in the interbank market."
Introduction
The Hong Kong Interbank Offered Rate (HIBOR) is a crucial benchmark interest rate in the financial landscape of Hong Kong. Similar to other interbank offered rates, HIBOR plays a pivotal role in determining lending rates across various financial products, including loans, mortgages, derivatives, and bonds.
This article delves into the concept, calculation, significance, and challenges associated with HIBOR.
Understanding HIBOR
HIBOR is the average interest rate at which a panel of major banks in Hong Kong is willing to lend to one another in the interbank market. It serves as a reference rate that reflects prevailing market conditions and influences borrowing and lending costs throughout the financial system. HIBOR rates are quoted for different time periods, such as overnight, one week, one month, three months, and six months.
Calculation of HIBOR
HIBOR rates are determined through a daily fixing process. Each contributing bank submits its estimate of the rate at which it can borrow funds in the interbank market. The highest and lowest quotes are excluded, and the remaining rates are averaged to calculate the final HIBOR rate for each tenor (e.g., three months).
Significance and Applications
Lending and Borrowing Rates: HIBOR serves as a foundational rate that influences lending and borrowing costs for banks, financial institutions, and individuals. It forms the basis for various loan products, including adjustable-rate mortgages and commercial loans.
Derivatives and Financial Contracts: HIBOR is commonly used as a reference rate for derivatives, interest rate swaps, and other financial contracts that involve interest rate adjustments.
Capital Markets: The HIBOR rate impacts the pricing and yield of debt securities, such as bonds and certificates of deposit.
Monetary Policy Transmission: Central banks may use interbank offered rates like HIBOR to implement and transmit monetary policy by influencing borrowing costs.
Challenges and Controversies
Market Manipulation Concerns: In recent years, HIBOR, along with other benchmark rates, has faced allegations of manipulation. Regulators have taken measures to enhance transparency and integrity in the rate-setting process.
Transition to Alternative Rates: Like many other interbank offered rates globally, HIBOR is being gradually replaced by alternative reference rates, such as the Hong Kong Dollar Overnight Index Average (HONIA), to mitigate the risk of manipulation and improve accuracy.
Transition to HONIA
In response to global efforts to reform benchmark rates, including HIBOR, Hong Kong has initiated a transition to the HONIA as an alternative reference rate. HONIA is based on actual overnight transactions and is considered more representative of market conditions.
Conclusion
The Hong Kong Interbank Offered Rate (HIBOR) is a fundamental benchmark interest rate that plays a critical role in Hong Kong's financial ecosystem. Its impact extends beyond interbank lending to influence lending rates for various financial products. As financial markets continue to evolve and address challenges, the transition to alternative reference rates like HONIA reflects the commitment to ensuring transparency, accuracy, and integrity in benchmark rates.
HIBOR's journey is emblematic of the broader efforts to enhance the stability and credibility of financial systems worldwide.