The Hong Kong Interbank Offer Rate, commonly known as HIBOR, is the reference interest rate quoted in HKD (Hong Kong Dollars) for lending between banks in the market. It is a benchmark/ reference rate for both the lenders and borrowers participating either directly or indirectly in the Far East economy.
A closer look at What Constitutes HIBOR
The banking industry in Hong Kong uses HIBOR for transferring funds and currency as well as liquidity management. For example, if a Hong Kong bank is edging close to a point where withdrawals are diminishing its short-term cash reserve, that bank borrows from the interbank market. The cash provided to replenish the cash reserve is provided at HIBOR. The terms and conditions for such loans could differ from one night to about a full year. Another system that works the same way to HIBOR is LIBOR (London Interbank Offer Rate).
The HIBOR is released every day at 11:00 am local time. The rate is calculated from quotes of 20 banks that are selected by the HKAB (Hong Kong Association of Banks). HKAB operates the way the central bank works. To calculate the rate, the top three and lowest three quotes are discarded. This means that only 14 quotes are left and used to calculate HIBOR.
HIBOR is also a tool of measurement
Though the primary role of HIBOR is acting as the reference rate for the banks, it is also used as a crucial financial measurement tool. It helps the government, mortgages, corporate bonds, and even derivatives such as interest swaps and currencies.
For example, an interest rate swap between two parties that have a good credit rating and bonds that are issued in Hong Kong will get quoted in HIBOR. A small percentage interest will also be included.
A reference under attack
Since 1997 when the Asian currency was in serious crisis, there have been a lot of concerns about liquidity and volatility to the point that HIBOR is getting doubted. It is not just HIBOR at crossroads. Even LIBOR has recently come under sharp fire since the infamous fixing scandal of 2012. By 2021, the Sterling Overnight Interbank Average Rate (SONIA) is expected to replace LIBOR come 2021. Unlike HIBOR and LIBOR, the new SONIA model is based on bidding and offers from contributing financial institutions.
In 2013, investigations were launched into HIBOR after reports of possible manipulation hit the news. The fixing mechanism used at HIBOR was ruled to be okay. With the same problem being reported in other interbank markets, there is no doubt that the trend towards getting HIBOR replacement is on.