HK companies support review of interbank borrowing mechanism

Fund managers and companies back Hibor assessment while bankers play down worries

PUBLISHED : Tuesday, 21 August, 2012, 12:00am
UPDATED : Tuesday, 21 August, 2012, 3:56am

Fund managers and listed companies have expressed support for a planned Hong Kong review of the local interbank rate setting to ascertain whether any manipulation is occurring.

The Hong Kong Association of Banks has recently mandated the Treasury Markets Association to implement a full review of the city's version of the interbank rate setting, known as the Hong Kong interbank offered rate (Hibor). This came after Britain's Financial Services Authority ordered a review last week to reform the London interbank offered rate (Libor) in the wake of a rigging scandal at Barclays.

Libor and Hibor reflect the cost of funding for banks as these are the rates at which they lend money to one another on the interbank market at tenors ranging from overnight to one year. The rates are also used to set prices for derivatives and other personal loans such as credit cards or mortgage loans.

This is why the rigging scandal has shocked markets worldwide, as it may mean thousands of corporates, fund houses or investors may have been overcharged.

"I agree that in view of what's happened to the interbank market, there is a need to rethink the use of Hibor as a reference rate," said Chan Tze-ching, senior adviser of the Bank of East Asia.

"However, I don't have any answer except more controls could be put in place to safeguard against manipulation."

Some bank loans are priced using the prime rate - also called the best lending rate - which is set by individual banks. Chan said the prime rate could not be a replacement for Hibor or Libor.

"While Libor is supposed to reflect market conditions, the prime rate is always an administered setting," he said.

"In other words, Libor is objective as the rate at which funds are borrowed between banks, but the prime rate is subjective because in the absence of a banking cartel, individual banks can set prime rates at their own discretion without having to explain to anyone, as long as their customers accept."

Chan said products such as mortgage loans and loans to small and medium-sized enterprises were suited to using the prime rate, but he did not think all products could be priced using the rate.

Andrew Fung, executive director of Hang Seng Bank, supported a review of Hibor but said the local setting did not have the same problems as Libor.

"Given what has happened in Libor, it is appropriate to make a health check and improve the fixing mechanism in response to market developments," Fung said. "However, there have been no particular issues regarding Hibor fixing as the Hong Kong dollar market is much smaller than Libor. The transaction prices are more transparent."

Fund managers and brokers also supported a review to enhance the transparency of interbank rate setting.

"What we have learned is that the level of transparency around setting rates needs to improve in the case of Libor and potential conflicts of interest need to be better addressed,'' said Mark Konyn, chief executive of Cathay Conning Asset Management.

Hong Kong-listed companies said many corporate loans and bonds were based on an interest rate benchmarked on Libor or Hibor.

That may mean companies are overpaying for their derivatives trading if the products were mistakenly priced on manipulated rates.

"There can have a devastating societal effect if there has been malpractice in Libor fixing. Banks will have been overcharged and borrowers will have overpaid," said Kelvin Wong Tin-yau, chairman of the Hong Kong Institute of Directors. "And almost all derivatives using Libor as a benchmark will have had their prices misrepresented.

"It is high time for banks to review the mechanism of Hibor fixing. This will ensure that both banks and borrowers participate in capital marketing in a perfectly competitive environment and in such a manner that the bank can only charge their cost of funds plus a margin, while the borrower is only obliged to pay what their underlying risk justifies."

Wong said it was not ideal to use prime rates for borrowing by corporations as those are targeted towards consumer-related loans.

"It is understandable that corporations should enjoy lower borrowing costs than individuals," he said. "Also, adjustments to prime occurs much less frequently than Hibor, which changes daily depending on market conditions."