Key Takeaways
- The Hong Kong Interbank Offered Rate (HIBOR) is a key interest rate benchmark for interbank lending in the Hong Kong dollar market.
- HIBOR is calculated daily, based on quotes from 20 banks, and helps set rates for loans and other financial products.
- Plans to transition from HIBOR to the Hong Kong Overnight Index Average (HONIA) were in place as of December 2020.
- HIBOR’s reliability as a benchmark has been questioned due to volatility and past manipulation concerns.
- Alternative benchmarks, like SONIA and SOFR, are emerging globally to replace traditional interbank rates.
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What Is the Hong Kong Interbank Offered Rate (HIBOR)?
The Hong Kong Interbank Offered Rate, known by its HIBOR abbreviation, is the benchmark interest rate, stated in Hong Kong dollars, for lending between banks in the Hong Kong market.
HIBOR facilitates not only interbank lending but also debt instruments in Asian markets, serving as a benchmark rate there as well. It is a reference rate for lenders and borrowers that participate directly or indirectly in the Asian economy.
HIBOR is set daily based on quotes from 20 banks. It helps set rates for government and corporate bonds, mortgages and other loans, and derivatives like currency and interest rate swaps, among many other financial products, in Asia.
HIBOR has faced criticisms related to liquidity and volatility concerns, as well as possible manipulation.
As of December 2020, plans were in place to transition away from HIBOR to the Hong Kong Overnight Index Average (HONIA).
How HIBOR Functions in the Hong Kong Banking System
The banking industry uses an interbank market for transferring funds and currency, and for managing liquidity. If a Hong Kong bank is nearing the point at which withdrawals are close to depleting short-term cash reserves, that bank will go into the Hong Kong interbank market and borrow money at the Hong Kong Interbank Offered Rate (HIBOR). The terms of the loans vary from overnight to one year. The United Kingdom’s version, the London Interbank Offered Rate (LIBOR), was similar to the HIBOR before its phaseout in 2024.
Every day at 11 a.m. local time, the rate is set based on quotes from 20 banks chosen by the Hong Kong Association of Banks (HKAB). The HKAB acts similarly to a central bank for Hong Kong. The top three and lowest three values are discarded, and the remaining 14 are used for the calculation.
HIBOR mainly serves as the benchmark rate for debt instruments in Asian markets. It supports bonds, mortgages, and derivatives like currency and interest rate swaps, among other financial products. For example, an interest rate swap involving two counterparties with good credit ratings, both of which have bonds issued in Hong Kong dollars, will likely be quoted in HIBOR plus a given percentage.
For example, a floating-rate note (FRN) in Hong Kong dollars pays interest based on HIBOR plus 35 basis points (0.35%) each year. In this case, the HIBOR rate used is the one-year HIBOR plus a 35-basis-point spread. Every year, the coupon rate is reset to match the current Hong Kong dollar one-year HIBOR, plus the predetermined spread.
If, for instance, the one-year HIBOR is 4% at the start of the year, the bond will return 4.35% of its par value at year’s end. The spread changes based on the creditworthiness of the institution issuing the debt.
Critiques and Challenges Facing HIBOR
Since the 1997 Asian currency crisis, volatility and liquidity concerns have raised questions about HIBOR’s value as a benchmark. Even LIBOR, which was a global benchmark, came under fire, especially since the 2012 LIBOR fixing scandal. LIBOR was phased out completely by 2024, replaced with benchmarks like the Sterling Overnight Index Average (SONIA). SONIA is based on actual bids and offers from the contributing banks and not indicated levels. The latter are subject to manipulation if the contributing bank wants to hide or enhance its capital position.
Indeed, in 2013, the HIBOR market had its own scandal when the city widened its investigation into possible manipulation of this key interest rate. The HIBOR fixing mechanism was eventually ruled to be sound, but with similar problems surfacing in other interbank markets, the trend toward finding replacements is moving forward.
The replacement push centers on LIBOR since it is the globally recognized standard. The U.S. Federal Reserve introduced the secured overnight financing rate (SOFR), working with the U.S. Treasury Department’s Office of Financial Research.
The Bottom Line
The Hong Kong Interbank Offered Rate (HIBOR) is a key benchmark interest rate in the Asian financial markets, particularly in Hong Kong.
HIBOR was similar to the former London Interbank Offered Rate (LIBOR) as two benchmarks for interbank lending, before LIBOR ceased to exist in 2024. They differed primarily in their geographic location, currency, and specific borrowing costs.
HIBOR is important to the function of various financial products, such as corporate and government bonds, mortgages and other loans, and derivatives like currency and interest rate swaps.
Criticisms surrounding HIBOR have included liquidity and volatility concerns and possible manipulation. Past scandals and issues with benchmark integrity have raised the need for HIBOR’s possible replacement.
LIBOR’s phaseout signals an ongoing global transition from benchmarks like HIBOR, with alternative rates like the Hong Kong Overnight Index Average (HONIA), the Sterling Overnight Index Average (SONIA), and the U.S. secured overnight financing rate (SOFR) on the rise. Despite reforms that have reduced global reliance on interbank offered rates, HIBOR exists alongside HONIA, SONIA, and SOFR for now.