HIBOR 2025: Current Rates, How It Operates, and Key Criticisms Explained
Explore the Hong Kong Interbank Offered Rate (HIBOR), its role as the Hong Kong dollar lending benchmark, how it functions in the banking sector, and the criticisms it faces amid global financial reforms.
What Is the Hong Kong Interbank Offered Rate (HIBOR)?
HIBOR, or the Hong Kong Interbank Offered Rate, is the essential benchmark interest rate used for lending between banks in Hong Kong, denominated in Hong Kong dollars. It serves as a vital reference point for financial institutions and borrowers within the Asian market. Since late 2020, there have been initiatives to gradually replace HIBOR with the Hong Kong Overnight Index Average (HONIA) to enhance market stability.
How Does HIBOR Work?
In Hong Kong’s banking system, the interbank market allows banks to manage liquidity by borrowing and lending funds among themselves. When a bank’s short-term cash reserves run low, it borrows at the HIBOR rate, with loan terms ranging from overnight to one year. HIBOR is similar to the London Interbank Offered Rate (LIBOR) used in the UK.
The rate is published daily at 11:00 a.m. local time, based on submissions from 20 banks selected by the Hong Kong Association of Banks (HKAB). To ensure accuracy, the highest and lowest three quotes are excluded, and the average of the remaining 14 rates forms the official HIBOR.
HIBOR functions as the benchmark for a wide array of financial products, including government and corporate bonds, mortgages, and derivatives like currency and interest rate swaps. For example, interest rate swaps between two counterparties with solid credit ratings often reference HIBOR plus a specified margin.
Consider a floating-rate note (FRN) denominated in Hong Kong dollars, which pays interest based on the one-year HIBOR plus a 0.35% margin. If the one-year HIBOR is 4% at the start of the year, the bond’s coupon will be reset annually to 4.35%, reflecting current market conditions and credit risk.
Criticism and Challenges Facing HIBOR
Since the 1997 Asian currency crisis, concerns about HIBOR’s volatility and liquidity have raised questions about its reliability as a benchmark. Similar scrutiny has been applied to LIBOR, especially after the 2012 manipulation scandal. Consequently, global financial authorities have planned to phase out LIBOR by 2023, replacing it with more transparent benchmarks like the Sterling Overnight Index Average (SONIA), which is based on actual transaction data rather than submitted estimates.
In 2013, investigations into possible manipulation of HIBOR intensified, although the fixing process was ultimately deemed sound. Nonetheless, the trend towards adopting alternative reference rates continues, driven by the desire for greater transparency and reduced manipulation risk.
In the United States, the Federal Reserve introduced the Secured Overnight Financing Rate (SOFR) as a replacement for LIBOR, developed in collaboration with the U.S. Treasury’s Office of Financial Research. Hong Kong’s transition to HONIA follows this global movement toward more robust and transaction-based benchmark rates.
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