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Plans for more transparent Sibor seen benefiting borrowers
PROPOSALS to reform Sibor, the Singapore interbank offered rate used by banks to price consumer loans, should benefit borrowers as efforts get underway to make the benchmark setting process more transparent.
The two main proposals call for changes in the way Sibor is calculated and for the rarely-used 12-month Sibor rate to be scrapped.
Sibor, set daily by panel banks submitting the rate at which they can borrow Singapore dollars, is currently published in four tenors - the one-, three-, six- and 12-month tenors. The one- and three-month ones are most widely used, and account for more than nine in 10 contracts that use the Sibor benchmark.
The proposed changes are contained in a consultation paper jointly released on Monday by the ABS (Association of Banks in Singapore) Benchmarks Administration Co Pte Ltd and the Singapore Foreign Exchange Market Committee (SFEMC).
The consultation ends on Feb 5.
The panel's proposed primary change is to reference a broader set of banks' borrowing transactions beyond those in the interbank market.
Lam Kun Kin, co-chair of the SFEMC and the ABS-SFEMC industry working group on Sibor, noted that there has been a structural change in the sources of funding markets both in Singapore and globally.
"Interbank funding activity has declined significantly, and all banks have to tap corporate deposits and other wholesale funding, which qualify as acceptable liquidity in meeting the various Basel requirements."
Following the 2007/8 global financial crisis, the Basel Committee on Banking Supervision tightened the rules aimed at strengthening banks by requiring them to raise their liquidity and lower their leverage.
"There is no available hard information, but this change (of tapping other funding sources) is very much apparent from the heavy competition for such deposits at quarter-end or year-end," said Mr Lam.
The underlying market for Sibor has extended from the interbank unsecured market to include other wholesale funding transactions - in particular, non-bank sources such as statutory boards, town councils, public-sector entities, insurers, fund managers and corporates.
Mr Lam said: "The proposal should be beneficial to consumers in terms of ensuring greater clarity and consistency among banks in contributing rates for Sibor computation and reducing the reliance on expert judgement which may differ from bank to bank."
Commenting on the proposals to reform Sibor, OCBC Bank's Head of Treasury Reseach & Strategy Selena Ling said: "There has been a fair bit of consultation within the industry, so it should not be too disruptive on the markets."
ABS Director Ong-Ang Ai Boon addded: "Based on back testing, the new Sibor does not differ too much from the current Sibor, and should not impact the man on the street." She said the panel banks in their expert judgement already consider the wholesale funding market.
The efforts to reform Sibor are in line with global developments for improving the robustness and integrity of financial benchmarks, adopted since 2014. Major interbank markets such as London and Europe are taking similar steps; Japan has already implemented a reformed Tokyo interbank offered rate (Tibor).
In 2013, the Monetary Authority of Singapore found that 20 banks here tried to rig key borrowing and currency rates. The authority did not fine the banks, but ordered them to set aside additional reserves for a year.
The reform on financial benchmark settings follows the global rate rigging scandal and UK and US authorities slapped fines of hundreds of millions of dollars on many banks.
"In terms of pricing of loans, there could be greater reliance on the shorter-dated Sibor rates and/or SOR going forward. The 12-month Sibor is rarely used anyway," said Ms Ling. The SOR is the swap-offer rate, the benchmark used for commercial loans.