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Discount Window Discounted? Steve Xu Treasury Economist Standard Chartered Bank Oct. 9, 1999
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Discount Window Discounted?
Steve Xu
Treasury Economist
Standard Chartered Bank
Oct. 9, 1999
Agenda
Contagion effects insignificant.
A permanent reduction in the risk premium.
The objectives of the Discount Window.
Suggested changes to the Base Rate.
Ultimate objectives of “7 wonders”.
The Base Rate: An overly binding constraint
4.00
4.50
5.00
5.50
6.00
6.50
7.00
7.50
8.00
1-Sep-98 31-Oct-98 30-Dec-98 28-Feb-99 29-Apr-99 28-Jun-99 27-Aug-99
Banks have little incentive to use the Discount Window
Borrowings at the Discount Window
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
7-Sep-98 6-Nov-98 5-Jan-99 5-Mar-99 6-May-99 5-Jul-99 30-Aug-99
Licensed banks’ ability to pledge
95.00
96.00
97.00
98.00
99.00
100.00
101.00
102.00
5-Oct-98 31-Dec-98 31-Mar-99 29-Jun-99 23-Sep-99
66.00
68.00
70.00
72.00
74.00
76.00
78.00
80.00
82.00
84.00
Exchange Fund paper held by licensedbanks(HKDbn)Exchange Fund paper(HKDbn)
The Discount Window eliminates wild swings in short-term rates
The Base Rate dampens rate volatility.
The Base Rate acts as a ceiling for licensed banks to obtain liquidity.
Expanded base money and repeated borrowing at the Window avoids sharp rise in local interest rates.
Waning contagion effects from the region
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
Jun-97 Oct-97 Feb-98 Jun-98 Oct-98 Feb-99 Jun-99
0
2000
4000
6000
8000
10000
12000
14000
16000
HKD overnight rate
USD/IDR
Waning contagion effects (continued)
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
Jun-97 Oct-97 Feb-98 Jun-98 Oct-98 Feb-99 Jun-99
0.00
10.00
20.00
30.00
40.00
50.00
60.00
HKD overnight rate
USD/THB
Yen shock taken in stride
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
Oct-97 Jan-98 Apr-98 Jul-98 Oct-98 Jan-99 Apr-99 Jul-990.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
160.00
The HKD de-coupled from the CNY
CNY 6mth implied yield
6.00
8.00
10.00
12.00
14.00
16.00
18.00
Jan-99 Feb-99 Mar-99 Mar-99 Apr-99 May-99 Jun-99
De-coupling effect continues
CNY 12mth implied yield
8.00
10.00
12.00
14.00
16.00
18.00
20.00
Jan-99 Feb-99 Mar-99 Apr-99 May-99 Jun-99
The HIBOR/LIBOR convergence
0.00
5.00
10.00
15.00
20.00
25.00
31-Oct-97 23-Jan-98 17-Apr-98 10-Jul-98 2-Oct-98 25-Dec-98 19-Mar-99 11-Jun-99 3-Sep-99
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
6.00
1-mth LIBOR(RHS)
1-mth HIBOR(LHS)
Review the Base Rate
The HIBOR/LIBOR convergence is driven by market forces.
The perceived HK premium: 100bps over the Fed Fund Rates, or 50bps over?
The key issue is to avoid having an overly-binding constraint.
The ultimate objectives of the “7 wonders”
Technical measures: rapid convergence between the HIBOR and the LIBOR a pleasant surprise.
The HKD is almost a perfect substitute for the USD in the inter-bank market.
Is the HKD a perfect substitute for the USD in the inter-bank market only?
