discount window discounted?
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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. - PowerPoint PPT PresentationTRANSCRIPT
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
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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
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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
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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
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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
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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
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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?