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
8.00
7.50
7.00
6.50
6.00
5.50
5.00
4.50
4.00
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
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
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
102.00
84.00
82.00
101.00
80.00
100.00
78.00
99.00
76.00
98.00
74.00
72.00
97.00
96.00
95.00
5-Oct-98
Exchange Fund paper held by licensed
banks(HKDbn)
Exchange Fund paper(HKDbn)
70.00
68.00
66.00
31-Dec-98
31-Mar-99
29-Jun-99
23-Sep-99
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
18.00
16000
16.00
14000
14.00
12000
12.00
10000
10.00
8000
8.00
6000
6.00
4000
4.00
HKD overnight rate
2.00
2000
USD/IDR
0.00
0
Jun-97
Oct-97
Feb-98
Jun-98
Oct-98
Feb-99
Jun-99
Waning contagion effects (continued)
18.00
60.00
16.00
50.00
14.00
12.00
40.00
10.00
30.00
8.00
6.00
4.00
2.00
0.00
Jun-97
20.00
HKD overnight rate
10.00
USD/THB
0.00
Oct-97
Feb-98
Jun-98
Oct-98
Feb-99
Jun-99
Yen shock taken in stride
18.00
160.00
16.00
140.00
14.00
120.00
12.00
100.00
10.00
80.00
8.00
60.00
6.00
40.00
4.00
2.00
20.00
0.00
0.00
Oct-97
Jan-98
Apr-98
Jul-98
Oct-98
Jan-99
Apr-99
Jul-99
The HKD de-coupled from the CNY
CNY 6mth implied yield
18.00
16.00
14.00
12.00
10.00
8.00
6.00
Jan-99
Feb-99
Mar-99
Mar-99
Apr-99
May-99
Jun-99
De-coupling effect continues
CNY 12mth implied yield
20.00
18.00
16.00
14.00
12.00
10.00
8.00
Jan-99
Feb-99
Mar-99
Apr-99
May-99
Jun-99
The HIBOR/LIBOR convergence
25.00
6.00
5.50
20.00
5.00
4.50
15.00
4.00
10.00
3.50
3.00
5.00
1-mth LIBOR(RHS)
1-mth HIBOR(LHS)
0.00
31-Oct-97
2.50
2.00
23-Jan-98 17-Apr-98
10-Jul-98
2-Oct-98
25-Dec-98 19-Mar-99 11-Jun-99
3-Sep-99
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 overlybinding 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?