Discount Window Discounted?
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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. - PowerPoint PPT Presentation
Transcript of Discount Window Discounted?
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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Banks have little incentive to use the Discount Window
Borrowings at the Discount Window
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Licensed banks’ ability to pledge
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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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HKD overnight rate
USD/IDR
Waning contagion effects (continued)
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HKD overnight rate
USD/THB
Yen shock taken in stride
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Oct-97 Jan-98 Apr-98 Jul-98 Oct-98 Jan-99 Apr-99 Jul-990.00
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The HKD de-coupled from the CNY
CNY 6mth implied yield
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De-coupling effect continues
CNY 12mth implied yield
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The HIBOR/LIBOR convergence
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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?
