To Asia Watch

As World Recalculates the Cost of Borrowing, Asia’s Banks Lag

September 21, 2020

Deadline for new system fast approaching . . .

With a 2021 deadline approaching, Asia’s financial systems are still lagging behind in the global transition to new ways to calculate the cost of borrowing money. Since the 1970s, banks around the world have relied on the London interbank offered rate (LIBOR), based on a daily survey of bankers, to calculate how much it costs for banks to borrow from one another. But a 2008 scandal revealed that banks had manipulated the LIBOR system. The result has been global financial systems planning to transition away from LIBOR, which had been used to calculate interest rates on things from credit cards and lines of credit to mortgages, student loans, and loans to governments.

Asia’s systems playing catch up . . .

Debt markets, whether for individual consumers or between banks, facilitate access to finance and keep Asia’s high-growth economies humming. But as of January, only the Bank of China’s Macau unit had transitioned away from LIBOR. By the spring, it emerged that while New York and London had largely transitioned to the new, more complex benchmark calculation system, Japan’s banks were still in the early planning stages, and only a minority of Hong Kong’s banks had transition plans. In August and September, further reports emerged that regulators and asset managers were still lagging. This raises the risk that regional banks and clients will have loans pegged to a benchmark that no longer exists post-2021, possibly creating an environment of legal uncertainty.

Canadian financial system intertwined . . .

While most of the world’s major financial hubs are covered by U.S. or European regulators, Asia’s – among them Hong Kong, Singapore, and Tokyo – are all in different economies, with their different central banks and governments acting as regulators. This patchwork of oversight has led to delays, and the Asian hubs’ plans to catch up were disrupted by COVID-19. Singapore and Taiwan have emerged as regional leaders, testing their new systems and educating borrowers and investors about the new benchmarks. While most Canadians do not borrow directly from Asia’s banks, with C$400 trillion in global funds tied to LIBOR, even small glitches in the transition could have large impacts. Moreover, with Canadian banks, pensions, corporations, and governments using loans tied to Asia’s banks, a rough transition could hit both sides of the Pacific. The LIBOR scandal, for instance, saw relatively minor manipulations of rates lead to up to 100,000 home repossessions and C$13 billion in additional costs to municipal taxpayers in the U.S. A similar scandal in Japan forced higher rates on millions of Japanese borrowers.



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