Review of Singapore Interbank Offered Rate-setting Regime

Ms Tan Su Shan asked the Prime Minister what is the Ministry's position on the appropriateness of the Singapore Interbank Offered Rate being used as a benchmark in the setting of loan pricing in Singapore.

The London Interbank Offered Rate (LIBOR) is an important interest rate benchmark that is used by market participants globally, including in Singapore, to directly price financial products or, indirectly, as a reference when setting interest rates. As an international financial centre, we host many global banks that trade and offer financial products that are referenced against LIBOR. The process for setting the Singapore Interbank Offered Rate (SIBOR) is similar to that for interbank offered rates in several other jurisdictions. The basic model for most jurisdictions has followed that for LIBOR, which is set by the British Bankers' Association (BBA).

So, for us, the SIBOR is currently set by 12 participating banks, and published by the Association of Banks in Singapore (ABS). Prior to 11.00 am every business day, each participating bank submits the interest rate at which it could borrow Singapore Dollars in the interbank market, at tenures ranging from one month to 12 months. These rates are then collated and ranked. The middle two quartiles – the middle band – of six submitted interest rates which are in the middle of the range – are then averaged to determine the official SIBOR, which means that the outliers, or the rates that are at the bottom and top end of the range, are not included in the computation of SIBOR. ABS publishes the SIBOR at 11.30 am daily.

As SIBOR is a measure of the cost of borrowing Singapore Dollars in the interbank market, banks have found it to be an appropriate benchmark to price their Singapore Dollar-denominated loans. Such loans include commercial term loans and residential property loans. Besides SIBOR, it is possible to peg contracts to other benchmarks of similar tenures, such as the Swap Offer Rate (SOR), central bank bills or Government bills and bonds. However, each benchmark will have its own unique characteristics so banks can decide. In 2009, ABS reviewed its rate-setting procedures and adopted several improvements. These included the establishment of a Financial Markets Committee to oversee the governance and procedures for daily rate setting; and establishing a minimum number of participating banks – 12 of them – and a minimum number of contributed rates for each daily setting – six rates. ABS also appointed an administrator to review the rates contributed by participating banks, including checking for consistent outliers and comparing with broker rates.

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In line with the investigation into LIBOR, regulators in several jurisdictions are looking into how key market interest rate benchmarks have been set by banks. MAS is doing the same in Singapore, and has directed banks that are on the ABS' rates contributing panels to conduct independent reviews to verify the integrity of their rate-submission processes. Pending the completion of these reviews, it is premature to draw conclusions about the impact on financial institutions in Singapore.

MAS is also working with ABS and the Singapore Foreign Exchange Markets Committee (SFEMC) to review the SIBOR-setting process more fundamentally. The review will take into account what SIBOR is used for, how it can be strengthened, whether proposed changes are resilient to future changes in market structure, as well as the impact on the existing stock of contracts that are already pegged to SIBOR. We are mindful that any change will impact lenders and borrowers. Other jurisdictions are also reviewing their benchmark setting processes, and we will study those closely as well.

Mr Speaker, Sir, three supplementary questions, please. May I ask the Senior Minister of State whether SIBOR should be left to the Association of Banks Singapore (ABS) to decide, or should it be overseen by MAS instead? Secondly, is the Senior Minister of State concerned that the rates may be skewed in view of the fact that fewer than 12 banks are contributing to submissions to ABS presently, instead of the 17 banks in the past? Lastly, should the rates be the actual price at which banks can borrow, rather than the price at which they think they might be able to borrow on the market?

Mr Speaker, Sir, I thank the Member for the questions. I think these are very relevant questions which we are studying. The first point to make is we should look at the broader context of how SIBOR came about, or how LIBOR came about. These are price-discovery mechanisms for lending and borrowing between banks, and so the way these rates were fixed or set were done by associations, because these were inter-bank rates. That was what happened in the case of LIBOR and that is also how our SIBOR rates have evolved. These were inter-bank rates relevant between banks and so the Association of Banks got involved in setting these rates.

That was the historical context of how these rates evolved. Over time, these inter-bank rates also came to be used for other purposes – for loans to corporates, to individuals. And so, there is a case for stronger governance or for strong supervision over how these rates are being set. That is why we are now in the process of reviewing the SIBOR-setting process, looking at how the SIBOR can be more fundamentally strengthened. Pending the outcome of the review, I do not want to speculate on the sort of recommendations or the framework that we will end up with. It is something we are studying and MAS is, indeed, looking at it more fundamentally to see how SIBOR can be strengthened. We are also studying what other jurisdictions are doing because this is not just a matter for Singapore alone. Many other jurisdictions are also having similar reviews and studies. It is also a discussion happening at international forums, and so we are keeping track of these. As these reviews in other jurisdictions are taking place, we will also see whether there are implications and whether there are aspects which we can adapt and apply to our context.

Whether the rates may be skewed, whether we should use actual rates rather than nominated rates – these are all part of the considerations which we want to look at to see how fundamentally SIBOR can be strengthened. How can there be better transparency in the rate-setting process? How can there be use of actual data? It is something we have been studying and will continue to study. As I have said, it is something that many other jurisdictions are also looking at. They are all looking at similar issues: transparency, better price discovery so that the rate-setting process can be more robust and more rigorous. We share the same interests and we are studying. Once our review is completed, we will be able to have a more robust SIBOR-setting process.

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Thank you, Mr Speaker. May I ask the Senior Minister of State whether it is correct to say that the method used to set SIBOR is similar to the one used for LIBOR? The US Federal Reserve Chairman Ben Bernanke has said that the LIBOR system is structurally flawed and is a major problem for financial systems and for confidence in the financial system. May I seek the views of the Senior Minister of State on Mr Bernanke's remarks?

Sir, the system is similar. We evolved in a similar way, and so our rate-setting system and processes are similar. But we have, over time, strengthened our own processes. As I mentioned, in 2009, ABS did a review and we did strengthen our own governance process. So, I would say that in the case of SIBOR, we have some confidence that we have a good system. It is robust. But can it be improved? Certainly so. Would I want to comment on Mr Bernanke's remarks that LIBOR is structurally flawed? Well, he made the remarks about LIBOR, so that is his view on the LIBOR process, not on SIBOR. SIBOR has shared some similarities with the LIBOR processes, as I mentioned earlier. But we have strengthened our SIBOR-setting processes over time, and we will continue to do so.

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