The Bangko Sentral ng Pilipinas (BSP) is set to release before the year ends a new unified interest rate benchmark to ensure a fair and more transparent pricing of loans across the industry.
BSP Governor Amando M. Tetangco Jr. said the creation of the so-called overnight index swap (OIS) was vital because the country’s banks no longer have a consensus on what benchmark to use in pricing their loans.
“Banks are not using any one benchmark. They are using different interest rates. It used to be the 91-day T-bill rate but that’s no longer being used because of developments in the government securities market and the supply of T-bills,” Tetangco told reporters.
The government’s 91-day treasury bills fetched a rate of a near record low 0.217 percent during the last auction in May.
In developing the OIS, Tetangco said the BSP’s intention was to create a unified benchmark that the entire industry could follow.
Tetangco said the OIS would work similar to the United Kingdom’s London inter-bank offered rate (Libor) benchmark, which is the average interest rate for overnight transactions among the country’s top banks.
He said banks would be required to submit on a daily basis the rates used for their overnight borrowing activities with other lenders. The BSP would act as the calculating agent to ensure that the rate is consistently calculated and trusted by market players.
“It’s going to be made available to the market and banks can use it for pricing loans. It’s going to be used as a benchmark. The spread will depend on individual banks,” he said.
Instead of using “offered rates” as the Libor does, the BSP said it would use rates from completed transactions. Using rates from completed transactions would ensure that the OIS would be more reflective of real market demand.
“Ours will use actual transactions. (Banks) can quote any offered rate, but if we use done transactions, then that’s the real rate,” Tetangco said.