The central bank has moved for the creation of new benchmarks for loans in the country that would be more transparent and less prone to manipulation, to preserve the integrity of the local banking industry.
In a statement on Friday, the Bangko Sentral ng Pilipinas (BSP) said the policy-making Monetary Board had approved new rules on the banks’ valuation of government debt paper, which serves as a guide for the cost of money in the country.
Under the new guidelines, yields on government securities should be valued in a bank’s books based on yields for actual or “done” transactions. The new approach replaces the previous method of pricing debt paper based on bids made by banks and other market players.
“The changes are meant to better reflect market valuation for said instruments by promoting price consistency and enhancing price discovery,” the BSP said.
The previous valuation guideline made the distinction between benchmark and non-benchmark securities. The former used actual rates in the secondary market. The latter, however, was valued on the books of the banks by averaging benchmark bonds.
There are 12 benchmark government security tenors in the country: the one-month, three-month, six-month, one-year, two-year, three-year, four-year, five-year, seven-year, 10-year, 20-year, and 25-year tenor buckets.
Government securities, which carry low yields and are considered risk-free assets, are used as benchmarks for all other loans extended by banks.
Securities whose remaining tenors fall within these tenor buckets are considered benchmark bonds, while those that cannot be slotted in them are non-benchmark securities.
In the absence of “done” rates, the GS for a particular tenor bucket would be valued using a simple average of the bid rates for securities of that tenor bucket. Only in the absence of “done” and bid rates will the yields of GS be “interpolated” or averaged using benchmark rates.
“The enhancement of the valuation guidelines for GS is essential to developing the country’s capital markets,” the BSP said.
Earlier this year, BSP Governor Amando M. Tetangco Jr. said the use of “done” rates was vital to avoid manipulation by market players. He cited the London Interbank Offered Rate (Libor) scandal—exposed in 2008—where banks inflated or deflated their bid prices for loans to increase their profits.
The Libor benchmark is calculated using the average interest rate bids for overnight transactions among the Londons’ top banks.
The method of getting “done” rates, Tetangco said, would also be used for the creation of the BSP’s so-called Overnight Index Swap (OIS), which is envisioned as a unified benchmark for the cost of credit that the entire industry could follow. The OIS would work similar to the Libor, except that “done” rates would be averaged instead of bid prices. Paolo G. Montecillo