BSP eyes new benchmarks for pricing bank loans

Financial regulators are preparing a new and more transparent set of benchmarks that banks can use for pricing loans which, in turn, may affect how much it will take for businesses to expand and consumers to buy cars and homes.

Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said the new benchmarks would be similar to the London Inter-Bank Offered Rate (Libor), which English banks use to set floor prices for extending loans.

Tetangco Wednesday told reporters at the sidelines of a luncheon with industry partners in Manila that the regulator was just waiting for banks’ reaction to the proposed set of benchmarks.

He said the new financial benchmarks would likely be released later this year.

The central bank is in talks with administrators, data submitters and calculating agents that will work on the new benchmarks, he added.

The new local benchmark will be similar to the United Kingdom’s Libor, which is the average interest rate for overnight transactions of England’s top banks, he said.

However, instead of using “offered” rates for securities of various tenors, the local benchmark will be based on “done” rates, which are less susceptible to manipulation.

Constantly calculated based on rates submitted by banks, the new benchmark will serve as a floor price for banks. Lenders may add premiums on top of these benchmarks depending on the risk profile of borrowers.

Today, there is no standard benchmark used by banks to price loans, resulting in varying interest rates throughout the industry. Tetangco said many banks used rates for special deposit accounts (SDA) or “some variant of the SDA” for loan prices.

SDA rates, which are set by the central bank, were raised by a quarter of a percentage point to 2.25 percent across all tenors. The SDA allows banks to park money with the central bank at a fixed rate. This window is also used to control the amount of money circulating in the economy.