Describe about the Financial Markets and Institutes of Private Banking?
The objective of the report is to shed light on the present behavior of the money market rates in Singapore and to forecast the future market trends for the money market interest rates in Singapore. For the purpose of evaluation, the Development Bank of Singapore Limited has been selected within the report (mas.gov.sg, 2015). The report has been structured in a sequential manner where the initial discussion is about the present money marled behavior followed by the future forecasting of trends. The report ends with the analysis of the strategies and their risks (Forbes, 2014).
The money market interest rates in Singapore are controlled by SIBOR (Dbs.com.sg, 2015). The SIBOR offers the reference rate based on which the banks in Singapore like DBS offers unsecured loans to the other commercial banks and the public at large. The bench mark for the interest rate in Singapore was recorded at 0.39 percent. From the year 1988 to 2015, the interest rate in Singapore has been recorded at 1.69 percent. It reached the all time high in the year January 1990. The rate of interest at that period of time was 20 percent. In the year 1993, the interest rate was at a record low of -0.75 percent. The rate of interest of Singapore has been set by the monetary authority.
The historical and current trend of the interest rate can has been set by the reference rates known as the SIBOR and the SOR.
SIBOR is the reference rate which is based on the rate of interest that is set by the banks for lending the unsecured funds to one another in the Singapore interbank market. The interest rate of Singapore is controlled by the monetary authority of Singapore (MAS). They do not focus on controlling the interest rate by monitoring the rate of interest. It is involved in the management of the Singapore dollar (SGD) exchange rate against the trade weighted basket of the currencies of the major trading partners in Singapore. In 2015, the slope was reduced by which SGD appreciates against the major currencies of the economy. The fall in the oil prices resulted in lower expectations of inflation (phillipfunds.com, 2015).
The SOR is the Swap offer rate. It is the FX implied rate that will reflect the interest rate that has been projected that will cost once the same amount of money has been borrowed in US dollars. The news of the US economy has impact on the rate as it varies the USD interest rate and the exchange rates.
The SIBOR and SOR are the benchmark rates loans in Singapore. Both the residential rates and the commercial rates are very popular among the consumers as the concept is very open and transparent.
Fig : SIBOR rate
(Parrado, 2015)., (Secure.sgs.gov.sg, 2015)
The economy of Singapore is a small domestic economy. The economy is dependent on the external sector. Thus the exchange rate is considered as an important instrument in order to achieve the policy objective of the economy. The rate of import of the expenditures is high in Singapore and the rate of exports is also high. It comprises 60-70% of the income of the economy. Thus the fluctuation of the interest rates of the money market instruments of DBS i.e. treasury bills, commercial papers and certificates of deposits largely depends on the exchange rate (Mihaljek, 2015).
The rate of interest in the money market is influenced by various factors are discussed below –
The interest rates or the market expectations in the United States have significant impact on the domestic interbank rate and interest rates of the money market instruments. The SIBOR is affected by the supply and demand for the funds in the interbank market (Economywatch.com, 2015). When there is more supply than the demand for the funds in the interbank market, the SIBOR is expected to have a lower rate but when the demand is high than the supply, the SIBOR is expected to be higher (Dbs.com.sg, 2015).
The domestic cost pressures affect the fiscal and monetary policies of the country. The inflation rate of the Singapore is low. The country does not suffer from the inflationary pressures. The interest rate set by the MAS is not affected by the monetary policy of the country. It is affected by the exchange rates (Gente and Ledesma, 2015).
The International banks play a major role in formulating the interest rates of Singapore. The monetary policy and the liquidity rules of Singapore are based on the new liquidity rules of the country which are set according to standards set by the foreign banks. The interest rate of the money market instruments in Singapore are influenced by the monetary policy in the International market. There has been shift in the currency composition of the lending from the banks (Room, 2015).
The forecast of the interest rate of the money market instruments is based on the economic growth of the country, the interest rates expectations in United States and SGS yield of the Government (Secure.mas.gov.sg, 2015).
The growth rate of Singapore will be similar to that has been tailed in the year 2014. The major contributors to the growth will be due to the restructuring of the labor market. The expansionary fiscal policy will promote growth in the country. It will support the growth in 2016. It is projected that the economy will grow by 3.0% in 2015. The growth of the economy will pick up to 3.2% in the year 2016.
The interest rates are expected to increase as the employment report of the country is declining. There will be decline in the oil prices. These factors will affect the interest rate in Singapore (Rudnitsky, 2015).
The interest rates in Singapore have decreased from 0.39% in January 2015 to 0.33 % in February 2015. It is expected that there will be further decline in the interest rate. The above factors will be the reason for decline in rate of interest. The interest rate will decline to 1.80% in the year 2016 (Tradingeconomics.com, 2015).
|
Month |
Interest rate (%) |
|
April |
0.33 |
|
May |
0.30 |
|
June |
0.26 |
|
July |
0.24 |
|
August |
0.22 |
|
September |
0.20 |
In 2016, the bond of Singapore Government for 10 years is expected to decrease and it will be 1.80% (Ieconomics.com, 2015). In long-term, the Government bond of Singapore for 10 years is projected to have a trend of 1.81, 2.10 and 2.20 % for the year 2020, 2030 and till 2050 (Asianbondsonline.adb.org, 2015).
There will be two strategies that will be undertaken.
Low cost long term funding
The strategy will generate low cost funds from long term investors. The 12 months deposit rates will be fixed. The fixed rate of interest will be offered to the depositors. The price of bidding will be set at 0.32% for 12 months. The main emphasis will be to lock the borrowing cost for the 12 months tenure will meet the objectives. This will increase the reserves of the bank.
Low cost short term funding
It is expected that the rate of interest will increase in the next 6 months. At the present moment the bank will lock in a borrowing cost which is low. Keeping this is mind, the 6 months SIBOR offer price is fixed at 0.72 % and the 12 month of SIBOR is fixed at 0.84%
Scenario of Profitability
The quantum of loan of $100 million and the cost of borrowing is 0.32%
Borrowing cost at 0.32% from the depositors = 0.32% x $100 million
= $320,000
Lending @ SIBOR for 12 months = 0.84 % x $100 m
Profit of bank = 0.52% * $100 m
= $520,000
There are several threats that may affect the bank which includes threat of war, threat of economic recession and loss of the bank due to under performance of the short term securities.
The money would be borrowed from the investors and lend out for mortgage loans @2.5%.
The money could be borrowed at SIBOR and loans could be made.
Strategy involving speculation
In this case, a 3 month SIBOR is borrowed at 0.65% and it is invested in short term discount securities. It is invested in 3 month commercial bill, treasury bills and certificates of deposits.
The quantum of loan is $100 million and the cost of borrowing for 3 months is
= $100 m x 0.65%
= $650000
Rate of discount of the commercial bill = 0.78% x $100 m = $780,000
Profit of Bank = $127100
Margin of the bank = 0.13%
Conclusion
The report provided a brief idea of the money market instruments issued by DBS. The money past and future performance of the interest rates of the money market instruments has been analyzed. It is seen that the interest rate of Singapore are dependent on the fluctuations of the exchange rate internationally. The country encourages foreign investment. The interest rate fluctuations are dependent on the demand and supply of the International market. The country is the major exporter of electronic goods. The yield on the money market products has been analyzed. It is seen that the money market in Singapore is stable. This is due to the stability of the economic performance of the country. There has been a potential increase in the interest rates on the money market instruments. Thus the yield on the money market instruments is more. This has resulted in the increase in the investment in the money market instruments. Two strategies has been discussed in the report. The profit of the bank from the strategies has been calculated. The strategies include the low cost short term funding and low cost long term funding. The speculation strategy involving money market instruments like commercial bills has been discussed. It is seen that the first strategy is generating the bank a profit of $520,000 and the second strategy is generating a profit of $ 127100. Thus the first strategy will optimize the profitability of the bank and it is a feasible strategy for the bank to make profits.
References
Asianbondsonline.adb.org, (2015). AsianBondsOnline – Bond Market Data. [online] Available at: https://asianbondsonline.adb.org/singapore/data/marketwatch.php?code=government_bond_yields [Accessed 21 Mar. 2015].
Dbs.com.sg, (2015). Money Market Instruments | DBS Private Banking. [online] Available at: https://www.dbs.com.sg/private-banking/investments/preserve-wealth/money-market-instruments.page [Accessed 15 Mar. 2015].
Dbs.com.sg, (2015). Money Market Instruments | DBS Treasures Private Client. [online] Available at: https://www.dbs.com.sg/treasures-private-client/investments/preserve-wealth/money-market-funds.page [Accessed 15 Mar. 2015].
Economywatch.com, (2015). Money Market Instruments: Treasury Bills and Certificate of Deposit | Economy Watch. [online] Available at: https://www.economywatch.com/market/money-market/money-market-instruments.html [Accessed 15 Mar. 2015].
Forbes, (2014). Why Singapore’s Economy Is Heading For An Iceland-Style Meltdown. [online] Available at: https://www.forbes.com/sites/jessecolombo/2014/01/13/why-singapores-economy-is-heading-for-an-iceland-style-meltdown/ [Accessed 15 Mar. 2015].
Gente, K. and Ledesma, M. (2015). Does the world real interest rate affect the real exchange rate? The South East Asian experience. [online] kent.ac.uk. Available at: https://www.kent.ac.uk/economics/documents/research/papers/2004/0405.pdf [Accessed 15 Mar. 2015].
Ieconomics.com, (2015). Singapore – Interest Rate – Forecast – Actual Data – Historical Charts. [online] Available at: https://ieconomics.com/singapore-interest-rates-forecast [Accessed 21 Mar. 2015].
mas.gov.sg, (2015). Singapore’s Exchange Rate-Based Monetary Policy. [online] Available at: https://www.mas.gov.sg/~/media/MAS/Monetary%20Policy%20and%20Economics/Monetary%20Policy/MP%20Framework/Singapores%20Exchange%20Ratebased%20Monetary%20Policy.pdf [Accessed 15 Mar. 2015].
Mihaljek, D. (2015). How have external factors affected monetary policy in the EMEs?. [online] bis.org. Available at: https://www.bis.org/publ/bppdf/bispap57.pdf [Accessed 15 Mar. 2015].
Parrado, E. (2015). Singapore’s Unique Monetary Policy: How Does it Work?, Issues 2004-2010.
phillipfunds.com, (2015). The lure of money market funds. [online] Available at: https://www.phillipfunds.com/file/press/The%20Lure%20of%20Money%20Market%20Funds.pdf [Accessed 15 Mar. 2015].
Room, R. (2015). Monetary Policy. [online] Sgs.gov.sg. [Available at: https://www.sgs.gov.sg/The-SGS-Market/Monetary-Policy.aspx Accessed 15 Mar. 2015].
Rudnitsky, J. (2015). Here’s the Next Biggest Threat to Global Crude Oil Prices. [online] Bloomberg.com. Available at: https://www.bloomberg.com/news/articles/2015-03-20/russian-teapots-pose-next-big-threat-to-global-crude-oil-prices [Accessed 21 Mar. 2015].
Secure.mas.gov.sg, (2015). Monetary Authority of Singapore. [online] Available at: https://secure.mas.gov.sg/msb/InterestRatesOfBanksAndFinanceCompanies.aspx [Accessed 21 Mar. 2015].
Secure.sgs.gov.sg, (2015). Daily SGS Prices. [online] Available at: https://secure.sgs.gov.sg/fdanet/SgsBenchmarkIssuePrices.aspx [Accessed 15 Mar. 2015].
Tradingeconomics.com, (2015). Singapore Interest Rate Forecast. [online] Available at: https://www.tradingeconomics.com/singapore/interest-rate/forecast [Accessed 21 Mar. 2015].
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