• Regulator told banks to stop lowballing rate, sources said
  • Rate jumps after banks said to get letter from regulator

During the 2008 global financial crisis, regulators discovered some banks had routinely manipulated their contributions to the London interbank offered rate to disguise their real cost of funding, affecting the value of trillions of dollars of loans and derivatives. The scandal resulted in more than $9 billion in fines. Fast forward eight years and benchmark interest-rate accuracy is again an issue, this time in Saudi Arabia, where the regulator is said to have told banks there to stop lowballing submissions. Here we examine the Saudi interbank offered rate, why it matters and what to expect.

The regulator hasn’t commented publicly on the matter and there has been no accusation of wrongdoing. The 15 banks that participate in setting the rate declined to comment or didn’t respond to requests for comment when contacted by Bloomberg.

What is the SAIBOR and how is it calculated?

The Saudi Interbank Offered Rate is a benchmark interest rate used to price loans and derivatives in riyals. Each morning, 15 banks are asked to estimate their borrowing costs for periods ranging from one month to 12 months, including what they need to pay to attract large deposits from customers. The top and bottom two quotes for each duration are excluded, and an average is taken of the rest. The resulting rates are supposed to reflect the interest rates banks charge each other in the interbank market.

What’s drawing attention to the rate?

The Saudi Arabia Monetary Agency has written to banks instructing them to only submit levels to SAIBOR at which they’re willing to lend, after some banks were found to be lowballing interest rate submissions, according to people with knowledge of the matter.

Any misrepresentation matters because SAIBOR determines interest payments on an estimated 900 billion riyals ($240 billion) to 1.1 trillion riyals of loans. It is also used to price riyal-denominated swaps and other derivatives, although hard estimates of the volume of derivatives priced using SAIBOR are difficult to find.

More broadly, SAIBOR is an important barometer of the creditworthiness of individual institutions and the market, particularly in periods of stress.

How is the slump in oil affecting the banks?

Bank liquidity is tightening after a halving of oil prices over the past two years caused the growth in deposits to slow. The government is also draining cash from the system as it seeks to plug the highest budget deficit since 1991. Last year, it raised 98 billion riyals ($26 billion) from selling bonds to local institutions and will probably sell about 120 billion riyals of debt in 2016, according to Saudi Fransi Capital. The country has also eased some rules on its banks to help alleviate the liquidity issue, allowing them to lend the equivalent of 90 percent of their deposits, up from an earlier limit of 85 percent.

So which banks are on the panel that set the rate?

The 15 banks on the panel are: Arab National Bank, Bank Aljazira, Banque Saudi Fransi, Saudi Hollandi Bank, Emirates NBD, Gulf International Bank, National Bank of Kuwait, National Commercial Bank, Riyad Bank, Saudi British Bank, Samba Financial Group, Saudi Investment Bank, Alinma Bank, Bank Albilad, Bank Muscat.

The banks were all contacted by Bloomberg and either declined to comment or didn’t return calls and e-mail requests for comment.

Where are the SAIBOR rates now?

SAIBOR reflects liquidity conditions in the banking system, with higher rates indicating a tightening of credit conditions as banks charge more to lend to their peers. Three-month Saibor now stands at 2.2 percent -- its highest in seven years -- and has increased 5 basis points since the regulator sent its demand to banks earlier this month.

Is the situation in Saudi Arabia comparable with Libor?

Yes and no. When credit markets dried up at the time of the financial crisis, regulators found that banks were lowballing their submissions to avoid the perception they were in trouble and also to favor their derivatives positions. While the lower submissions also appear to be an issue in Saudi Arabia, it’s not clear what is behind the lowballing of rates alleged by the regulator.

Has anything happened since the regulator sent the letter?

Publicly, at least, it’s been radio silence from the regulator, banks and commentators. Dubai-based investment bank Arqaam Capital has been one of the few to comment on the news. In a note to investors, it said that it doesn’t expect the Saudi Arabian Monetary Agency to levy any fines, without saying why. Still, it’s advising investors to keep away from investments in Saudi Arabian banks because of a slowing economy, tighter liquidity and rising interbank rates.

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