If you have USD in a Singapore bank, what set of rates do you think the bank uses to pay you interest? Is it USD rate?
The answer is No. US rates would only be used for USD deposits within the United States. International rates would be used for USD deposits outside the United States, called Eurodollars, and the main rate used is the London Interbank Offered Rate, or LIBOR.
LIBOR is the interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market.
The LIBOR is fixed on a daily basis by the British Bankers’ Association and is quoted for 30-day, 60-day, 90-day, 180-day, or 360-day (1-year) terms. The LIBOR is derived from a filtered average of the world’s most creditworthy banks’ interbank deposit rates for larger loans with maturities between overnight and one full year.
The LIBOR is the world’s most widely used benchmark for short-term interest rates. It’s important because it is the rate at which the world’s most preferred borrowers are able to borrow money. It is also the rate upon which rates for less preferred borrowers are based. For example, a multinational corporation with a very good credit rating may be able to borrow money for one year at LIBOR plus 4 or 5 points.
Countries that rely on the LIBOR for a reference rate include the United States, Canada, Switzerland and England.
In Singapore, a similar term Singapore Inter-Bank Offered Rate (Sibor) is more commonly used.