HIBOR is actually the rate through which the banks in Hong Kong deal with each other in the inter bank market. The lending and borrowing in Hong Kong dollars between their banks is done with the help of a rate that is known as HIBOR.
HIBOR is the official rate that is used to trade in the Asian economy just like LIBOR (London Interbank Offer Rate). HIBOR is sued when the banks in Hong Kong seem to face a cash shortage and has problem in liquidity due to withdrawals. Therefore in this situation the bank goes to the open market and borrows at HIBOR. In simple words HIBOR is that interest rate that makes it easy for the banks to lend and borrow the money through the open market. It is similar to the federal fund rate but is not applicable in US as HIBOR does not work there.
HIBOR is set by reference to market rates and quotations from the 20 banks that are authorized by the Honk Kong association of banks. These banks send their quotations to the association after deciding themselves what the rate must be. Then it is the duty of association to take 14 middle quotations and take out the average rate from them. This rate is then sounded off to 5 decimal places if required. The final rate is then announced by the association and this rate is then used by all the banks in the open market. This rate can be set for one night or for the year but normally it gets set every day. With HIBOR the functionality of borrowing and lending becomes easy and the process gets done in less time. The intervention of the association lends a helping hand to the banks so that at times of liquidity problem any bank in Hong Kong can borrow from the open market with the HIBOR rate.
It is also important to know that the HIBOR rates can be high or low depending on the situation in the market that is mostly the liquidity situation. However the rate approved by the association is the one that needs to be followed at all cost.
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