What is the definition of Prime rates and floating rates?
The Prime rate is the lowest lending rate which a bank is prepared to lend in Singapore Dollars to its best customers on an overdraft or demand basis. A floating rate is one which is not fixed, and is pegged to an index rate eg Prime + 1%, and "floats" according to the movements in the index rate.
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How do banks in Singapore derive their prime rates?
Prime rates are determined by banks based on their cost of funds, plus a spread to cover credit risks, operating expenses and a desired return on shareholders' funds.
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Are there any upper and lower limits that banks peg their prime rates to?
There are no upper or lower limits for banks to peg their prime rates to. However, all banks must notify the Monetary Authority of Singapore in advance of any changes in their prime rates.
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Why is it that when banks slash interest rates for deposits, the cuts are substantial but when they reduce their prime rate, the reduction appears to be minimal?
Prime and deposit rates reflect market conditions including the level of interbank rates. Generally, banks do not lend money based on their prime rate alone. Increasingly, banks are charging interest based on interbank rates. Furthermore, not all deposits are used to fund prime-pegged loans. Neither do banks necessarily fund prime-pegged loans with only deposits. Hence, it is erroneous to assume that banks are increasing their profits by widening the gap between their prime and deposit rates.
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