What Is an Interest Rate Agreement?

The interest rate agreement is a cap on the interest rate limit for Hong Kong licensed banks to accept Hong Kong dollar deposits. In July 1964, in order to stop the vicious competition of banks to attract deposits by competing to raise interest rates, the Hong Kong Association of Foreign Exchange Banks formulated a Hong Kong dollar deposit "interest rate agreement". The agreement divides banks into two categories: local banks and foreign banks. Bank deposits are divided into five levels: foreign bank deposits are classified as first level, and local bank deposits are classified into four levels based on amount. The deposit interest rate set by a foreign bank is the basic interest rate. When absorbing deposits, local banks can increase by 0.25% per level on the basis of the basic interest rate. Interest rate agreements have played an active role in maintaining the stability and development of Hong Kong's financial market. After the Hong Kong Association of Banks replaced the Association of Foreign Exchange Banks in 1981, the 1964 interest rate agreement was amended to reduce the original five-tier bank deposits to two. That is, all foreign banks and the original local bank deposits with more than 25% of foreign capital holdings are classified as Tier 1, and the remaining local banks and Chinese banks are classified as Tier 2. Second-tier bank deposits can be paid up to half a percent higher than interest on first-tier bank deposits. ^[1]