Banking Regulator Adds Three Liquidity Risk Indices, Seeks to Curb Interbank Lending

The China Banking Regulatory Commission will launch a trio of new quantitative indices to improve its assessments of liquidity risk within the financial system, while also seeking to heavily curb interbank lending.

On 6 December CBRC released the “Commercial Bank Liquidity Risk Administrative Provisions (Amended Draft for Solicitation of Opinions)” (商业银行流动性风险管理办法(修订征求意见稿, whose biggest change to the existing regulatory regime lies in the addition of three new quantitative indices.

The current “Commercial Bank Liquidity Risk Administrative Provisions (Trial Implementation)” (商业银行流动性风险管理办法(试行)) contains only two indices – a liquidity ratio and liquidity coverage ratio.

The liquidity coverage ratio is only applicable to banks with 200 billion yuan in assets or greater, with no indices whatsoever for small or medium-sized banks.

The new Provisions require that banks with different assets scopes fulfil disparate requirements with respect to a set of three new regulatory indices.

The first index is the net stable funds ratio, for which a higher value indicates that a bank has a greater ability to deal with medium and long-term structural issues.

The provisions require that Chinese commercial banks with assets of 200 billion yuan or greater have net stable funds ratios of no less than 100%.

The second index is the high quality liquid assets adequacy ratio, which is significant of the ability of a bank to withstand short-term liquidity gaps.

The provisions also stipulate that Chinese commercial banks with assets of 200 billion yuan or greater have a high quality liquid assets adequacy ratio of no less than 100%.

The third index is the liquidity matching ratio, for which a lower value indicates that a given bank has greater problems with respect to the use of short-term funds to support long-term assets, and that there are more severe maturity mismatches.

The provisions require that all Chinese commercial banks have a liquidity matching ratio of no less than 100%.

Xiong Baiyue (熊启跃), a researcher with the Bank of China International Financial Research Institute said to Securities Daily that the liquid assets adequacy ratio is intended to better assess the liquidity conditions of small and medium-sized banks, and is easier to calculate than the liquidity coverage ratio.

According to Xiong the goal of the liquidity matching ratio is to prevent banks from engaging in excessive liquidity mismatches.

In addition to adding new regulatory indices the Provisions also target interbank lending operations, which are categorised as a form of shadow banking given their ability to obscure the final destination of funds.

The new Provisions require that banks set separate quotas for interbank wholesale financing of multiple maturities, including 1 to 3 months, 3 to 6 months, 6 months to one year, and more one year.

In order to prevent the new changes from having too large or abrupt an impact upon China’s banking sector and financial markets, authorities have scheduled their implementation for March 2018.

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