China’s banking regulator is taking aim at the use of the country’s interbank lending market to engage in what it refers to as “regulatory arbitrage.”
Over the past two weeks CBRC has stepped up pressure on the banking sector with the release of a slew of new regulatory measures and the imposition of penalties upon misbehaving lenders.
CBRC is shifting its focus to interbank lending market specifically, with CBRC Document 46, issued on 28 March, and CBRC Document 6, the “Guidance Opinions on Work in Relation to the Prevention and Control of Banking Sector Risk,” both making extensive reference to problems with the sector.
CBRC Document 46 points in particular to the use of shady interbank lending practices by banks to “fraudulently inflate balance sheets, understate capital amounts, and cover up risk.”
Less than a fortnight after the release of CBRC Document No. 46, the banking regulator indicated in CBRC Document 6 that it would turn its attention to rampant growth in interbank deposits.
CBRC said that it will “adopt effective measures to reduce reliance on interbank deposits and other forms of interbank financing,” and “oversee banks with comparatively rapid growth in interbank deposits, or whose interbank deposits comprise a comparatively high percentage of liabilities, and rationally control the scope of interbank deposits and other forms of interbank financing.”
Will China’s Interbank Deposits Surge or Slacken in 2017
Statistics from Hengfeng Bank’s Commercial Banking Research Center anticipate a dramatic increase in the volume of interbank deposits in China this year.
416 commercial banks in China have publicly released their interbank deposit plans for 2017, with the total projected sum expected to exceed 14.56 trillion yuan, as compared to an actual issuance of 12.99 trillion yuan in 2016.
Despite this projected growth in volume, however, analysts expect interbank deposit activity to cool in 2017 as a result of actions by regulators.
Signs of a slowdown are evident already. As of the end of March both the volume and pricing of interbank deposits began to soften, with a turnaround in rates for products of various maturities.
Figure from financial data provider Wind indicates that the rate for 1 month triple A-rated interbank deposits has fallen from a recent high of 4.76% to 3.9% at present, the same level it was at during the start of February.
Six month interbank deposits have fallen from 4.65% to 4.35%, while those with one-year maturities have seen rates slip from 4.40% to 4.25%.