Interbank Lending Under Pressure from Chinese Banking Regulator

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The China Banking Regulatory Commission hopes to rein in the use of negotiable certificates of deposit (NCD’s) by banks to sidestep restrictions on interbank lending, as the Chinese government strives to deleverage the finance sector.

A notice issued by CBRC last week requires that banks include NCD’s as part of interbank lending and borrowing when reporting to regulators, instead of recording the instruments as bonds payable.

The measure is designed to crack down on the use of NCD’s to flout restrictions on interbank lending, a feature which has spurred their surging popularity amongst lenders in recent several years.

In 2014 the central government stipulated that the amount that banks borrow from their peers in the financial sector should not exceed one-third of total liabilities.

Chinese commercial banks are also subject to the requirement that their net volume of interbank lending to a single given financial institution should not exceed 50% of quality core capital, following the deduction of assets with zero risk weighting.

These curbs on interbank lending have since been undermined by the surging popularity of NCD’s amongst lenders, ever since the introduction of these instruments to the Chinese market in 2013 as part of the government’s interest-rate liberalisation drive.

Instead of channelling funds towards real economic activity via NCD’s, many banks instead use them to purchase wealth management products supplied by their peers, thwarting efforts by regulators to stymie banking sector leverage.

Because NCD’s are recorded under “bond payables” instead of “interbank liability,” banks can use them to evade regulatory restriction on loan-to-deposit limits and capital provisions.

Their utility as regulatory evasion tools has made NCD’s immensely popular amongst lenders – especially small and medium-sized banks, with data from Wind Information indicating that issuance of interbank NCD’s leaped by 65.4% in the first quarter of 2017 to reach 5.5 trillion yuan.

 

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