Chinese banks are cutting back on their interbank lending and finance operations in response to a heavy crackdown by financial regulators.
Considered a major segment of the Chinese shadow banking sector, interbank lending has flourished in recent years as a convenient means for smaller banks to access capital and dodge regulatory controls.
Interbank lending operations have recently come under heavy pressure from financial regulators who are keen to deleverage the economy as well as forestall systemic risk.
Members of China’s banking sector report that the efforts of regulators are taking effect, with lenders either cutting back substantially on interbank activities or refraining from them completely.
An executive from the Guangzhou branch of one of China’s joint-stock banks said to China Securities Journal that lenders are under heavy pressure as a result of vigorous action on the part of regulators.
“All of the banks are pulling back from the battlefront,” said the banker, who donned the pseudonym Wang Xun for the interview.
According to Wang interbank operations have entered a period of “real deleveraging” as regulators launch measures of unprecedented intensity.
Many banks are actively winding down their interbank operations, with some banks even suspending them completely.
“We feel that we cannot basically use interbank operations as channels [for transferring funds.]” said Wang. “In the past there were many channels for making entrusted loans or putting things off balance sheet, but now the on-site inspections of regulatory departments focus on these things.
“Because of the severity of the crackdown, our head bank has imposed heavy control of the interbank operations amounts of all of the local branch banks. ”
In recent years interbank certificates of deposit have seen particularly strong growth, with smaller lenders such as municipal commercial banks heavily dependent upon them as a source of funds.
This activity has caused strong concern amongst financial regulators, with analysts expecting that some smaller banks could suffer from marked liquidity issues when the repayment peak arrives in May.
As part of its crackdown on lenders, the China Banking Regulatory Commission is focusing in particular on inspections of “empty transfers” on the interbank market, which eventually results in expanded leverage and interest rate arbitrage.
According to Wang interbank “empty transfers” have long been the unspoken rule of the sector, serving as a convenient means for expanding the assets of banks as well as obtaining greater returns.
“The outlook for the real economy hasn’t been that great for the past several years, and for this reason banks have turned to certain operations on the interbank market to put capital into the bond market,” he said.
“Of course some funds are also being invested in certain lending areas with comparatively high returns, such as real estate.”