China’s central bank has released further details on the inclusion of interbank certificates of deposit in its macro-prudential assessments (MPA) of Chinese lenders.
On 11 August the People’s Bank of China issued its “2017 Second Quarter China Monetary Policy Execution Report” (2017年第二季度中国货币政策执行报告), which indicates that interbank CD’s of banks with assets in excess of 500 billion yuan (USD$ 75.08 billion) will be included in MPA interbank debt ratios starting from the first quarter of 2018.
According to the report the inclusion of interbank CD’s in key assessment indices is for the purpose of better determining the dependence of Chinese financial institutions upon interbank financing, and guiding financial institutions in the proper performance of liquidity management.
The latest PBOC reports provides confirmation of long circulating rumours on the Chinese market on the inclusion of interbank CD’s in bank MPA’s.
Xu Chengyuan, chief economist at ratings agency Dongfang Jincheng (东方金诚) said to Economic Information Daily that interbank CD’s have seen explosive growth in recent years, yet inadequate regulation has transformed them into a major source of regulatory arbitrage, as well as key tool for raising leverage levels in the Chinese finance system.
Data from the end of 2016 indicates that the 500 billion yuan asset threshold mean a total of 35 of China’s largest banks will see the inclusion of their interbank CD’s in MPA assessments, including the big five state-owned banks, 12 national joint-stock commercial banks, 13 municipal commercial banks and 5 rural commercial banks.
According to Xu these banks are amongst the biggest issuers of interbank CD’s, and the slated changes to MPA will put pressure on certain lenders to contract their interbank debt in order to meet targets.
Xu said however that the deadline of 2018 Q1 will leave ample time for these banks to put their houses in order, while the weighting given to interbank CD’s is comparatively modest, in order to prevent their inclusion in MPA’s from causing market disruption.
The move is nonetheless viewed by Xu as likely just the first step in efforts by Chiense financial regulators to contain the interbank CD’s business which has seen such rapid growth in recent years.