New regulations on the management of liabilities by Chinese commercial banks are expected to have a far-reaching impact upon the nature of domestic lending operations as regulators step up efforts to contain systemic risk.
On 26 March the China Banking and Insurance Regulatory Commission (CBIRC) released the “Commercial Bank Liabilities Quality Administrative Measures” (商业银行负债质量管理办法), which propose “requirements with regard to the sourcing, structure and costs of the liabilities of commercial banks for the purpose of ensuring their security, liquidity and returns.”
The release of the Measures comes following concern that some Chinese banks have made recourse to new forms of fintech to access funds in breach of regulations, increasing the risk and complexity of their liabilities and making them more difficult to regulate.
The includes the use of online lending platforms by small and medium-sized Chinese banks to access deposits outside their own regions in breach of geographic restrictions, to operate on a de facto nation-wide basis.
Chinese authorities have expressed strong concern that the sensitivity and volatility of online deposit rates could have a major adverse impact on the liabilities of smaller lenders who lack strong liquidity management capabilities.
This concern prompted the Chinese central bank to introduce a ban on lenders accepting cross-regional deposits via online platforms in the final quarter of 2020.
The Administrative Measures further step up regulation of Chinese bank liabilities in the following areas:
- Clarifying core requirements for commercial bank liabilities management and establishing a liabilities operations management system which covers organisational structure, corporate governance, internal controls and operational innovation. The measures further refine and integrate pre-established indices, in order to increase their comprehensive and systemic nature.
- Setting commercial bank performance assessment requirements with a greater focus on long-term growth, and a greater focus on the correlation between the management of liability quality and risk management. The Measures call from a shift away from the use of market share, market ranking, interbank comparisons and deposit terms and scale as assessment benchmarks, to avoid “risk triggered by the excessive pursuit of short-term operations and profit expansion, and the neglect of long-term growth.”
- Strengthening regulation and regulatory measures in relation to liabilities quality, by requiring that commercial banks submit regular and annual reports on liabilities quality management to regulators, as well as mandating regulatory inspections and diversified regulatory mechanisms.
- Guiding banks to focus more on liabilities quality instead of scale, by outlining requirements with regard to the “six qualities” (六性) when it comes to liabilities management. These “six qualities” including the “stability of liabilities resources, the diversification of the liabilities structure, the rationality of liabilities and asset matching, the agency of liabilities acquisition, the appropriateness of liabilities costs and the veracity of liabilities items.
Requirements of the Commercial Bank Liabilities Quality Administrative Measures in Relation to the “Six Qualities of Liabilities”
|1.||Agency of liabilities acquisition||When adverse changes or trends appear on the market, the ability to finance and dispose of assets at rational prices.|
|2.||Stability of liabilities sources, to prevent risk in relation by large-scale fluctuations in liabilities||Net stable funds ratios and core liabilities rations.|
|3.||Appropriate liabilities costs||The establishment of scientific internal and external funds pricing mechanisms, and strengthening of internal fund transfer pricing management, to ensure access of funds at a reasonable cost.|
|4.||Veracity of liabilities items||Liabilities operations should be based upon real creditor and debt relations, as well as satisfy the relevant requirements of accounting rules.|
|5.||Diversification of liabilities structure||Ratio of ten biggest depositors, and ten biggest interbank fund sources. Liquidity coverage ratios.|
|6.||Rationality of liabilities and asset management, to prevent risk in relation to excess mismatching||High-quality liquid assets ratio, liquidity matching ratio, liquidity gap ratio, major currency liquidity ratio.|