Removal of 20-year-old rule a boon to banking sector

A few days ago, legislators adopted an amendment to the law on commercial banks, removing a stipulation of a 75 percent loan-to-deposit ratio.

The China Banking Regulatory Commission, the industry watchdog, required banks in the country to have a loan-to-deposit ratio of no higher than 75 percent, which means a bank could only lend 75 yuan out of every 100 yuan it took from depositors. The measure was first proposed by the central bank in 1994 to manage assets and liabilities of some joint-stock banks. The next year, the rule was written into the Commercial Banking Law, becoming a major policy tool for the government to manage the banking sector.

In the initial stages of implementing the Commercial Banking Law, the LDR rule was a simple and effective regulatory measure. It was designed to tie lending closely to the level of deposits, providing a stable source of capital for creating credit and reducing bank exposure to short-term funding and leverage risks.