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Smaller lenders look to reduce interbank liabilities

By Jiang Xueqing (China Daily) Updated: 2020-01-17 00:00

Some small-and medium-sized commercial banks reduced quotas that they reported to China's central bank concerning their plans to issue interbank negotiable certificates of deposit (CD) this year, as they tried to improve their liability structure by cutting their interbank liabilities.

Guiyang Rural Commercial Bank Co Ltd reported to the People's Bank of China, the central bank, to set a quota of 9 billion yuan ($1.3 billion) on its planned issuance of interbank negotiable certificates of deposit this year, down by 35 percent from the level of the previous year.

The quota reported by Shanghai Huarui Bank Co Ltd, one of the first batch of five pilot private banks nationwide, fell by 30 percent year-on-year to 4.9 billion yuan during the same period.

Quotas reported by Tianjin Rural Commercial Bank Co Ltd and Jiangsu Zijin Rural Commercial Bank Co Ltd also dropped by more than 20 percent year-on-year, based on their CD issuance plans posted on the website of the National Interbank Funding Center.

Small-and medium-sized banks are under pressure to downsize their interbank business, said Xiong Qiyue, a researcher with the Bank of China Research Institute.

"Regulators are looking forward to guiding small-and medium-sized banks to return their focus to their main business and strengthen their functions to serve the local economy. This will weaken banks' urge to further increase their assets and will cause a decline in their demands for interbank negotiable certificates of deposit," Xiong said.

"Furthermore, as credit rating differences intensified among small-and medium-sized banks, financing costs became high for some of them, reducing their interest in issuing CDs," he said.

Earlier this month, China's top banking and insurance regulator said it will strengthen regulation of the quality of assets and liabilities of banks and insurers to make sure that their liabilities, especially those of small-and medium-sized financial institutions, remain stable.

"In the past, many banks tried to expand their business scale as soon as possible, relying on interbank funds as a type of liability. However, interbank funds lack stability. When market conditions worsen, liquidity problems will emerge at banks whose interbank funds account for an unduly large proportion of their liabilities," said Zeng Gang, deputy director-general of the National Institution for Finance and Development.

After Chinese regulators took over the troubled Baoshang Bank Co Ltd last year, increased differentiation of channels and costs among banks to replenish liquidity had an impact on banks where a large part of liabilities are interbank liabilities, Zeng said.

"The core of liability management is to strengthen banks' liquidity management and make their liability structure more reasonable. Stable core liabilities will account for a desirable proportion of banks' total liabilities, whereas interbank liabilities will be reduced moderately. This will ensure that bank liquidity will not be overly affected by market changes," he said.

Wen Bin, chief researcher at China Minsheng Banking Corp, said the action of some banks to cut their quotas on the issuance of interbank negotiable certificates of deposit has a lot to do with the current monetary policy of the country.

China will keep monetary policy prudent, flexible and appropriate this year. It is widely expected that the People's Bank of China will further cut the reserve requirement ratio and the benchmark interest rate.

The central bank will launch policies and use monetary instruments, including the targeted medium-term lending facility, to encourage small-and medium-sized banks to lend to small and private businesses, Wen said.

"As the central bank will increase liquidity and corporate borrowing costs will fall, the pressure on banks to satisfy their liquidity needs by issuing interbank negotiable CDs will be less heavy than before," he said.

"Besides, under regulatory guidance, financial institutions will step up support for the real economy, the part of the economy that produces goods and services, especially by increasing medium-and long-term loans. However, the duration of interbank negotiable CDs is short. This may create a maturity mismatch risk. So it is necessary for banks to adjust their assets and liabilities with the aim of making reasonable arrangements," he said.

 

Smaller lenders look to reduce interbank liabilities
A customer comes out of an outlet of Shanghai Huarui Bank in Shanghai. CHINA DAILY

 

 

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