PBOC puts US$1.27 trillion of bank debt under closer scrutiny

China’s central bank said it will start to closely examine 8.43 trillion yuan (US$1.27 trillion) of money market debt issued by big banks from next year.

The People’s Bank of China said in its second-quarter monetary report that from the first quarter of 2018, it will include negotiable certificates of deposit (NCDs) issued by banks with over 500 billion yuan of assets when it calculates their interbank liabilities under its macro-prudential assessment(MPA).

The move is part of efforts by Beijing to curb risk in the financial system by reining in rampant interbank funding.

But the PBOC is providing some leeway for smaller lenders, which have made the most of the debt instrument to amplify returns, and in doing so added to risk in the banking and bond systems. They will be exempt from the first round of the test, though the PBOC said it will continue to monitor them.

The inclusion had been expected, after the PBOC said in March it was mulling the idea of requiring lenders to reclassify NCDs as interbank liabilities. But this is the first time it has given a clear timetable for the inclusion.

“The overall impact will likely be small, as the move is probably less severe than expected: there is enough time for adjustment, and medium and small banks, which rely on more NCDs and interbank liabilities, will be excluded from the first test,” said a Citibank note.