Beijing to tighten interbank grip

Beijing is expected to tighten interbank financing with a new rule regulating the business.

The China Banking Regulatory Commission had drafted new regulation to restrict lenders' exposure, improve information disclosure, and require them to make provisions and calculate capital consumption for their interbank businesses, bankers said.

The rule is expected to be announced soon and take effect in February.

Interbank assets of the mainland's 16 listed banks doubled to 10.52 trillion yuan (HK$13.3 trillion) from 2010 to 2012 as developers, local government financing vehicles and other borrowers with difficulty accessing bank loans turned to trust firms, which then issued trust beneficiary rights in the interbank market to raise funds from banks.

Interbank assets, accounting for 12 per cent of mainland banks' 143.7 trillion yuan of total assets, should be better regulated, said Guo Tianyong, a professor with the Central University of Finance and Economics.

"Interbank money should be invested in low-risk products such as treasury bonds. However, in China, most of the funds go to highly risky trust products as banks pursue high returns," Guo said.

Banks resort to interbank lending to bypass loan quota restrictions set by the People's Bank of China, distorting money supply measures and weakening their role in serving companies in the real economy. That has prompted the central bank to improve scrutiny and open up new channels, including asset securitisation, to meet financing demand in a more transparent way, say bankers.

The new regulation was expected to affect lenders' bottom line, weigh on their capital strength, push interbank money rates higher and reduce liquidity next year, analysts said.

Under the draft rule, total lending to a single financial institution should not exceed 100 per cent of a bank's net capital, that to non-bank financial institutions should not exceed 25 per cent of the bank's net capital, and that to all financial institutions should not exceed 50 per cent of the bank's deposits.

Maturities of interbank lending will be restricted to within one year and rollover will not be allowed.

"Among the H-share banks, China Minsheng Banking could have the greatest pressure to reduce its interbank lending business," said May Yan, an analyst at Barclays Capital, noting that the bank's interbank lending accounted for 49 per cent of its deposits at the end of June.

Small and medium-sized banks, with fewer outlets to take deposits than big lenders, rely heavily on interbank business for expansion. They are also likely to bear the brunt of the regulation when banks are asked to calculate capital consumption for their interbank business.

The draft rule requires banks to include interbank financing into a unified credit system under which capital consumption is calculated and provision is booked.

If banks were required to put their interbank assets back on the balance sheet, Minsheng's tier one capital adequacy ratio could be reduced by 17 basis points and its overall capital ratio by 22 basis points, Yan said.

According to Shanghai-based research firm CEBM, core tier-one capital ratio of most joint-stock banks could drop by more than 100 basis points if interbank assets are treated as loans, a requirement in the draft rule.

Mainland banks are faced with mounting pressure to meet regulatory requirements on capital adequacy as the lending binge after the 2008-09 financial crisis has caused a surge in bad loans, eroding their capital strength.

If banks booked 1 per cent of trust beneficiary rights value as provisions, the net profit of small and medium-sized banks was likely to fall 7 per cent on average, while a 2.5 per cent provision would eat up 17 per cent of their net earnings, analysts at Beijing-based Minsheng Securities said in a research note.

The interbank tightening was expected to lower total social financing, an official measure of financing in the equity market, banking and shadow banking systems, by about 600 billion yuan next year, Yan said.

The mainland's total social financing stood at 14.82 trillion yuan in the first 10 months of this year, up 13.9 per cent from a year earlier.

"Interest rates in the bond market could rise due to higher demand and tighter liquidity," Yan said. "While the Communist Party's third plenary reform plan offers a positive outlook for the economy over the medium to long term, we remain cautious on the banking sector in the near term."