Small and medium banks worst hit by liquidity crunch
Shares of lenders slump in Shanghai trading, reflecting panic in the market, particularly in banks with a large proportion of interbank assets
Bank shares slumped yesterday after small and medium-sized lenders were singled out by analysts as being worst hit by the liquidity crunch in the mainland's interbank market.
Shares in China Minsheng Banking Corp, Industrial Bank and Ping An Bank almost hit the 10 per cent daily downside cap in Shanghai as the Shanghai Composite Index lost 5.3 per cent, its biggest drop in four years.
"The slump reflected panic over a liquidity crunch, especially in banks with large proportion of interbank assets," said Luo Yi, an analyst with China Merchants Securities.
Interbank rates have been surging this month owing to a slowdown in foreign exchange inflows, tightening of regulatory controls over the interbank bond market and banks' wealth management products, and the central bank's reluctance to inject liquidity, among other reasons.
Medium-sized banks could be most vulnerable to a liquidity squeeze in the interbank market because they generally operate at the regulatory ceiling of 75 per cent loan to deposit ratio (LDR), said May Yan, an analyst at Barclays Capital.
Small and medium-sized banks have been aggressive in the interbank business, using it as an alternative lending channel to get round the lending quota, LDR and capital constraints, and they are more dependent on interbank funding to support their business growth, Yan said.