Bank of Communications hits back at new deposit constraint

Bank of Communications has shot back at a new constraint on bank deposits, calling the rule issued jointly by three mainland regulators an obstacle to growing deposits and saying banks would simply find a way around it.

The People's Bank of China, the Ministry of Finance and the China Banking Regulatory Commission issued a notice on Friday meant to reduce major fluctuations in deposits at the end of each month as banks scramble to meet regulatory requirements such as the 75 per cent loan-to-deposit ratio.

The notice, posted on the CBRC website, said deviations in deposits on the final day of the month could not exceed 3 per cent of a bank's monthly deposit average.

However, Bank of Communications' Finance Research Centre in Shanghai said in a statement drafted on Sunday that the new rule would not only hinder some banks' ability to collect deposits, but banks would also find a way around it.

"Under the constraints of slowing deposits and loan ratios, banks cannot change the behaviour of pulling deposits [on to balance sheets]," it said, adding that some banks could start bolstering deposits mid-month to circumvent the new rule.

Mainland banks are increasingly competing with non-financial-sector firms, such as internet-based lenders, for deposits. At the same time, they have become accustomed to pulling off-balance-sheet funds on to their balance sheets as one way of increasing deposits at the end of the month and quarter to meet the CBRC's loan-to-deposit ratio requirements. The practice increases the volatility of the money market and can lead to a spike in mainland interbank rates.