China bans new deposit certificates, tightening screws on interbank lending to curb risks
The central bank will ban financial institutions from issuing interbank negotiable certificates of deposit with maturity of more than one year from September 1
China has tightened the scrutiny of interbank funding by banning new issues of long-term negotiable certificates of deposit (NCDs) from September 1 as part of its broader drive to curb financial risks.
From Friday, financial institutions will not be allowed to issue interbank NCDs exceeding one year, the People’s Bank of China said on its website on Thursday.
China had previously allowed the issuance of certificates with maturities of two and three years. The central bank said existing long-term NCDs would be allowed to run their course until maturity.
The certificates, introduced in China in 2013, are an important source of funding for smaller banks that find it harder to attract saving deposits due to their limited network.
NCD issues have grown quickly over the last two years, with smaller lenders using them to aggressively raise money to invest in higher yield but risky instruments to profit from the spread.
Authorities who have been alerted to the heightened risks from the growing volume have stepped up scrutiny this year.
China’s interbank business shrank in the first half of the year for the first time since 2010 as the crackdown on financial risks took effect, according to the China Banking Regulatory Commission (CBRC).
“The latest step signals regulators’ ongoing stance to strengthen the regulation of the interbank business, steering money to be pumped into supporting the real economy instead of being manipulated within the financial industry,” said Xu Wenbing, chief banking analyst at Bank of Communications in Shanghai.
The central bank’s head of the financial research institute, Sun Guofeng tried to play down the ban’s impact, citing the marginal scale of the long-term certificates, according to a report from the central bank-affiliated Financial News on Thursday.
Sun said the outstanding value of certificates with more than one-year maturity stood at 111.5 billion yuan (US$17 billion) at the end of June, accounting for a mere 1.4 per cent of all certificates.
In the first half, financial institutions issued a total of 37.2 billion yuan of longer-than-one-year certificates, or 0.4 per cent of the total issuance in the period.
The central bank said earlier in August that it would start to include certificates issued by banks with assets of more than 500 billion yuan when it calculates their interbank liabilities under its macroprudential assessment from the first quarter of 2018.
In May 2014, the central bank and the CBRC capped interbank liabilities at no more than a third of a bank’s total liabilities, but the issuance of certificates in those early days were not taken into account as interbank liabilities.
Banks have been quick to take advantage of the loophole. At their peak in the last two years, the certificates accounted for over half of total debt issuance.