Bank Regulator Curbs Use of Interbank Fundraising Tool

(Beijing) — China’s banking regulator has taken steps to curb use of an increasingly popular interbank fundraising tool that is undermining moves to reduce leverage in the market.

The China Banking Regulatory Commission (CBRC) issued a notice to lenders last week requiring banks to report the amount of negotiable certificates of deposit (NCDs) as part of interbank lending and borrowing, according to bankers who have seen this notice.

Under a policy jointly laid out in 2014 by five authorities, including the central bank and the CBRC, the amount one bank can borrow from other financial institutions should not exceed one-third of its total debt. Meanwhile, the net amount of interbank lending of a commercial bank to a single financial institution, excluding interbank deposits for settlement purposes, should not be more than 50% of its quality core capital after deducting assets that have zero risk weighting.

The latest CBRC notice requires lenders to ensure the ratios still hold when NCDs are included in outstanding interbank lending and borrowing, the bankers said.

This is the first major regulatory step that the CBRC has taken since NCDs were introduced in 2013 as part of broad government efforts to liberalize the interest-rate system. But the explosion in the use of the funding tool by banks has created a serious challenge for the government as it strives to cut leverage in the interbank market, because money raised by NCDs is often moved among banks who purchase each other’s wealth management products rather than flowing into the so-called “real economy.”

A major reason NCDs have become popular is that banks, particularly smaller ones, can circumvent regulatory requirements on capital provision and loan-to-deposit limits because the use of NCDs is recorded as “bond payables” rather than “interbank liability.”

Since the start of 2017, the issuance of interbank NCDs has reached 5.5 trillion yuan ($800 billion), up 65.4% compared with the same period a year ago, according to data from Wind Information, a financial data provider.

Small and midsize banks have been the primary issuers of interbank NCDs, and annual reports indicate that under the new reporting requirements, many joint-stock banks and city commercial banks, such as Bank of Qingdao Co. Ltd., Bank of Tianjin Co. Ltd. and Bank of Jiangsu Co. Ltd., will see their interbank borrowing exceed the limit.

Contact reporter Dong Tongjian (tongjiandong@caixink.com)