China’s Regulators Wary of Interbank Lending to transfer loans off their balance sheet
September 6, 2013 Leave a comment
Updated September 5, 2013, 8:07 a.m. ET
China’s Regulators Wary of Interbank Lending
RICHARD SILK
China’s regulators are on the lookout for risks posed by the rapid growth of interbank lending, a vice governor of the central bank said Thursday. The interbank market all but seized up and interest rates rose to almost 30% in late June, after capital outflows exacerbated a seasonal spike in liquidity demand. The People’s Bank of China proved reluctant to supply cash to the market, surprising an industry that had gotten used to regular liquidity support. “The rapidly expanding interbank market has brought new challenges for implementing monetary policy and avoiding financial risks,” said Hu Xiaolian at a conference in Beijing. “For example, some banks have been using the interbank market to transfer loans off their balance sheet.”Liability mismatches create the potential for hidden dangers when banks rely too much on borrowing from other financial institutions, Ms. Hu added.
Regulators have struggled to control the rapid expansion of lending, with banks selling “wealth-management products” to their customers to effectively circumvent controls on deposit rates and using complex interbank transactions to disguise the level of their loans.
These tactics have fueled the growth of the money supply, Ms. Hu said. The M2 measure of broad money grew 14.5% in the year to the end of July, ahead of the government’s 13.5% target.
“An important lesson of the international financial crisis is that the rapid growth of ‘shadow banking’ is to a large extent not consistent with supervisory policies,” Ms. Hu said.
To ward off the danger posed by high debt levels, China needs to better coordinate supervision of the financial system, Ms. Hu said. “Overcapacity and the very high level of debt in some sectors have the potential to cause hidden financial risks,” she said.
“The main risk lies in the close connections between the banking system, the money market, the credit market, the capital market and the insurance market.”
Last month China announced that a new body, headed up by the People’s Bank of China, would be set up to coordinate financial supervision. Several agencies, including the China Banking Regulatory Commission, the China Securities Regulatory Commission and the China Insurance Regulatory Commission, are responsible for policing different industries.
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