CBRC Promotes Interbank De-leveraging; Interbank business is just another channel for banks in their never-ending quest to circumvent regulatory controls, which is becoming increasingly complex and hidden

CBRC Promotes Interbank De-leveraging

11-19 14:15 Caijing

Interbank business is just another channel for banks in their never-ending quest to circumvent regulatory controls, which is becoming increasingly complex and hidden.

By staff reporters Dong Yuxiao and You Xi

Interbank financing has surged in China in the past few years, spurring banking regulators to introduce regulatory policies that will tighten their grip on interbank operations and limit growth of banks’ off-balance sheet assets. Caijing learned that relevant authorities at the China Banking Regulatory Commission (CBRC) have drafted the Interbank Financing Management Rules for Commercial Banks (the “Rules”). The Rules are expected to be approved and implemented in Feb. 2014 after being submitted to CBRC leadership in November.This new round of regulatory countermeasures to address banks’ “covert credit business” can be interpreted as a sharp warning directed towards interbank operations, which currently account for 12 percent of banks’ total assets.

Interbank financing is a regular business to conduct financial transactions between financial institutions and has been around for quite some time. It mainly includes interbank lending, interbank deposits, reverse repurchase agreements, and interbank borrowing. But tight controls on credit over the past two years has led to a massive expansion of interbank operations, with interbank assets of 16 listed banks soaring from 5.25 trillion yuan in 2010 to 10.52 trillion yuan in 2012.

Two factors have driven the rapid expansion of interbank operations: one, the attempt by banks to circumvent lending quotas put in place by regulators; and two, banks’ response to capital adequacy ratio requirements and loan ratio assessments.

The People’s Bank of China (PBOC), China’s central bank, recently pointed out in its third-quarter monetary policy report that some commercial banks use interbank financing to lend in covert and complicated ways or inflate the size of their deposits, making liquidity management and risk control more difficult and to some extent impacting macro-control and financial supervision.

The basic means banks utilize interbank operations to circumvent credit controls is as follows: commercial banks provide covert credit to non-financial businesses, and through certain accounting operations, this business is recorded as interbank funds instead of loans on the asset side, thereby meeting banks’ goal of reducing occupied capital; meanwhile, on the liability side, this business is recorded as deposits of non-financial enterprises in commercial banks.

For banking regulators, the core essence of capital adequacy ratios is that banks have sufficient capital to withstand risks. If a covert credit asset that should have been risk weighted at 100 percent is recorded as an interbank asset, the bank’s own credit risk exposure will be greatly underestimated.

Even more worrying is the direction of loan investment, said a source at a loan and trust company. Of the projects the source handles, 80 percent of funds are invested into state-owned enterprises, local government financing platforms and government-limited real estate companies.

Banks using covert credit to look for new channels within regulatory loopholes is not a new phenomenon. Banks’ quest for profit growth, strong social financing needs, and a strict credit management environment has led to the emergence of a great variety of financing instruments and paths. Interbank business is just another channel for banks in their never-ending quest to circumvent regulatory controls, which is becoming increasingly complex and hidden. Trust, securities companies, and insurance companies have all fought to become channels. Meanwhile, the risk is hidden in the banking system’s off balance-sheet business and cannot be accurately measured.

Although regulators have set up layers of defenses, it can be expected that the game of cat-and-mouse between regulators and financial institutions will continue for some time.