PBOC tightens oversight on bank deposits

Benchmark interest rate to be 'ballast stone' of entire system over long term

China has barred local and regional banks from providing cross-regional deposit services and tightened the deposit management supervision system, according to the People's Bank of China, the central bank.

The PBOC said that the benchmark deposit interest rates, or the "ballast stone" of the entire interest rate system, will be retained for the long term. Currently, the one-year loan prime rate is at 3.85 percent, while the one-year benchmark deposit rate has remained unchanged since 2015 at 1.5 percent.

Adjusting the deposit rate will either widen or narrow the interest rate spread between how much commercial banks can pay out to depositors and how much they can charge for loans.

Last year, the PBOC shifted the pricing benchmark for outstanding floating rate loans to the LPR, and committed to advancing market-oriented interest rate reforms this year. Since the novel coronavirus epidemic, the LPR has been lowered by 20 basis points and the relending rate by 50 basis points. In addition, the PBOC has lowered the reserve requirement ratio to free up more capital in the banking system.

Deposit rate reforms are key to sustained profits for commercial banks and stability of the entire financial system, said experts.

Xie Yaxuan, chief analyst at China Merchants Securities, cited a recent article by Sun Guofeng, head of the PBOC's monetary policy department, and said that deeper LPR reforms will push forward the market-oriented deposit rate reform this year, and enhance the management of deposit products. It will also facilitate the implementation of new rules for wealth management products, said Xie.

PBOC Deputy Governor Liu Guoqiang said regional banks must mainly serve local clients and stop providing cross-regional deposit services.

The new regulation is critical for city and rural commercial banks, as they will face pressures to expand business beyond their place of registration, but will be hampered as the new rule curbs competition for savings deposits, experts said.

Some experts expect the central bank to include cross-regional deposit indicators in the macro prudential assessment framework for evaluating bank performance and testing the stability of financial institutions. The regulatory bodies may issue plans later to reduce the amount of cross-regional deposits, they said.

PBOC Governor Yi Gang had indicated during the annual work conference in January that the central bank will further popularize the LPR-based lending and gradually marketize deposit rates.

Besides, regulators will also strengthen the management of online platform deposits and cross-regional deposits to stabilize commercial banks' costs on the liability side, for improvements in the policy rate and the money market benchmark rate systems.

The PBOC has also highlighted the need to tighten supervision on nonstandard innovative deposit products, for investor protection. The central bank and the China Banking and Insurance Regulatory Commission jointly issued a notice in January that seeks to strengthen regulations on internet-based personal deposits of commercial banks.

It said commercial banks should not conduct time deposit or time-demand optional deposit businesses via non-self-operated online platforms. It also stressed on the need to enhance management of assets, liabilities and liquidity risks, and properly keep banks' cost of liabilities under control.

"Locally incorporated banks shall stick to their mission of serving clients within the regions where their branches are located," the PBOC said.