Tags: China | Bank | Loan-to-Deposit Calculation | Growth

China Changes Bank Loan-to-Deposit Calculation in Growth Bid

Monday, 30 June 2014 08:45 AM

China changed the way it calculated banks’ loan-to-deposit ratios, giving them greater capacity to lend money and help bolster the slowing economy.

Banks can include in the calculation negotiable certificates of deposit sold to companies or individuals, the China Banking Regulatory Commission said in a statement. They can also exclude loans advanced to small enterprises and the rural sector that are backed by bonds, the CBRC said. A bank’s lending is capped at no more than 75 percent of its deposits to prevent an overextension of credit.

Premier Li Keqiang is seeking to cut funding costs and feed credit into the world’s second-largest economy, which is forecast to expand this year at the weakest pace in 24 years. A cash demand by banks to meet regulatory requirements such as the loan-to-deposit ratio and a crackdown on off-balance-sheet lending combined to push interbank lending rates to a record in June last year.

“This is another ‘targeted stimulus’ policy conducted by the Chinese authorities to help the economy regain momentum,” Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd., wrote in an e-mail. “The new loans extended by the Chinese commercial banks in the next few months will be significantly bigger compared with the same period of last year.”

Zhou estimates total lending in China will exceed 10 trillion yuan ($1.6 trillion) in 2014, more than last year’s 8.9 trillion yuan.

Rural Lending

Banks can also exclude from the ratio calculation some loans backed by bonds with at least one year of maturity, and credit backed by funding from international financial organizations and foreign governments, the CBRC said.

Rural banks can take out loans funded by their largest shareholder that were offered to farmers and smaller companies. Locally-incorporated foreign banks can include among their deposits funding put in place by their parents for more than a year, according to the statement.

While the loan-to-deposit ratio for China’s banking industry was nine percentage points below the cap as of March at 66 percent, the requirement has become a constraint for some publicly traded lenders. Bank of Communications Co.’s ratio was 74 percent at the time, while Bank of China Ltd.’s was 72.5 percent as of Dec. 31, according to their earnings reports.

Critics of the ratio have said it exacerbates the volatility of deposits. Wu Xiaoling, a former deputy governor of the central bank, said in September that the ratio and China’s lending quota have severely undermined the authority of banks in managing their owns assets and liabilities, and led to distortions in the market as some banks use illegal means to obtain deposits.

Basel III

The ratio can be replaced by more thorough liquidity indicators under new rules set by the Basel Committee on Banking Supervision, according to Lu Zhengwei, chief economist at Industrial Bank Co. Liquidity risks won’t get out of control and the complete removal of the loan-to-deposit ratio can lower the economy’s borrowing costs by 138 basis points, Lu wrote in a report.

New rules under the so-called Basel III regulatory regime require banks to comply with a liquidity coverage ratio, which measures how much liquid assets a financial institution has to meet expected cash outflow for a certain period. Chinese banks’ liquidity coverage ratios should be at least 60 percent by the end of this year and reach 100 percent at the end of 2018, the banking regulator said in February.

Stimulus Program

The CBRC’s statement came out after China’s stock market closed today. Bank of China shares rose 0.4 percent to close at 2.55 yuan in Shanghai, while Bank of Communications added 0.3 percent. China Construction Bank Corp., the second largest lender, gained 0.5 percent.

The calculation change — flagged by CBRC Vice Chairman Wang Zhaoxing on June 6 — is the latest government measure to support growth without unleashing a broad stimulus program. The central bank this month cut the amount some banks are required to hold in reserve.

The economic slowdown has hurt borrowers’ ability to repay debt and driven up banks’ bad loans. Sour debt at Chinese lenders increased to 646.1 billion yuan as of March 31, the highest level since September 2008, according to CBRC data.

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China changed the way it calculated banks' loan-to-deposit ratios, giving them greater capacity to lend money and help bolster the slowing economy.
China, Bank, Loan-to-Deposit Calculation, Growth
Monday, 30 June 2014 08:45 AM
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