德银-中国-银行业-流动性风险管理指南：分歧持续-20171207-15页_751kb

Summary of Liquidity Risk Management Guideline in China (December 7, 2017)

Core Content

The CBRC (China Banking Regulatory Commission) issued a new Liquidity Risk Management Guideline on December 7, 2017, aligning with Basel III standards. This guideline introduces new liquidity risk indicators and aims to reduce systemic liquidity risks by addressing duration mismatch and shadow banking exposure. It is seen as a continuation of the financial deleveraging campaign.

Main Points

Regulatory Changes

• Three New Liquidity Risk Indicators:

  1. Net Stable Funding Ratio (NSFR): Measures stable funding available against stable funding needed. Applies to banks with assets over Rmb200bn. Minimum requirement is 100% effective from March 2018.
  2. Liquidity Matching Ratio (LMR): Evaluates the duration mismatch between funding sources and uses. Applies to all banks. Minimum requirement is 90% by 2018 and 100% by 2019.
  3. High Quality Liquid Assets (HQLA) Adequacy Ratio: A simplified version of LCR, applies to banks with assets below Rmb200bn. Minimum requirement is 70% by June 2018 and 100% by end-2018.

• Existing Indicators:

  • Liquidity Coverage Ratio (LCR): Applies to banks with assets over Rmb200bn. Minimum requirement is 90% in 2017 and 100% in 2018.
  • Liquidity Ratio (LR): Applies to all banks. Minimum requirement is 25%.

• Additional Requirements:

  • Wholesale Funding Management: Set concentration limits for different funding terms.
  • Intraday Liquidity Risk Monitoring: Track expected inflows and outflows at different times.
  • Peer Group Comparison: Alert on liquidity risk when certain metrics are out of line with industry averages.
  • Expanded Monitoring Measures: Banks must report to the CBRC when liquidity risk measures approach or fall below minimum requirements.
  • Inclusion of Policy Banks and Foreign Banks: All types of banks are subject to the new rules.

Implications for the Financial System

• The regulation is intended to reduce speculative interbank activities and shadow banking exposure, while encouraging traditional loans and bond investments.
• Retail deposits are considered more stable than corporate and interbank deposits, with the NSFR calculation assuming a 90-95% stability rate for retail deposits.
• Interbank deposits with terms less than 3 months are given a 0% discounting rate, while longer-term deposits are given 70%, indicating a bias toward long-term funding.
• The financial deleveraging campaign is ongoing, and this regulation is a follow-up to the Asset Management Guideline released in November 2017.

Implications for Individual Banks

• Big banks (e.g., the "Big Four") are expected to benefit from the regulation due to their strong deposit franchises, high CASA ratios, and better asset quality.
• Smaller banks, especially joint-stock banks (JSBs), are likely to face NIM pressure as they may need to shift to lower-yield assets or lengthen liability duration.
• Some banks, such as CMB, CNCB, and MSB, were found to be noncompliant with LCR requirements in 1H17.
• NSFR is particularly challenging for banks with low retail CASA and high long-term credit risk.

Key Information

• Liquidity Coverage Ratio (LCR):

  • Big banks are mostly compliant, with some reporting 123-131% in 1H17.
  • Smaller banks face pressure to meet LCR requirements, with some reporting below 90%.

• Liquidity Matching Ratio (LMR):

  • Big banks are more compliant, with some reaching 79-92% in 1H17.
  • Smaller banks may need to shorten asset duration or lengthen liability duration to meet the requirement.

• Net Stable Funding Ratio (NSFR):

  • Not applicable to all banks, only to those with assets over Rmb200bn.
  • Due to lack of sufficient disclosure, individual NSFR calculations are not feasible.
  • Banks with low retail CASA and high risk-weighted assets may face challenges.

• Valuation and Investment Recommendations:

  • Buy recommendations for ICBC, CCB, BOC, BOCQ, Bank of Beijing.
  • Hold recommendations for BOC, BoCom, CMB, SPDB, PAB.
  • Sell recommendations for CEB, Huishang Bank, Industrial Bank, Minsheng Bank, Bank of Ningbo.

• Risks:

  • Disorderly deleveraging could lead to bank runs and wholesale funding constraints.
  • Over-tightening in real estate and infrastructure could affect asset quality.
  • Systemic liquidity risks may persist if regulatory measures are not effectively implemented.

Summary Table of Liquidity Ratios (1H17)

Conclusion

The new liquidity risk management guidelines aim to reduce systemic liquidity risks and promote financial stability by aligning with Basel III standards. While big banks are expected to benefit, smaller banks and shadow banking-focused institutions may face short-term NIM pressure. The regulation is part of an ongoing financial deleveraging campaign, and its long-term benefits are anticipated despite near-term challenges.