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Medium & small banks face test from liquidity management

Xinhua Financein
2017-02-17 15:53

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Interest rate of negotiable certificates of deposit (NCD) in interbank market increases rapidly with de-leverage in finance field. Meanwhile, faced with pressure from maturity of a great many of NCDs, medium and small banks have to continue at high cost, which causes issuance of NCDs to keep climbing.

In the opinion of industrial insiders, it shows that de-leverage by financial institutions gains effect. Banks need to strengthen liquidity management and make reasonable arrangements on duration of assets and liabilities based on economic environment, actual demand, status of market liquidity and interest rate to guard against liquidity risk.

Interest rate of NCD increases rapidly

Interest rate of NCD continues to go up this week. Interest rate of 3-month NCD with AAA rating was about 4.5 percent on average when it was issued, but it surged by 6 base points when compared with that in last week. Its average yield to maturity (YTM) was 4.2, up by 10 base points when compared with that in last week.

Rise in interest rate this week is actually an epitome of growing interest rate of NCD since last October. According to data from, interest rate of 3-month NCD registered around 2.9 percent in last October, but it hiked by about 160 base points to 4.5 percent on Feb. 16, 2017.

Why did the interest rate edge up? In the opinion of Wang Yifeng, vice director of financial center of research institute from China Minsheng Bank, the People’s Bank of China, or the Chinese central bank, previously raised interest rate at open market operation, reduced liquidity injection and required financial institutions to de-leverage and reduce mismatch, which resulted in rise of interest rate of NCD.

Huge pressure from maturity of a great many of NCDs is another reason. “As medium- and long-term assets of banks have been allocated, banks have to use higher issuance cost to maintain liabilities, which also makes interest rate of NCD stay at a high level.” said Xiong Qiyue, researcher from international financial institute of Bank of China.

 “Under the background that interest rate of NCD climbs remarkably, policy will see obvious effect in a short term.” said Sun Binbin, researcher from TF Securities.

Medium and small banks face test from liquidity management

Under the background that interest rate of NCD keeps climbing, the total issuing amount of NCD doesn’t decrease but increase instead. The root reason is bank assets have been allocated but the pressure of continuation of expired liability escalates, indicating that banks lack liability in terms of liquidity management.

The journalist learnt that 1,323 pieces of NCDs were issued at the primary market during Feb. 1 and 16 and the amount was worth 970.17 billion yuan, basically keeping flat with that issued in January. But at the secondary market, turnover of NCD kept growing and its weight exceeded that of financial bonds to become the product with highest turnover.

At the same time, pressure from maturity of a great many of NCD is intensified. Wang Wenhuan, analyst from Huachuang Securities, pointed out that 279.6 billion yuan of NCDs will be matured this week, up by nearly 72 billion yuan when compared with that in last week, and 350.5 billion yuan of NCDs will expire next week, reaching historical peak at a single week. And 1.2 trillion yuan of NCDs will see maturity in March, the highest level in a single month.

“This reflects that small and medium banks face tight capitals and have to bear active liability with high cost.” said Sun.

When deposit stability decreases or banks are impacted by liquidity, particularly when liquidity of financial system is further tightened, banks will depend more on wholesales financing. Industrial insiders pointed out that if risk of interbank liquidity occurs, prices will move up and turnover will slip suddenly.

 “Banks need to reinforce management over liquidity, aggressively develop core liability, and flexibly control the pace of issuing NCD in accordance with economic environment, actual demand, situation of market liquidity and interest rate level to prevent liquidity risk.” said Wang Yifeng.

Many bankers told the journalist that commercial banks are actively embarking on internal control and management on interbank business, calculating cash flow of various assets and liabilities, intensifying internal control, expanding liability channel, increasing allocation of liquid assets and reducing maturity mismatch.  

 “In terms of future liquidity, they need to make reasonable arrangements on duration of assets and liabilities to guard against risk of mismatch. When de-leverage is carried out in financial system, investors need to be more cautious.” The banker told the journalist that “in the short term, reserves of high-quality liquid assets should cover net outflow in one month under pressure; in the long term, whether there is sufficient and stable capital source to support long-term capitals with duration more than o)

Translated by Vanessa

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