China Banks:Liquidity measures to strengthen the weaker part of the banking syst
New measures introduced to reduce liquidity risks for small banks: Media。 21st Century Business Herald has reported (7 Feb 2014) that in order to helpsmaller banks cope with higher seasonal demand for funds during the quarterend, CBRC has introduced new measures that will strengthen their liquiditymanagement. These measures include setting aside more cash to meetwithdrawal obligations through maintaining a higher excess reserve ratio andestablishing a liquidity reserve fund to benefit small banks in selectedprovinces, including city commercial banks, rural commercial banks and ruralcredit cooperatives. Selective application of new measures – to be seen only in a few provinces。 While these measures might be viewed as a sign of policy tightening, webelieve that the development should lower event risks, with limited impact onthe overall system liquidity. The Chinese banking system is highlyconcentrated, with the targeted smaller banks accounting for 21% of the totalsector assets. More importantly, it’s likely that these measures have beenintroduced in a few provinces only, with little indication of being appliednationally, as none of the listed city commercial banks under DB coveragehave received these new instructions by CBRC. As a result, we expect a limitedoverall impact on system liquidity, at least at this stage. Liquidity enhancing measures taken by local regulators include…。 1) In Henan, local banks need to set aside reserves to meet cash demand in 30to 45-day period (slightly stricter than liquidity coverage ratio in Basel III callingfor 30-day period) and to perform quarterly stress tests; 2) Also in Henan, 17city commercial banks have submitted 0.5% of their deposit balances to form amutual liquidity reserve fund in order to provide liquidity support to banks thatmay have trouble in meeting their repayment obligations; 3) In Shandong, alllocal banking institutions have to maintain excess reserve ratio to above 3%. Previously, with the intention of helping smaller banks cope with temporaryliquidity challenges, the PBOC had relaxed regulations allowing local PBOCbranches in 10 provinces to offer Standing Lending Facility, amounting toRmb120bn, to smaller financial institutions starting from January 2014. Move aimed at strengthening the weaker part of the banking system。 We see higher liquidity risks at the unlisted smaller banks, i.e. city commercialbanks, rural commercial banks and rural credit cooperatives, given theirheavier reliance on inter-bank funding, bigger asset/liability duration mismatchand weaker liquidity management ability. We believe these measures shouldstrengthen the financial system by improving the liquidity management of thesmaller banks and providing them with short-term liquidity when needed. Hence, we note the current share price weaknesses of some of the listedbanks could be viewed as a buying opportunity by select investors.
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