In recent years, with the development and reform of financial sector, the interbank business has experienced frequent innovation and rapid expansion, and played in important role in facilitating liquidity management, optimizing the allocation of financial resources, and providing services to the real economy. However, there are problems in the interbank business of financial institutions, including the lack of regulation in certain transactions, inadequate information disclosure, ducking financial regulation and macro-economic management policies, and etc. The People’s Bank of China (PBOC), China Banking Regulatory Commission (CBRC), China Securities Regulatory Commission (CSRC), China Insurance Regulatory Commission (CIRC) and State Administration of Foreign Exchange (SAFE) jointly issued the Notice on Regulating Interbank Business of Financial Institutions〔2014〕No.127 to further regulate the interbank transactions of financial institutions.
In the premise of encouraging financial innovation and supporting the independent operation of financial institutions, and in line with the principle of closing side doors, opening front doors, strengthening management and promoting development, the Notice put forward 18 guidelines in regulating the behavior of interbank business, stepping up internal management and external regulations of interbank business, and promoting regulated innovation in asset and liability business.
The Notice defined and regulated every category of the interbank financing business, i.e. interbank lending, interbank deposit, interbank borrowing, interbank agent payment, repo and reverse repo. The financial institutions are required to divide their investment and financing oriented interbank business into the above-mentioned basic categories, and exercise category-specific management.
The Notice has strengthened internal and external management requirements for financial institutions in their interbank business, providing standard accounting and capital calculation requirements, establishing maturity and risk concentration requirements, and stressing the importance of more intensive liquidity management. Moreover, the Notice has opened the “front doors” for financial institutions to conduct interbank business in a regulated manner, supported financial institutions to expedite the development of asset securitization and actively participate in the pilot interbank CD program in order to make their asset and liability management more forward-looking, standardized and transparent.
Regulating the financial institutions’ interbank business is consistent with the overall requirements of the State Council of encouraging innovation, preventing risks, balancing the pros and cons, and seeking sound development, and will help maintain orders on the financial market, promote the healthy growth of interbank business, manage financial risks, and protect the legitimate rights and interests of financial consumers; this will also help channel more fund into the real sector, reduce financing cost for enterprises, and enhance financial sector’s capacity to support the real
economy development; this will facilitate the rapid growth of a multi-tier capital market, increase the share of direct financing, and build the resilience of the financial sector and real sector; this will also help promote the implementation of credit policy, revitalize the stock of credit asset while making good use of the new loans, and support the adjustment and transformation of economic structure.
The PBOC, CBRC, CSRC, CIRC and SAFE will cooperate and coordinate with one another more closely, unify regulatory standards, enhance supervision and oversight of the interbank business of financial institutions within their respective mandate and in the principle of combining institutional regulation and functional regulation, and impose strict penalty on misconduct that constitutes violation of laws and regulations, so as to promote the sound development of the financial industry.
Notice on Regulating Interbank Business of Financial Institutions
In recent years, with the development and reform of financial sector, the interbank business has experienced frequent innovation and rapid expansion, and played in important role in facilitating liquidity management, optimizing the allocation of financial resources, and providing services to the real economy. However, there are problems in the interbank business of financial institutions, including the lack of regulation in certain transactions, inadequate information disclosure, ducking financial regulation and macro-economic management policies, and etc. In order to further regulate the interbank business of financial institutions, effectively prevent and control risks, channel more funds to flow to the real economy, reduce financing cost for enterprises, promote the development of multi-tier capital market, and support transformation and adjustment of the economic structure, the Notice is released to cover the following matters:
1. Interbank business in this Notice refers to investment and financing oriented business conducted among financial institutions legally established within the borders of the People’s Bank of China, and mainly includes interbank borrowing, interbank deposit, interbank lending, interbank agent payment, repo (reverse repo) and other interbank financing and investment activities.
Financial institutions shall divide their interbank investment and financing oriented business into the above-mentioned categories and manage the business in a category-specific manner.
2. Interbank lending business refers to unsecured lending transactions conducted by financial institutions that are members of the national interbank funding market on
the centralized national interbank lending network.
Financial institutions shall abide by the Rules on Administration of Interbank Lending (released by the People’s Bank of China in its No. 3 Decree in 2007), and other related rules and regulations. The book keeping for fund flow in the interbank lending business shall be under the items of lending and borrowing, and shall be managed and accounted for in separately established sub-items of the above mentioned items.
3. Interbank deposit refers to deposit taking between financial institutions, in which only deposit taking financial institutions can take interbank deposits. Interbank deposits are subdivided into the two categories of interbank deposit for settlement purpose and interbank deposit for non-settlement purposes based on their maturity, business relationship and use. The book-keeping for funds from interbank deposit should be under the items of interbank deposit from other financial institutions and bank’s deposit with other financial institutions.
Interbank lending refers to borrowing and lending money among financial institutions that are legally qualified for this business. The book-keeping for funds from interbank lending should be under the items of borrowing and lending.
4. Interbank agent payment refers to the financing behavior in which a commercial bank (the agent) entrusted by a financial institution (the entrusting party) makes payment to a client enterprise before receiving the principal and interest repayment from the entrusting party at the agreed repayment date. The book keeping for the funds from interbank agent payment by the agent shall be under the item of lending while the book keeping by the entrusting party shall be under borrowing.
The interbank agent payment business is in principle only to be used in the settlement of cross-border business by banking financial institutions. The payment arising from domestic letter of credit, factoring and other trade settlement businesses shall in principle be made via the payment system or branch offices of a bank. The entrusting bank shall not entrust the payment business to any other financial institutions where it has branch offices in the same city (or county), and shall not seek financing via the interbank agent payment business.
5. Repo (reverse repo) refers to the sale of financial assets together with an agreement for the seller to buy back the assets at a preset price on a later date. It is a kind of financing between financial institutions. The book-keeping for funds from repo (reverse repo) shall be under the item of repo (reverse repo) of financial assets. Similar transactions involving three parties or more shall not be included into the management and accounting of repo (reverse repo) of financial assets.
The underlying financial assets in the repo (reverse repo) business shall be banker’s acceptance, bond, central bank bill, and other financial assets with reasonable fair value and high liquidity on the interbank market and stock exchanges. The party that originally sells the assets shall not move the underlying financial assets in the interbank business out of its balance sheet.
6. Interbank investment refers to the behavior of purchasing by a financial institution (or entrusting other financial institutions to purchase) interbank financial assets (including but not limited to financial bonds, subordinated bonds and other interbank financial assets traded on the interbank market or stock exchanges) or special purpose vehicles (including but not limited to wealth management products of commercial banks, trust investment schemes, securities investment funds, asset management schemes of securities firms, asset management schemes of fund management companies and their subsidiaries, asset management products of insurance asset management institutions).
7. In its repo (reverse repo) and interbank investment, a financial institution shall not accept or provide any direct or indirect, implicit or explicit third-party financial institution credit guarantee, unless otherwise prescribed by the state.
8. When conducting the interbank business, a financial institution shall comply with relevant laws, regulations, and policy directives, establish and improve the risk management and internal control system, follow the principle of consultation-based and voluntary participation, good faith, self-discipline, and each party responsible for its own risks, strengthen internal review and accountability, and ensure that all risks are under control.
9. When conducting the interbank business, a financial institution shall comply with the requirements of relevant laws and regulations and accounting standards, apply proper accounting treatment, and make sure that all types of interbank businesses and transactions are recorded and reflected in their balance and off the balance sheet in a timely, complete, true, accurate manner throughout the entire cycle of each transaction.
10. A financial institution shall properly manage the source and use of funds arising of the interbank business, incorporate the interbank business into its liquidity management framework, strength maturity mismatch management, and control liquidity risks.
11. When conducting the interbank business, a financial institution shall comply with the requirements of regulatory agencies. When branch offices of a financial institution conduct the interbank business, the financial institution shall improve the unified interbank business credit extension policy within the institution, incorporate the interbank business into the institution-wide unified credit
extension system, and exercise authorization management in a top-down manner starting from the headquarter. Branch offices of a financial institution shall not conduct the interbank business without credit extension authorization or by exceeding the credit line.
A financial institution shall give separate authorization to their branch offices based on the category, pricing, quota, and underlying assets of the interbank business, as well as risk control capacity of the branch offices, and shall conduct reevaluation and approval of the authorization at least once a year.
12. When carrying out interbank investment, a financial institution shall conduct rigorous risk examination and fund use compliance review, and in line with the principle of “substance over formality” make accurate risk measurement, and set aside capital reserve and provisioning based on the nature of underlying assets.
13. When carrying out the interbank business, a financial institution shall decide on the duration of financing in a reasonable and prudent manner. In particular, the maximum maturity of interbank lending business shall not exceed three years, while the maximum maturity of other interbank financing businesses shall not exceed one year and shall not be renewed upon maturity.
14. The net interbank financing volume (excluding interbank deposit for settlement purpose) from a commercial bank to another legal-entity financial institution, after deducting zero risk-weighted financial assets, shall not exceed 50 percent of the tier-one capital of the bank. In particular, the calculation of tier-one capital and assets with zero weighted risks is subject to the requirements of the Capital Rules for Commercial Banks (Provisional) (Decree of CBRC, No.1 ). The outstanding interbank borrowing of a commercial bank shall not exceed two thirds of total liability of the bank, except for provincial level associations of RCCs, RCCs with second level legal-entity status in a province, and village and township banks.
15. While developing the interbank business in a regulated manner, financial institutions shall accelerate the sound development of asset securitization business, and revitalize the stock of credit asset while making good use of the new loans. Financial institutions shall actively participate in the pilot program of interbank certificates of deposit, and make their asset liability management more forward-looking, standardized, and transparent.
16. This Notice shall apply mutatis mutandis to the interbank business among special purpose vehicles and the interbank business between special purpose vehicles and other financial institutions.
17. The PBOC and various financial regulatory agencies shall, in accordance with the
their mandates, comprehensively strengthen supervision and inspection of the interbank business, and increase on-site inspection and special examination of the financial institutions that have complex business structure and risk management capacity misaligned with the business development. Financial institutions that breach the rules in conducting the interbank business shall be penalized in accordance with the laws and regulations.
18. This Notice shall enter into effect on the date of issuance. For those interbank transactions conducted prior to the issuance of this Notice, the financial institutions shall report their business conditions to the PBOC and other relevant financial regulatory agencies as long as the transactions have not reached maturity. The relevant transactions shall be closed upon maturity.