China's interbank market woes overstated: UBS

Fears that China’s interbank market is a conduit for bank contagion risks are exaggerated even though many claim China’s banks have never been more reliant on each other for funding.

China's interbank market is vastly different to other interbank markets around the world and so the term in misleading, according to UBS analyst Jason Bedford.  

To contrast, he said, US and European interbank markets are exactly that - interbank markets involving short-term liquidity exchanges between banks where the majority of lending is overnight to less than 30 days.

“However, China does not have an interbank market per se but rather an 'interfinancial' institutions market, which is also open to securities companies, insurers, leasing firms, finance companies and trust companies.”

Bedford’s findings suggest worries about the scale of China's interbank financing might be overstated as 46 per cent of interbank borrowing does not come from banks at all but rather from non-bank financial institutions - much of which is simply liberalised rate deposits of corporates.

Bank connectivity

A consequence of this is that much of the credit in the Chinese interbank system is not short-term.

“Maturity analysis of interbank borrowing indicates that nearly a third of interbank deposits are termed exposures with tenures between 90 days and more than five years - and thus not subject to interest rate shocks from volatility in short-term rates," argued Bedford.

Moreover, he added, bank connectivity via interbank channels is less than what many market watchers assume; bank-to-bank interbank liabilities - including negotiated certificates of deposits - only account for 12.6 per cent of total banking sector liabilities. For their part, interbank bank-to-bank assets (including banks buying NCDs) account for 9.5 per cent of assets.

Overall, the big five banks are by a significant margin the least reliant on interbank funding from other banks, he added, while the regional banks are the most reliant on this funding source.

“While many outlier banks are a concern, overall we believe that the lack of deep interbank markets means that interbank shocks are not yet a source of systemic risk.”

However, Bedford warned, the interconnectivity between banks is not confined to the interbank market - there is a significant level of counterparty risk between banks that sits outside of the interbank market.

“We remain concerned about asset overlap via other parts of bank balance sheets, such as through bank bond purchase and, more worryingly, through the swapping of loans and deposits via trust beneficiary rights and directional asset management plans - the latter of which are now the largest items on many bank balance sheets.”

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