Interbank Deposit Rate Self-Discipline Management "Patches" Over 10 Trillion Yuan in Funds May Face Repricing

◎ Reporter Zhang Xinran

Self-regulation of interbank deposit rates is being further strengthened. Shanghai Securities News reporters have learned from multiple banking industry insiders that recently, some member banks were asked to strengthen management of their overnight interbank deposit rates during meetings related to the market interest rate pricing self-regulation mechanism. According to the latest requirements, the scale of interbank demand deposits with a scale higher than 7-day reverse repurchase (OMO) policy rate plus 1.4% should, in principle, not exceed 10% to 20% of the total at the end of each quarter.

Industry experts estimate that as self-regulation tightens further, approximately 10 trillion yuan of bank interbank deposits will be affected and may face re-pricing. This round of self-regulation upgrade is seen as a continuation and reinforcement of measures related to the end of 2024, also indicating that the policy rate system centered on open market operations rates is gradually increasing its constraints on bank liability pricing.

Self-regulation of interbank deposit rates “patches”

Recently, the management of interbank deposit rates has tightened again, drawing increased market attention.

In fact, the management of interbank deposit rates began as early as the end of 2024. In November 2024, the market interest rate pricing self-regulation mechanism issued the “Proposal on Optimizing the Self-Regulation of Non-bank Interbank Deposit Rates,” which first included non-bank interbank demand deposits into the self-regulation framework. Among them, the reference rate for demand deposits at financial infrastructure institutions is set at 0.35% excess reserve deposit rate, while other non-bank institutions’ demand deposits are referenced to the 7-day reverse repo rate of 1.4%.

This round of new requirements further refine management standards based on the original framework, extending constraints from overall interest rate levels to the proportion of high-yield interbank demand deposits, imposing ratio limits on deposits exceeding the 7-day reverse repo rate.

Huaxi Securities research reports believe that this self-regulation upgrade is essentially a “patch” to previous rules. Previously, some banks could use a combination of high and low interest rates to meet average interest rate assessment requirements while continuing to attract some high-yield interbank deposits. Now, further refining management to the proportion of high-yield deposits helps improve the practical effectiveness of self-discipline constraints.

Huatai Securities estimates that currently, the total interbank deposit scale in the banking system is about 40 trillion to 50 trillion yuan, with interbank demand deposits around 25 trillion to 30 trillion yuan. Considering that some deposit rates already meet the latest self-regulation requirements, industry-wide estimates suggest that with a correction ratio of 40% to 50%, about 10 trillion yuan of interbank demand deposits could have room for rate reductions.

Main reason for expansion of funds circulation

The further upgrade of this round of self-regulation is related to the expansion of interbank funds circulation and the re-emergence of arbitrage opportunities.

Wang Xianshuang, Assistant Director of the Guolian Minsheng Securities Research Institute, told Shanghai Securities News that recently, the scale of interbank deposits in the banking system has experienced a phased increase, partly because the low base formed after the previous implementation of self-regulation. As financial institutions gradually adapt to the rules, some institutions have found space to rebalance their indicators, and the interbank funding chain has expanded again. In practice, some non-bank institutions obtain funds through repo financing and then deposit them into banks as demand deposits, forming a “non-bank borrowing repo, banks attracting deposits” cycle. For banks, interbank demand deposits are a relatively low-cost liability; for non-bank institutions, there is some arbitrage space.

A bank funds trader told Shanghai Securities News that this pattern causes interbank funds to circulate within the financial system, which can easily push up the scale of high-yield interbank deposits and weaken the effect of previous self-regulation measures aimed at lowering banks’ liability costs. “From a regulatory perspective, the current further strengthening of self-regulation on interbank deposit rates aims to reduce this arbitrage space, lower banks’ motivation to attract liabilities through high-yield interbank deposits, and guide interbank funding pricing closer to policy rates,” the person said.

Impact on bank liability structure and bond markets

As interbank deposit rates face re-pricing, banks’ liability structures and bond markets may also be affected.

Wang Xianshuang stated that on one hand, after the decline of interbank demand deposit rates, the space for non-bank institutions to conduct deposit arbitrage through repo financing will significantly shrink, possibly reducing repo demand, with some funds shifting to short-term certificates of deposit or bond assets; on the other hand, for banks, the scale of interbank deposits may temporarily contract, and some liabilities may shift to instruments like interbank certificates of deposit.

A person from the asset-liability department of a northern bank told Shanghai Securities News that if the scale of interbank demand deposits decreases, banks might issue interbank certificates of deposit to make up for some liquidity gaps. Meanwhile, the scale of bank interbank assets could also shrink, and driven by asset allocation needs, the financial market department might increase bond holdings, which could temporarily intensify the “asset shortage” in the bond market.

Overall, the decline in banks’ liability costs may be relatively limited. Huatai Securities fixed income team estimates that if the average interbank deposit rate drops by 10 to 20 basis points, banks could save about 10 to 20 billion yuan in interest expenses, with an overall net interest margin improvement of less than 1 basis point.

In the bond market, industry consensus generally believes that this self-regulation is more favorable to short- and medium-term bonds. Based on the market response after non-bank interbank deposits were included in self-regulation in November 2024, the market is expected to continue trading on the expectation of declining bank liability costs and increased bond issuance demand in the short term, benefiting interbank certificates of deposit and short- to medium-term bonds.

(Edited by Qian Xiaorui)

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