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 above the 7-day reverse repurchase (OMO) policy rate plus 1.4% should generally not exceed 10% to 20% of the total at the end of each quarter.

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

Self-regulation of interbank deposit rates “patch”

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 for the first time 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 repurchase rate of 1.4%.

The 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 repurchase rate.

Huaxi Securities’ research report believes 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 assessments while still attracting some high-yield interbank deposits. Now, further refining management to the proportion of high-yield deposits helps improve the practical effectiveness of self-regulation constraints.

Huatai Securities’ calculations show that the current bank system’s interbank deposit scale is about 40 trillion to 50 trillion yuan, with 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 about 40% to 50% of the 10 trillion yuan of demand deposits could be subject to rate reductions.

Main reason for expanding capital circulation

The further upgrade of this round of self-regulation is related to the expansion of interbank capital 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 previous self-regulation implementation. As financial institutions gradually adapt to the rules, some institutions have found new balance points, 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 via repos, banks attracting deposits” capital 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 deposits, and guide interbank funding prices 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 arbitrage through repo financing will shrink significantly, possibly reducing repo demand and shifting some funds to short-term certificates of deposit or bonds; on the other hand, for banks, the scale of interbank deposits may temporarily contract, and some liabilities could shift to instruments like interbank CDs.

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 CDs 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, potentially intensifying the “asset shortage” in the bond market in the short term.

Overall, the decline in banks’ liability costs may be 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, most institutions believe that this self-regulation is more favorable for medium- and short-term bonds. Based on the market response after non-bank interbank deposits were included in self-regulation in November 2024, the market is likely to continue expecting declines in bank liability costs and increased bond issuance demand in the short term, benefiting interbank CDs and medium-short-term bonds.

(Edited by Qian Xiaorui)

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