Li Qilin： A complete analysis of the banking supervision system
Source: Sina Finance
Text/Sina Financial Opinion Leader Columnists Li Qilin, Zhong Lin Nan, Sun Yongle
In the last article, we introduced the asset allocation behavior of commercial banks and their balance sheets to investors. In this article, we will introduce the supervision system of banks and the influence of supervision on the asset allocation behavior of commercial banks.
According to the subject of supervision, banks are now mainly supervised by the central bank and China Banking and Insurance Regulatory Commission (after March 2018, China Banking Regulatory Commission and China Insurance Regulatory Commission merged into China Banking and Insurance Regulatory Commission, and in order to unify the title of China Banking and Insurance Regulatory Commission).
Among them, the central bank’s supervision system is mainly MPA, which emphasizes the macro-prudential supervision of the stability of the entire financial system; China Banking and Insurance Regulatory Commission’s supervision system can be divided into two categories, one is the "Camel Plus" system (commonly known as camel rating), and the other is the Core Indicators of Bank Risk Supervision, which emphasizes the micro-prudential supervision of individual banks’ stable operation and risk exposure.
In this article, we will divide China Banking and Insurance Regulatory Commission and the central bank into two parts to look at the regulatory constraints on banks and their asset-liability behaviors under regulatory constraints.
one
China Banking and Insurance Regulatory Commission’s Supervision and Assessment System
China Banking and Insurance Regulatory Commission’s two major regulatory assessment systems have their own functions.
The Core Indicators of Risk Supervision of Commercial Banks is a standard system, which includes three categories of indicators: risk level, risk migration and risk offset. Its purpose is to provide standards for the regulatory authorities and tell them whether the risk of a bank is high or low (risk level) in a certain period. Whether the risk change trend is decreasing or increasing (risk migration); If the risk event really happens, whether the bank has enough strength and capital to make up for the loss (risk compensation).
"CAMELS+" is a classification system, which includes seven categories of qualitative and quantitative indicators. Its purpose is to provide a scoring and rating system for the regulatory authorities and evaluate the corresponding risk levels of each bank, so as to adopt different regulatory measures and formulate different regulatory plans, such as the frequency of on-site inspections of each bank and how to limit the business scope of each bank.
Therefore, the starting point of the two is not the same, but their ultimate goal is the same, both of which are to prevent risks.
From Figure 1 and Figure 2, there is a lot of overlap in the indicators used by the two, and in the past few years, various new regulatory policies have emerged one after another. Therefore, in the following specific analysis,We don’t elaborate separately, but choose to break the boundary between the two and integrate all the indicators into four series: capital adequacy, liquidity risk, asset quality and profitability.
(A) Capital adequacy series
The capital adequacy series mainly includes core tier-one capital adequacy ratio, tier-one capital adequacy ratio, capital adequacy ratio and leverage ratio.
The supervision and assessment of these four items is to ensure that when the bank suffers losses, the bank can have enough self-owned funds to make up for the losses and ensure the interests of depositors and creditors when it does not use deposits and other liabilities; The second is to control the scale expansion multiple of banks and the degree of risk added by banks.
1. Core Tier 1 capital adequacy ratio, Tier 1 capital adequacy ratio and capital adequacy ratio
Calculation formula: core tier-one capital adequacy ratio = (core tier-one capital-corresponding capital deduction) ÷ risk-weighted assets.
Tier 1 capital adequacy ratio = (Tier 1 capital-corresponding capital deduction) ÷ risk-weighted assets
Capital adequacy ratio = (total capital-corresponding capital deduction) ÷ risk-weighted assets
For the assessment of these three items, the banking supervision adopts the form of classification and setting a transition period. The Banking Regulatory Commission first divides banks into two categories: systemically important banks and other banks, and then sets different regulatory requirements for different types of banks, and stipulates that they will gradually meet the standards by the end of 2018. As shown in Figure 3.
(1) Calculation and current situation of core tier 1 capital adequacy ratio, tier 1 capital adequacy ratio and capital adequacy ratio.
The calculation formulas of these three items are very similar in structure, and the numerator is capital MINUS the corresponding deduction, but the caliber is different; Denominators are all risk-weighted assets.
Let’s make a detailed disassembly of the numerator denominator.
The caliber composition of various types of capital
In order to understand the components of capital under different caliber in molecules, we use a virtual example to illustrate.
Suppose one day, you get a bank license and are ready to do something big.
But before you go all out, you need enough savings and liabilities. To do this, you must first gain the trust of others and let them trust you with their money. There are many conditions for the establishment of this trust, one of which is to inject my own money into the empty shell of the bank to tell depositors that we are a community of interests, and if the bank has problems, I will have nothing myself.The money you pay out is called equity (paid-in capital)）。
After that, you made unremitting efforts to get some deposits, and you began to use these deposits to do loans, settlement and other businesses, and gradually earned money and made profits. By the end of the year, some of these profits will be distributed to your partners, some will be taxed, and the money will leave the bank.
However, some of them will stay in the bank, which may be used for expansion and re-operation, and may be used to make up for possible losses in the future (for example, loans made before cannot be recovered and bad debts appear), or for other purposes.Formally, these remaining profits are shown as surplus reserves, undistributed profits and general risk reserves, which are newly added capital of banks..
After two years, the fact that your bank made money was known by venture capital institution A. He wanted to buy shares, subscribe for 1 million shares as shareholders and share the profits of the bank.
But now that the bank’s operating efficiency is so good, the value of each share can’t be one yuan as before, so venture capital institution A may need 1.1 million to get the 1 million shares.Then, of the 110 Wan Li, 1 million is his subscribed shares, which are included in the share capital, and the extra 100,000 is called capital reserve.
At this time, the bank’s capital has included equity, surplus reserve, undistributed profit, general risk reserve and capital reserve. When we add these up, we get the core Tier 1 capital in the first formula (in reality, there is also a minority shareholder capital that can be counted and ignored).
Core Tier 1 capital = share capital (paid-in capital)+capital reserve+surplus reserve+undistributed profit+general risk reserve+minority shareholders’ capital can be included.
Note: Minority shareholders’ capital refers to the rights and interests of investors other than the parent company in subsidiaries.
After venture capital institution A became a shareholder, under the good business strategy, the scale of the bank became larger and larger, and the capital began to be insufficient. In order to continue to expand the scale, it is necessary to increase the capital (regulatory requirements).
At this time, you have two choices. One is to issue securities such as preferred shares and perpetual bonds, that is, other Tier 1 capital instruments; The second is to issue subordinated debt, mixed capital instruments and convertible bonds, that is, secondary capital instruments.
If you choose to issue other Tier 1 capital instruments, what you increase is your Tier 1 capital.It includes the above-mentioned core tier-one capital and some minority shareholders’ capital that is not included in the core tier-one capital.
Tier 1 capital = core Tier 1 capital+other Tier 1 capital instruments and their premium+minority shareholders’ capital can be included.
If you choose to issue secondary capital instruments, then you increase secondary capital.It is an important part of total capital (in reality, there is also an excess loan loss reserve and a small amount of minority shareholders’ capital that can be included).
Total capital = Tier 1 capital+Tier 2 capital
= Tier 1 capital+Tier 2 capital instruments and their premium+excess loan loss reserve+minority shareholders’ capital can be included.
Note: The meaning of minority shareholders’ capital is the same as above, and the excess loan loss reserve is the part of the bank’s loan loss reserve that exceeds the minimum requirements, which is calculated artificially and has great adjustability.
At this point, the capital composition of various calibers in the molecule is basically clear.
Another item in the numerator: "corresponding capital deduction item", its composition structure and calculation method are very complicated, but it can be roughly divided into two items: goodwill and other items, and the composition of other items is relatively small, so we can probably regard it as goodwill.
Risk-weighted assets
Denominator risk-weighted assets are the sum of credit risk-weighted assets, market risk-weighted assets and operational risk-weighted assets, which are used to indicate the total exposure of banks to three risks (credit, market and operation), and the calculation methods are different.
Credit risk weighted assets are generally calculated by weight method, that is, different risk weights are given according to the credit risk of different types of assets, and then the amount of various assets is multiplied by their corresponding risk weights.
If the calculated assets are in the balance sheet, the risk weight is directly multiplied by the amount of assets. However, if the calculated assets are off-balance sheet (such as off-balance sheet wealth management), before calculation, they must be multiplied by a credit conversion coefficient, converted into on-balance sheet assets, and then multiplied by the corresponding risk weight.
Credit risk weighted assets = ∑ all kinds of credit risk assets on and off the balance sheet * corresponding risk weights.
Market-weighted risk assets adopt the standard method, that is, a "building block combination" method is adopted. First, the capital required for each type of project (including interest rate, equity, foreign exchange and commodities) is determined separately, and then it is simply added up to get a total capital required to cover all market risks, and finally it is multiplied by 12.5 to get market risk-weighted assets. (The reason why 12.5 is used here is because the minimum capital adequacy ratio required by the Basel Accord is 8%, and 12.5 is the reciprocal of 8%.)
The operation of risk-weighted assets is similar, that is, the total capital required to cover all operational risks is calculated first, and then multiplied by 12.5 to determine.
In reality, the highest proportion of risk-weighted assets is credit risk-weighted assets, and all major listed banks are basically above 90% (Chart 6). Therefore, in general, what we call risk-weighted assets mainly refers to credit risk-weighted assets.
The present situation of capital adequacy ratio of banks
At present, the definition of systemically important banks in capital adequacy ratio assessment in China Banking and Insurance Regulatory Commission is not clear. Although the Central Bank and China Banking and Insurance Regulatory Commission issued the Measures for Evaluating Systemically Important Banks (Draft for Comment) in November 2019, the specific list has not yet been released. For the time being, we will take the five state-owned banks that have established diplomatic relations with workers, peasants and China as systemically important banks, and the rest are other banks.
According to this definition, the core capital adequacy ratio, tier-one capital adequacy ratio and capital adequacy ratio of the five state-owned banks in 2019 are 8.5%, 9.5% and 11.5%, while those of other banks are 7.5%, 8.5% and 10.5%.
Judging from the capital adequacy ratio disclosed in the financial statements of listed banks in the first quarter of 2020, the capital adequacy ratio of banks is basically above the requirements of regulatory assessment.
(2) The impact of capital adequacy ratio assessment on bank asset allocation.
The assessment of capital adequacy ratio will have two major impacts on the debt management and asset allocation of banks.
First, capital adequacy restrictions give banks an incentive to allocate low-risk weighted assets such as interest rate bonds and certificates of deposit, which brings allocation power to the bond market.
Under the condition of constant bank capital, the allocation of interest rate bonds can effectively expand the scale because the risk weight of interest rate bonds is zero and does not occupy capital.
However, the yield of interest rate bonds is only about 3%-4% (still in the medium and long term). Compared with loans with an average yield of more than 5%, is it too low? Even if the scale expansion is realized, it seems that it can’t bring profits to banks.
On the contrary, we said in the last "Asset Allocation Analysis Manual of Commercial Banks" that if we only compare the static rate of return, the loan may not be dominant.
Because compared with interest rate bonds, on the one hand, loans have to pay interest income tax and value-added tax, which is about 25%+6%, while CDB only needs 25% interest income tax, while national debt is tax-free; On the other hand, the risk weight of many loans is 100%, which requires capital and has opportunity cost, while the risk weight of interest rate bonds is 0%, and there is no opportunity cost.
We use the data of Minsheng Bank’s 2019 annual report to make an estimate. The average enterprise of Minsheng Bank has a loan yield of 5.38%, its capital adequacy ratio is 13.17% (simply understood as one unit of risk-weighted assets takes up 13.17% of capital) and its ROE is 12.4% (simply understood as one unit of capital can create 12.4% of after-tax profits).
Then the opportunity cost of capital occupied by a unit loan is 1*100%*13.17%*12.4%=1.63% (loan quantity * risk weight * capital adequacy ratio *ROE), and the tax cost is 5.38%-(5.38%*0.75*0.94) =1.59%. After deducting these two items, the actual loan yield is 2.16%.
Similarly, after considering the opportunity cost of capital occupation and tax cost, the yields of 10-year national debt (set at 3.0%) and 10-year national development bank (set at 3.40%) are 3.0% and 2.55% respectively. Judging from the actual rate of return, compared with corporate loans, bond assets have an advantage.
However, the allocation of credit assets by banks has the function of credit derivation, which can bring ordinary deposits to banks, which interest rate bonds do not have, so this method of simply comparing "actual rate of return" may not be accurate. But in any case, this calculation clearly shows that the yield of interest rate bonds is competitive and banks have the motivation to allocate.
Second, capital adequacy restrictions force banks’ assets and liabilities to turn off-balance-sheet, avoid on-balance-sheet regulatory restrictions, or make use of on-balance-sheet interbank accounts to make regulatory arbitrage. Off-balance-sheet and inter-bank businesses have developed rapidly, and non-standard, channel and outsourcing businesses are prevalent.
When calculating the actual rate of return above, credit assets have a large deduction in capital occupation. If a way can be found to reduce the deduction, banks can enjoy the advantages of credit derivation and obtain high rate of return on assets.
To achieve this goal, banks have two ways.
1) Turn off the table.Banks can issue a non-guaranteed wealth management (off-balance-sheet wealth management), obtain debt funds in the form of wealth management, and then allocate credit assets, thus directly changing the on-balance-sheet "deposit-loan" business model to "off-balance-sheet wealth management-non-standard" model, not entering the balance sheet, not being restricted by the assessment of on-balance-sheet capital adequacy items, and not occupying capital.
2) Packaging the on-balance-sheet operations into interbank assets to reduce the risk weight.This needs to use the buy-back item in the interbank assets account.
For example, if Bank C wants to lend money to an enterprise, it will first ask Bank A to contribute, issue a trust loan through a trust company, and then introduce a bridge-crossing enterprise, so that Bank A will transfer the trust beneficial right to Bank B, and Bank B will act as a bridge-crossing bank. Finally, Bank B will transfer the trust beneficial right to Bank C, and Bank C will really contribute.
During the accounting treatment, Bank C received an inter-bank asset, which is generally included in the purchase and resale, and the risk capital is 20% or 25%.
In 2011-2013, this method was very popular, and we saw that the assets bought and sold back by 21 listed banks continued to increase during this period.
However, in 2014, the Banking Regulatory Commission issued Circular No.127, which stipulated that the assets in the purchase and resale items must be standardized financial products with trading market. The mode of evading supervision by lending through the purchase and resale items was banned, and non-standard assets such as trust income/beneficiary rights were forced to be transferred to accounts receivable. However, the risk weight of capital withdrawal in this kind of subjects is 100%, which is no different from general loans, and the peak of non-standard allocation in the bank’s balance sheet has gradually passed.
Since then, under the background of "monetary easing+excessive entity credit risk premium", banks began to allocate assets by purchasing asset management products issued by financial institutions. On the one hand, it was really because the interest rate of assets and liabilities was upside down, and the banks themselves began to allocate assets. Secondly, this method has the effect of reducing credit risk, avoiding credit limit and capital adequacy assessment.
Generally speaking, asset management products such as interbank wealth management and brokerage asset management plan purchased by banks with on-balance-sheet funds belong to interbank assets, and there are two ways to deal with them when entering the table. One way is to directly treat them as interbank assets to withdraw capital, and give 20% or 25% risk weight according to whether the term exceeds 3 months.
The other is to penetrate to the bottom and make provision according to the underlying assets, which is highly respected by the regulatory authorities. In actual processing, banks often make provision according to the bottom list given by the issuer. However, this accrual method is often inaccurate and tends to be underestimated, because on the one hand, in order to improve the attractiveness of asset management products, issuers often produce fake lists with low risk weights, which is convenient for buyers to enter the table for processing; On the other hand, the underlying assets of asset management products will flow, managers may frequently adjust positions, and it is difficult to guarantee synchronous updates in bank statements.
Therefore, we can see that in the credit balance sheet of deposit-taking financial institutions, the equity and other investment subjects that record the scale of asset management products of financial institutions have soared rapidly in 2015.
However, with the opening of the strict financial supervision mode in the fourth quarter of 2016, the regulatory authorities cracked down on the chaos in the financial industry, and the bank’s use of outsourcing to carry out regulatory arbitrage has converged, and the year-on-year growth rate of equity and other growth rates began to drop sharply.
2. Leverage ratio
Calculation formula: leverage ratio = (Tier 1 capital-deduction) ÷ adjusted balance of assets on and off the balance sheet.
The existence of leverage ratio is mainly to constrain the financial leverage ratio of banks. Although the assessment of the above three capital adequacy ratios can also play a role in controlling leverage, there is an extreme situation: the assets allocated by bank debt funds are all treasury bonds with a risk weight of 0%, so the constraint of capital adequacy ratio will lose its role.
However, this leverage ratio is different from our traditional financial leverage. Traditionally, total assets ÷ owner’s equity, here is a reciprocal nature. Among them, the caliber of numerator (Tier 1 capital-deduction) is consistent with Tier 1 capital adequacy ratio, and the balance of off-balance-sheet assets after denominator adjustment includes the total assets on and off-balance-sheet, and the off-balance-sheet assets need to be adjusted and converted by using a discount factor.
Judging from the actual situation of existing banks, the leverage ratio will not have too much impact on banks. The standard required by the Banking Regulatory Commission is not less than 4%, but the leverage ratio of all listed banks at the end of 2019 is above 4%, and banks do not have much pressure to meet the regulatory assessment standards.
(II) Liquidity risk series
Liquidity risk means that when there is a problem with the bank’s cash flow, the bank can’t or needs to pay back the due liabilities at a very high price or cost.
In the past few years, China Banking and Insurance Regulatory Commission’s supervision over the liquidity of commercial banks has been increasing, and the corresponding liquidity supervision indicators have been constantly updated.With the Measures for the Management of Liquidity Risk of Commercial Banks issued by China Banking and Insurance Regulatory Commission in 2018 as the core document, at present, China Banking and Insurance Regulatory Commission’s liquidity supervision and assessment indicators mainly include five indicators: liquidity coverage ratio, high-quality liquidity asset adequacy ratio, liquidity ratio, liquidity matching ratio and net stable fund ratio, and other indicators are specified as monitoring indicators.
1. liquidity coverage ratio (LCR)
Calculation formula: liquidity coverage ratio = qualified high-quality liquid assets ÷ net cash outflow in the next 30 days.
= Qualified high-quality liquid assets ÷ (cash outflow in the next 30 days-cash inflow in the next 30 days)
Liquidity coverage ratio (LCR) is an important part of Basel III liquidity risk supervision.
In February 2014, China Banking and Insurance Regulatory Commission issued the Measures for the Management of Liquidity Risk of Commercial Banks (Trial), which formally introduced LCR into the domestic liquidity risk supervision index system. The assessment targets are commercial banks with assets exceeding 200 billion yuan, and the minimum supervision standard is 100%, which is required to reach the standard before the end of 2018.
In July 2018, the Measures for Liquidity Risk Management of Commercial Banks was officially promulgated, and the provisions on LCR were consistent with the requirements of the previous trial rules.
From the formula, we can also see that the purpose of this index is to ensure that commercial banks have enough assets to ensure that there will be no serious liquidity risk in the next 30 days.
Considering that this item has an extremely important impact on the bank’s asset-liability behavior, and its own composition and calculation are also complicated, we will make a detailed analysis in blocks.
(1) Calculation and present situation of 1)LCR
When analyzing LCR, it can be divided into two parts: numerator and denominator.
Look at the molecule first: qualified and high-quality liquid assets. It is a concept of stock, which is a variety of assets that can be quickly realized in the financial market without loss or minimal loss through sale or mortgage under the pressure scenario set by liquidity coverage ratio, including two categories: first-class assets and second-class assets.
Among them, Tier 1 assets mainly include cash, reserves available under stress scenarios, and securities assets with zero risk weight and active trading, which are directly included at the discount rate of 100%.
Tier 2 assets can be subdivided into 2A and 2B, the proportion of which shall not exceed 40% of qualified high-quality liquid assets and 2B assets shall not exceed 15%.
Specifically, 2A assets include securities assets with a risk weight of 20% and good liquidity, and non-financial corporate bonds with a rating of AA- or above, which are counted as 85% of the market value of assets. 2B Assets mainly include non-financial corporate bonds with ratings of BBB- to A+, which are included at 50% of the market value of assets.
Here, we will find that the creditor’s rights assets within the financial system, such as financial bonds and interbank certificates of deposit, are almost excluded from the qualified liquid assets, and even non-financial corporate bonds from BBB- to A+ are counted as secondary assets, but interbank certificates of deposit and financial bonds with better market liquidity and higher credit rating are not included in the primary assets and secondary assets.
Why is this?
We believe that the original intention of regulators to introduce liquidity indicators such as LCR is to improve the risk prevention ability of the financial system, and if interbank deposit certificates and financial bonds are included in this indicator, it may violate this purpose.
Interbank certificates of deposit often operate within the financial system and are used by banks for liquidity adjustment, so at ordinary times, the liquidity of interbank certificates of deposit is very good, but whenever the liquidity of the financial market tightens, assets such as interbank certificates of deposit in the market will fall in volume and rise in price.
Therefore, if there is systemic risk, banks often freeze liquidity with each other and are unwilling to borrow money from each other. At this time, interbank deposit certificates will quickly lose liquidity. Therefore, in statistics, assets such as peers are not included in qualified high-quality liquid assets.
Look at the denominator: the net cash outflow in the next 30 days. It is a concept of flow, which is the difference between the expected cash outflow in the next 30 days and the expected cash inflow in the next 30 days, and the total cash inflow that can be included shall not exceed 75% of the total expected cash outflow.
Expected cash outflow in the next 30 days
Expected cash outflow refers to multiplying the balance of related liabilities and off-balance-sheet items by the expected cash outflow rate (also called withdrawal rate) under the set stress scenario. Among them, related liabilities and off-balance-sheet items can be divided into four items: retail deposits, wholesale financing without collateral, collateral financing and other items.
Retail deposits refer to deposits deposited by natural persons in banks, including time deposits and demand deposits.
Among them, demand deposits are all cash flows that may flow out in the next 30 days because there is no fixed term limit, and time deposits that naturally flow out within 30 days also belong to this item.
If the maturity date is not within 30 days, but the possible expenditure may eventually flow out, it is not included in the outflow cash flow. When designing the withdrawal rate, the regulatory authorities adopted a different caliber, dividing demand deposits and time deposits with a remaining maturity of 30 days into stable and unstable ones, and giving them a ratio of 5% and 10% respectively.
Wholesale financing without mortgage (pledge) refers to wholesale financing projects without mortgage (pledge) that customers have the right to recover within 30 days, with the earliest contract expiration date within 30 days or with no definite expiration date, including demand deposits of small business customers, time deposits with remaining maturity within 30 days (the withdrawal rate is consistent with that of retail deposits), business relationship deposits (deposits generated by providing clearing, custody and cash management services, Generally, the withdrawal rate is 25%), non-business relationship deposits provided by non-financial institutions and central banks (such as borrowing from the central bank, the withdrawal rate is 40%), and financing provided by other legal persons (such as interbank deposits and lending, the withdrawal rate is generally 100%).
Collateral financing refers to the liabilities that banks use special assets as collateral, mainly refers to the funds that banks borrow within 30 days by means of repurchase.
The withdrawal rate varies according to the collateral and counterparty. If Tier 1 assets are collateral, the withdrawal rate will be zero regardless of the counterparty. If 2A assets are used as collateral, the withdrawal rate is 15%, except when the central bank is the counterparty (such as OMO and MLF, at which time the withdrawal rate is 0); If 2B assets are used as collateral, the withdrawal rate is 50%, but if the counterparty is a central bank, the withdrawal rate is still 0, and if it is a policy bank or other institutions with risk weight less than 20%, the withdrawal rate is 25%. Except for the above conditions, the extraction rate shall be calculated as 100%.
Other projects are complicated, mainly derivatives, financing facilities, etc. For specific projects, please refer to the Liquidity Risk Management Measures of Commercial Banks of China Banking and Insurance Regulatory Commission.
Expected cash inflow in the next 30 days
The expected cash inflow is the balance of the corresponding receivable items multiplied by the expected cash inflow rate under the set pressure. The corresponding receivables mainly include reverse repurchase and borrowed securities, other cash inflows from different counterparties, credit, liquidity and contingent financing facilities, and other cash inflows.
Reverse repurchase and securities borrowing mainly refer to the cash inflow value that banks may obtain in the next 30 days through repurchase transactions and securities borrowing business.
In terms of extraction rate, reverse repurchase needs to distinguish whether the used (collateral) collateral is used for (collateral) pledge again and whether it is related to the pledged assets. If the collateral is used for re-collateral (pledge), the extraction rate is 0%. If it is not used for re-collateral, the extraction rate is 0%-100% respectively according to the mortgaged assets.
Other cash inflows from different counterparties mainly refer to the maturity of loans, borrowing funds and investment bond assets, and the withdrawal rate will vary according to different counterparties.
When retail, small business customers and non-financial institutions are counterparties, the withdrawal rate is 50%; When financial institutions, central banks, multilateral development banks and other institutions with risk weight less than 20% are counterparties and tier-1 assets and 2A assets are not used as collateral, the withdrawal rate is 100%; When the financial institution with business relationship is the counterparty, the withdrawal rate is 0%.
The extraction rate for convenience of credit, liquidity and contingent financing is 0%.
Other cash flows are mainly income from derivatives transactions and contractual cash flows.
Finally, from the actual situation, by the end of 2019, the liquidity coverage ratio of listed banks have reached the standard, and the assessment pressure is limited.
(2) the impact of 2)LCR assessment
Under the assessment pressure of LCR, in order to improve LCR, banks should try to find ways from both ends of numerator and denominator. Banks should either increase the scale of molecular high-quality liquid assets (the higher the numerator, the higher the LCR); Either reduce the net cash outflow in the next 30 days.
For the former, banks can increase their holdings of qualified high-quality liquid assets such as bonds, while for the latter, banks will tend to borrow medium and long-term funds, control the lending of medium and long-term funds, and reduce maturity mismatch.
Specifically, different types of transactions with different maturities will have different effects on LCR.
Interbank deposit slip
Capital outflow:If a bank buys interbank deposit certificates due within 30 days, the change of LCR of the buying bank is not clear, because although the denominator-net cash outflow in the next 30 days is small (due to maturity within 30 days, there will be cash inflow), the molecules as qualified high-quality liquid assets will be relatively small due to the decrease of cash (interbank deposit certificates are not qualified high-quality liquid assets, so buying interbank deposit certificates will not increase qualified high-quality liquid assets).
The change of LCR at this time depends on whether its original LCR is higher than 100%. If it is higher than 100%, the LCR will become larger (simple principle, 5/4 becomes 4/3 becomes larger); On the contrary, if it is lower than 100%, the LCR will become smaller. (Similarly, 2/3 becomes 1/2 and becomes smaller.)
If you buy certificates of deposit for more than 30 days, then only the molecules of LCR as qualified high-quality liquid assets have decreased, and the denominator has not changed, so the LCR will become smaller at this time.
Capital inflow:According to the regulations, the issuance period of interbank deposit certificates is at least one month, so it is not necessary to consider the situation that the time is within 30 days.
If the bank issues certificates of deposit and obtains funds for more than 30 days, then the numerator increases the amount of cash, while the denominator does not change, and the LCR index becomes larger.
Pledged repurchase
Financing:Because neither the interbank deposit certificate nor the pledged bonds of pledged repo are included in qualified high-quality liquid assets, the LCR change of the lender of pledged repo funds is consistent with the change of the above-mentioned purchase deposit certificate, so we will not repeat the analysis here.
Financial integration:The impact of pledged repo on the financial integration party is not consistent with the issuance of interbank deposit certificates. If the bank uses pledged repo to integrate the funds within 30 days, then the qualified high-quality liquid assets of the molecule increase the cash, but reduce the pledge bonds; The denominator increases the cash outflow in the next 30 days (to be repaid after 30 days). Therefore, to sum up, the final change of LCR depends on the relationship between (cash-pledge * discount coefficient) and cash-withdrawal rate.
If the pledged bonds are first-class assets such as treasury bonds, and the term is within 30 days, then according to Figures 14 and 15, the numerator will increase (cash -100%* pledged bonds) and the denominator will increase (cash-0%, and the discount rate when the first-class assets are used as collateral is 0%), and the market value of cash and pledged bonds will be added without considering the discount of pledged repurchase funds.
However, if the pledged bonds are assets of other grades, such as corporate bonds (2B assets) with A rating, at this time, because the withdrawal rate of outflow funds is 50%, and 2B assets are included in qualified high-quality current assets according to 50% of market value, the numerator has increased (in cash -50%* the value of pledged bonds), and the denominator has increased in cash-50%. Whether or not the pledged repo financing amount will be considered? At this time, the change direction of LCR is still related to whether the original LCR is greater than 1.
If the bank invests more than 30 days, the numerator will also increase (cash-pledge * discount coefficient), but the denominator will not change. Whether the LCR will change at this time depends on the nature of the pledged bonds. If it is a first-class asset such as national debt, then 100% will be withdrawn without any change, but if it is a 2A or 2B-class asset, then the LCR will increase without considering the discount of the pledged repo financing amount.
Buy-out repurchase
Financing:In the case of buyout repurchase, the bank as the lender will get the ownership of the pledge, and this kind of pledge with ownership is included in the qualified high-quality liquid assets, so unlike pledged repurchase, the qualified high-quality liquid assets will change.
If the funds are financed within 30 days, then the qualified high-quality liquid assets will reduce cash and increase the discount coefficient of pledge bonds; Denominator The net cash outflow in the next 30 days will reduce the cash withdrawal rate. The change of LCR will depend on the change of numerator and denominator.
If the funds are released for more than 30 days, the qualified high-quality liquid assets will reduce cash and increase the discount coefficient of pledge bonds, and the denominator will not change. The change of LCR depends on the change of molecules. Considering the discount coefficient, the high probability of molecules is reduced, which means that the LCR will deteriorate if the funds are financed for more than 30 days.
Financial integration:At this time, the situation of buyout repurchase is the same as that of pledge, and there is no difference. The integration of funds will bring about the same changes in molecular qualified high-quality liquid assets, and the denominator depends on the period of integration of funds.
inter-bank borrowing
Although interbank lending, like repurchase, is a means of financing, unlike repurchase, interbank lending does not need collateral, so the change of numerator and denominator is mainly the increase and decrease of cash. The basic situation is similar to the above, so I will not repeat it.
2. Adequacy ratio of high-quality liquid assets
Calculation formula: high-quality liquid asset adequacy ratio (HQLAAR)= high-quality liquid assets ÷ short-term net cash outflow.
= High-quality liquid assets ÷ (possible cash outflow-confirmed cash inflow)
After reading the formula, we will find that the adequacy ratio of high-quality liquid assets is almost the same as that of liquidity coverage ratio.
This is not surprising. Both the high-quality liquidity asset adequacy ratio and liquidity coverage ratio aim to ensure that commercial banks can have high-quality assets to meet the liquidity demand for at least 30 days in the future, but the high-quality liquidity asset adequacy ratio applies to small and medium-sized banks with assets below 200 billion, while liquidity coverage ratio applies to large banks with assets above 200 billion.
Because it is applicable to small-scale banks, the requirements for the adequacy ratio of high-quality liquid assets will be looser than those of LCR.
Taking molecules as an example, LCR is a qualified and high-quality liquid asset, while HQLAAR is more relaxed in the identification of actual assets as long as it demands high-quality liquid assets and lacks the word "qualified", such as national debt and other assets, as long as HQLAAR has no liquidity obstacles, while LCR needs to meet more detailed requirements such as large scale, deep market and active trading.
According to strict classification, even if they are all treasury bonds, some treasury bonds with almost no trading market and poor liquidity may not be qualified high-quality liquid assets, but they are high-quality liquid assets.
In addition, according to regulatory requirements, the adequacy ratio of high-quality liquid assets of commercial banks should reach 100% by the end of June 2019. The requirements on transition time are also looser than LCR.
Here are some points that need the reader’s attention:
First, the possible cash outflows and cash inflows in the formula are also aimed at the funds in the next 30 days, which are the same as the cash outflows and cash inflows in the LCR formula in the next 30 days.However, there is a certain gap between the two in the specific cash flow conversion ratio. Compared with LCR, HQLAAR has more clear regulations on cash flow items.
Second, under the buyout repo business, the bonds obtained by the financier (reverse repurchase) cannot be counted as "high-quality liquid assets", and HQLLAR will be stricter than LCR in this respect.According to the requirements of LCR, bonds obtained in buyout reverse repurchase can be counted as numerator as long as they meet the requirements of "qualified high-quality liquid assets".
Thirdly, compared with the provisions on the adequacy ratio of high-quality liquid assets in the Measures for the Management of Liquidity Risk of Commercial Banks, G26′ s statement on the adequacy ratio of high-quality liquid assets has stricter requirements on HQLAAR.
G26 is one of the "1104" statements of China Banking and Insurance Regulatory Commission, and it is a requirement that banks should abide by when reporting the adequacy ratio of high-quality liquid assets. China Banking and Insurance Regulatory Commission will update the reporting requirements of this statement in a timely manner according to the regulatory requirements. If the Measures for Liquidity Risk Management of Commercial Banks is a theoretical guiding document, then the 1104 statement is a guiding manual in actual operation.
After the implementation of HQLLAR, the impact on commercial banks is the same as LCR. In order to meet the standards, we need to find ways from both the numerator (high-quality liquid assets) and the denominator (possible cash outflow-confirmed cash inflow), either increasing the numerator of high-quality liquid assets or increasing the cash inflow and reducing the cash outflow and denominator.
The impacts of specific projects are similar to those of LCR, so we won’t repeat them here.
3. Liquidity ratio and liquidity gap rate
Calculation formula: liquidity ratio = balance of current assets ÷ balance of current liabilities.
Liquidity gap rate = liquidity gap in future time periods ÷ off-balance sheet assets due in corresponding time periods.
= (off-balance-sheet assets due in future time periods-off-balance-sheet liabilities due in future time periods) ÷ (off-balance-sheet assets due in corresponding time periods+off-balance-sheet income due in corresponding time periods)
Among these two indicators, the liquidity ratio is a regulatory indicator (mandatory indicator), while the liquidity gap rate is a monitoring indicator (non-mandatory indicator). Because the two indicators are relatively close, we will explain them together.
In these two formulas, the definition of current assets and current liabilities is the core. According to the standards of banking supervision, liquid assets mainly include cash, assets due within one month and bond assets that can be realized at any time; Current liabilities include demand deposits and liabilities due within one month.
For the liquidity ratio and liquidity gap rate, there are two ways for banks to reach the assessment standards of not less than 25% and -10%:First, reduce the proportion of liquidity liabilities. Considering that liquidity liabilities basically consist of ultra-short-term liabilities within one month, the purpose of this indicator is very clear, which is to curb the enthusiasm of banks to increase maturity mismatch and make liquidity risk money, and force banks to ensure the duration and rationality of liabilities.
The second is to increase the scale of liquid assets.From the perspective of the composition and structure of liquid assets, except for the existing loans, accounts receivable and long-term bond assets that will expire within one month, the assets with extremely high liquidity, such as overstock and cash, have relatively low returns. Therefore, banks may allocate some liquid assets with relatively high returns, such as short-term, active bonds and cargo bases, under the condition of ensuring compliance.
In reality, we can’t know the specific situation of the liquidity gap rate because of the lack of data availability. However, the liquidity ratio of all banks can basically meet the standards. In December 2019, the liquidity ratio of commercial banks was 58.46%, which was much higher than the regulatory requirement of 25%. The data of banks obtained from wind also showed that the lowest liquidity ratio was 28% in 2019, mostly above 50%, and there was basically no assessment pressure.
4. Liquidity matching rate
Calculation formula: liquidity matching rate (LMR)= weighted capital source ÷ weighted capital utilization.
The liquidity matching ratio is used to measure the term allocation structure of the main assets and liabilities of commercial banks, with the purpose of matching the assets and liabilities of banks with different terms and reducing the short-term funds used by banks to invest in long-term projects.
This indicator is similar to LCR and HQLLAR, but LCR and other indicators only focus on short-term liquidity matching, while the matching rate focuses on the overall situation, including short-term and long-term.
As can also be seen from the calculation formula,If banks want to improve this index, they should either increase the source of funds (liabilities) or reduce the use of funds (assets).
Let’s look at the weighted funding source project first.The source of funds is the liabilities of commercial banks. The longer the term of general liabilities is, the more stable the bank’s funds will be, and the corresponding liquidity risk will not easily occur. Therefore, we can see that for the same liabilities, the longer the term, the higher the asset conversion rate. The higher the conversion rate, the larger the molecule.
According to different sources of liabilities, we can see that the conversion rate of deposits is obviously higher than that of other types of assets without considering borrowing from the central bank, which also reflects the purpose of the regulatory authorities to guide banks to return to their original business.
It is worth noting that for short-term interbank liabilities (including interbank deposits, interbank borrowing, selling and repurchase), as well as the issuance of bonds and interbank certificates of deposit, the conversion rate designated by the regulatory authorities is 0%, which means that banks cannot temporarily increase their debt scale by issuing short-term certificates of deposit or temporarily increasing interbank liabilities, thus avoiding supervision.
Let’s look at the weighted fund application project.The use of funds is also the assets of commercial banks. Generally speaking, the shorter the term of assets, the sooner banks can recover their funds, and the lower the possibility of liquidity risk. Because the use of funds is the denominator, the smaller the denominator, the greater the liquidity matching rate, so we will see that the longer the term of weighted funds, the greater the discount rate. (For the use of weighted funds, the smaller the discount rate, the better)
According to different investment assets, regulators guide commercial banks to return to the original credit business by giving different conversion rates. We can see that among different assets, the discount rate of loans is the lowest, while interbank certificates of deposit are lower than interbank businesses such as buying and selling back.
As for other asset investments (excluding bonds and stocks, mainly referring to special-purpose carrier investments such as bank wealth management, trust and brokerage asset management), the regulatory authorities stipulate that no matter the term, as long as banks invest in such projects, they will be converted at a 100% conversion rate.
This may be due to the phenomenon of multi-layer nesting of such assets. Although the regulatory authorities have rectified the multi-layer nesting problem at present, the underlying assets of such assets are still difficult to penetrate, so the regulatory authorities directly and strictly identify them.
This also reflects the strong supervision of such assets by the regulatory authorities. If banks want to meet the supervision in the liquidity matching rate, it is undoubtedly a good choice to reduce the funds invested in brokerage asset management and bank wealth management.
It is worth noting that at present, the regulatory authorities have not included stock investment and bond investment in the use of weighted funds, that is, the funds used by banks to invest in bonds and stocks will not be counted as the denominator (weighted capital use).
This has little effect on stocks. Although stocks are not included in the denominator, it is difficult and unwilling for banks to invest in stocks because of capital constraints. But it is undoubtedly a good thing for banks to invest in bonds. After all, as long as bonds are not used as weighted funds, investing funds in bonds can effectively improve the liquidity matching rate.
Until now, the liquidity matching rate has been used as a monitoring indicator. Since 2020, this indicator has been formally included in the regulatory requirements and is applicable to all commercial banks.
Since this indicator obviously encourages commercial banks to return to their original deposit and loan business, and sets a relatively unfavorable discount rate for interbank business, especially for banks to invest through trust and brokerage asset management, after this indicator is formally regulated, it is expected that banks will be inclined to invest in assets such as bonds and credit, while investment in fixed-income assets such as trust and directional asset management will be reduced.
5. Proportion of net stable funds
Calculation formula: Net stable fund ratio (NSFR)= available stable funds ÷ required stable funds ×100%.
= (book value of capital and liabilities × available stable fund coefficient) ÷ (book value of various asset items × required stable fund coefficient)
This indicator is calculated based on the balance sheet of commercial banks. If LCR focuses on short-term liquidity risk and LMR focuses on global liquidity risk, then NSFR mainly focuses on medium and long-term liquidity risk.
From the formula, we can also see that the molecular part mainly corresponds to the owner’s equity and debt items of commercial banks; The denominator part corresponds to the asset end part of the balance sheet. It can be understood that the funds that banks can use are their own money plus borrowed money, and the funds they need are their own investment expenses.
Although it is based on the bank’s balance sheet, in actual filling, compared with LCR or LMR, the specific filling of NSFR will be more complicated. We won’t explain it too much here. After all, this is not the core of the article.
We are more concerned about how to determine the available stable fund coefficient and the required stable fund coefficient.
Let’s talk about the stable capital coefficient. According to the regulations, the coefficient of self-owned capital is 100%. After all, it is the bank’s own money, and there is no stability problem. Therefore, this coefficient is mainly used to convert liabilities.Regulators will mainly consider the following points when defining coefficients for different assets:
First, the debt period.Available stable funds are mainly concerned with the stability of liabilities, and in general, the longer the term of liabilities, the more stable the funds are. So we can see that the conversion ratio of long-term liabilities will be higher than that of short-term insurance liabilities.
Second, the counterparty.The source of liabilities also has obvious influence on the stability of liabilities. Generally speaking, the liabilities of individuals or small and medium-sized enterprises will be more stable, while the stability of interbank liabilities will obviously be much worse.
This is also well understood. Generally, interbank liabilities are more sensitive to the interest rate trend of the market, and the term is shorter. When there is a liquidity shock in the market, interbank liabilities are prone to collective contraction. For example, the 19-year contractor bank incident had a significant impact on the interbank liabilities of small and medium-sized banks at that time.
Next, analyze the required stable fund coefficient.
The required stable capital coefficient is generally used to estimate the amount of additional financing needed for this asset because it cannot be realized reasonably in time or needs to be extended. For example, the original commercial bank expected that the bonds it held could be realized reasonably after maturity, but after maturity, the enterprise could not repay the principal, so the commercial bank could use stable funds to support the capital demand arising from this incident.
The simple understanding is that this ratio indirectly reflects the possibility of liquidity risk of assets, and the lower the possibility of liquidity risk, the smaller the conversion coefficient.
The specific setting of the general stable fund coefficient will consider the following factors;
First, the quality of assets.The higher the quality of general assets, the lower the demand for stable capital that banks need. From the setting, we can also see that the stable capital coefficient of 2A assets (the same as that set under the LCR index, such as corporate bonds rated AA) is 15%, while that of 2B assets is 50%.
Second, the counterparty.According to different counterparties, different stable fund coefficients are set. However, the coefficient corresponding to general interbank assets here will be lower than that corresponding to loan projects issued to individuals or non-financial institutions. For example, the coefficient of loans granted to individuals and non-financial institutions within six months (without realizing obstacles) is 50%, while the coefficient of loans granted to financial institutions within six months (referring to interbank deposits, loan trade, reverse repurchase, etc.) is 15%.
Third, the term of assets.The shorter the term of general assets, the less stable funds are needed, and the smaller the corresponding stable fund coefficient is. On the contrary, the longer the asset term, the greater the potential capital needs (such as default), and the greater the corresponding stable capital coefficient.
At present, all listed banks have reached the target in the proportion of net stable funds.
6. loan-to-deposit ratio
Calculation formula: loan-to-deposit ratio = total loans ÷ total deposits.
For banks, in order to obtain the highest possible income, it will tend to keep loan-to-deposit ratio at a higher level, because the higher the loan-to-deposit ratio, the more interest-bearing assets relative to liabilities, and the higher the interest margin income of banks.
However, if the loan-to-deposit ratio is too high and the amount of deposits is too small, the funds needed by banks for daily settlement, cash expenditure and dealing with depositors’ withdrawals will be relatively insufficient, and liquidity risks will easily occur. Therefore, in the past, the banking supervision required that this item should not be less than 75% of the regulatory red line.
Because this item is assessed at the end of the month and the end of the quarter, that is, the loan-to-deposit ratio is calculated based on the balance of deposits and loans at that time at the end of the month and the end of the quarter, so in order to meet the assessment requirements of this item, banks often have "rushing deposits" at the end of the month and the end of the quarter, which has two consequences for the bond market:
First, the bank’s deposits at the end of the month and the end of the quarter are high, and it is necessary to pay a large amount of statutory deposit reserves and take away a large amount of excess reserves, resulting in tight fluctuations in funds at the end of the month and the end of the quarter;
Second, as interbank deposits are also included in the scope of loan-to-deposit ratio, banks may compete for interbank deposits at the end of the month and the end of the quarter, resulting in the shortage of medium and long-term interbank debt funds.
After 2015, due to the great downward pressure on the economy, the government urgently needs banks to increase their support for entities, and at the same time, a supervision system for liquidity risks has been gradually established. Banks themselves have the motivation to increase their deposits under the background of financial disintermediation and continuous loss of deposits. loan-to-deposit ratio, a supervision indicator, has been abolished and turned into a liquidity monitoring indicator, and its disturbance to capital and interbank liabilities has also declined.
7. Dependence on core liabilities
Calculation formula: Dependence on Core Liabilities = Core Liabilities ÷ Total Liabilities
For this item, the assessment standard of the banking supervisor is not less than 60%. Its main purpose is to ensure the rationality of the bank’s debt duration and restrain the debt duration from being too short-term. At present, this indicator has also been turned into a monitoring indicator and is no longer used as a regulatory indicator.
The statistical caliber of molecular core liabilities of this item changed in 2017. In the past, it included 50% of time deposits, bond issuance and demand deposits with a maturity of more than three months (inclusive), but after February 2017, the Banking Regulatory Commission began to include interbank deposit certificates with a maturity of more than 90 days.
In this way, it is undoubtedly easier for banks to meet the regulatory requirements, and banks will have more incentive to issue interbank certificates of deposit, which is contrary to the purpose of strict supervision to crack down on interbank arbitrage chaos since the end of 2016, but it will be good for the bond market, because the scale of interbank certificates of deposit intercropping with interbank financial management and outsourcing may expand against the trend, and then the liquidity of the bond market will improve marginally.
Then why did you make such a policy move? We guess there may be three reasons:
1) With the expansion of interbank liabilities that are not strictly regulated, such as interbank deposit certificates and interbank financial management, the denominator of the dependence on core liabilities has been continuously expanded, and commercial banks may face the dilemma that the dependence on core liabilities is not up to standard (due to insufficient data availability, we cannot know the exact situation);
2) Interbank certificates of deposit are similar to interbank deposits, which are essentially part of interbank liabilities. At this time, inclusion is to fill the original regulatory vacuum;
3) According to the requirements for inclusion, the term of interbank deposit certificates should be more than 90 days, which is undoubtedly encouraging banks to increase long-term interbank liabilities, improving the stability of the bank’s liability side and the comprehensive liability cost, and reducing the interbank arbitrage space.
After making this move, the supervision may need supporting measures to curb the motivation of the expansion of interbank deposit certificates, such as including the assessment ratio of interbank liabilities. This point was stated in the implementation report of monetary policy in the second quarter of 2017, and we will elaborate it in the next section of MPA assessment system.
(III) Asset quality series
This series of asset quality assessment includes three categories: static level, dynamic change and offset, with a total of 12 indicators. The main purpose is to ensure that the bank’s credit risk is controllable and the asset quality is relatively high, so as to avoid the phenomenon of excessive losses caused by the sharp deterioration of asset quality.
Each of the three categories has its corresponding connotation and purpose.Static level category indicates the level of bank assets quality as of a certain point, which represents the level of credit risk faced by banks at a certain moment; Dynamic change category indicates the changing trend of asset quality in the past period of time; The offset category indicates whether the bank has made the expectation and preparation when the risk event happens exactly.
1. Non-performing asset ratio and non-performing loan ratio
Calculation formula: NPL ratio = NPL assets ÷ total credit risk assets.
Non-performing loan ratio = (sub-category+doubtful category+loss category) ÷ balance of various loans.
According to the caliber of the Banking Supervision Bureau, the denominator credit risk assets mainly include various loans, assets deposited with peers, assets bought and resold by loan trade, bond investment in bank accounts, interest receivable, other receivables, commitments and contingent liabilities, etc. Among these assets, those classified as non-performing categories are the molecules with non-performing asset ratio: non-performing credit risk assets.
There are many bad credit risk assets, which can be roughly divided into loans, non-standard, credit bonds and peers. Among them, the classification of loans as non-performing loans is consistent with the classification of "non-performing loan ratio", which is sub-category+doubtful category+loss category (Table 27), and the classification of other non-performing loans is separately formulated by China Banking and Insurance Regulatory Commission.
At present, the requirements for NPL ratio and NPL ratio in China Banking and Insurance Regulatory Commission are not higher than 4% and 5%. As banks do not publish NPL ratio, we cannot know the exact value of NPL ratio.
However, the NPL ratio will be announced regularly by banks. Judging from the financial reports of listed banks in the first quarter of 2020, they are basically below 2%.
The rise of non-performing rate generally has the following effects on the banking business:
First, the bank’s profits may be eroded (it needs profits to write off bad debts, which involves the problem of loan loss reserve, which we will discuss in detail later), which will affect the bank’s operating performance;
Secondly, the rise of non-performing banks is easy to attract the attention of the regulatory authorities, and the subsequent business development may be affected.
Therefore, under the pressure of non-performing asset ratio and non-performing loan ratio, banks will make adjustments on the asset side, improve the qualifications of loan customers, and shift general corporate loans to lower-risk real estate loans (so we see that new credit in 2015-2016 was filled with mortgages) and low-risk bond interbank assets.
For the bad loans that have been formed, banks will also adopt the methods of debt-to-goods swap, debt-to-equity swap, and non-performing asset securitization to achieve the table and beautify the indicators.
2. Single customer loan concentration and single customer credit concentration
Calculation formula: loan concentration of a single customer = total loan of the largest customer group ÷ net capital.
Single customer credit concentration = total credit of the largest customer group ÷ net capital.
The assessment of these two items is mainly to disperse the allocation direction of bank credit assets and avoid risk accumulation caused by excessive concentration of loans. For these two items, China Banking and Insurance Regulatory Commission’s assessment requirements are not higher than 10% and 15% respectively.
For big banks with outlets all over the country, these two items will not constitute shackles, because they face a wide customer base and relatively more high-quality customers.
However, for rural commercial banks and city commercial banks, especially small banks, the scope of their credit loans is often limited to the local area. Not only are they facing a narrow customer base, but local high-quality customers, such as large state-owned enterprise city investment, will also be taken away by big banks at local outlets, so it is a big problem for them to issue loans and credit.
If the conditions of lending customers are relaxed and their qualifications are lowered, then the bad and bad debts of these rural shopping malls may rise; If they don’t relax, their loans will be limited by these two concentrations, and the allocation of loan assets may be limited.
In this case, many small city merchants have two choices, either by purchasing financial asset management products and lending by other financial institutions to obtain relatively high returns; Or directly purchase interbank assets such as interbank deposit certificates or high-quality bond assets such as CDB and high-grade credit bonds to develop financial market business.
3. Migration rate of normal loans and migration rate of concerned/subprime/suspicious loans.
Calculation formula: migration rate of normal loans = amount of downward migration of normal loans at the beginning of the period ÷ (balance of normal loans at the beginning-amount of decrease of normal loans at the beginning of the reporting period)
Interest/Subprime/Suspicious Loan Migration Rate = Initial Interest/Subprime/Suspicious Loan Migration Amount ÷ (Initial Interest/Subprime/Suspicious Loan Balance-Initial Interest/Subprime/Suspicious Loan Decreased Amount during the Reporting Period)
These items are the risk migration items in the Core Indicators of Risk Supervision of China Banking Regulatory Commission, and the formulas are complicated. However, the actual disassembly shows that the molecular terms of these indicators are: all kinds of loans become the net amount of the next type of loans within one quarter.
What do you mean?
Take the migration rate of interest-related loans as an example. Its next types of loans include: subprime loans, doubtful loans and loss loans. Suppose there is a bank A, which has 10 million loans of concern at the beginning. By the end of the period, 250,000 loans have been reclassified as secondary, 200,000 loans have become suspicious, and 150,000 loans have become losses. At the same time, 100,000 loans (secondary+suspicious+loss) have improved and been reclassified as concern.
Then at this time, the numerator is equal to (25+20+15-10) = 500,000, the denominator is equal to (1000-10) = 9.9 million, and the migration rate of interest-related loans of Bank A is equal to 50/990=5.05%. Similarly, the calculation methods of other items can also be calculated in this way.
In reality, the indicators of dynamic changes do not specify a rigid regulatory standard, and the regulatory constraints are not strong.
On the contrary, it is the bank itself, which will use it as a reference indicator of the changing trend of asset quality to formulate future business strategies and policies. For example, when the migration rate of normal loans in banks increases, it shows that the rate of normal loans turning into non-performing loans is accelerating and the asset quality is deteriorating, and banks may correspondingly reduce the allocation ratio of high-risk loans (as shown in Figure 32).
4. Loan reserve adequacy ratio
Calculation formula: loan reserve adequacy ratio = actual provision for loan losses/provision for loan losses.
This is the first item in the compensation item, and it is also the key to understand the following two items. We need to pay special attention to the concept and connotation of loan loss reserve.
The so-called loan loss reserve is the reserve set aside by the bank according to the expected loan loss, which is used to deal with the possible loan bad debt loss in the future.
We can understand it as a pool, in which the water comes from bank profits. When the water level is high, the loan provision ratio and provision coverage ratio are relatively high, and the pressure to meet the standards is relatively small, and vice versa.
Because the loan loss reserve needs to consume the bank’s profits (the water shifts from the profit subject to this subject), it will worsen the profit indicators such as the bank’s profit growth rate, so the bank itself has no incentive to fully accrue the loan loss reserve, so the banking supervisor designed the loan reserve adequacy ratio accordingly to force the actual loss reserve to be not less than the amount that should be accrued.
As for this accrued amount, the Banking Regulatory Commission also has a perfect set of regulations. We can look at it from the perspectives of caliber composition and regulatory regulations:
1) From the perspective of caliber composition, it includes general preparation, special preparation and special preparation.
General reserve year-end balance =1%* year-end loan balance; Special provision =2%* attention category +25%* sub-category +50%* doubtful category +100%* loss category, in which 2%, 25%, 50% and 100% respectively represent the probability of possible bad debts of various loans; Special provision is made by the bank itself.
2) From the perspective of regulatory requirements, the Guiding Opinions on the Implementation of New Regulatory Standards for Banking Industry in China issued by China Banking and Insurance Regulatory Commission in 2011 clearly stipulates that the amount of loan loss reserve should follow the principle of calculating the higher of loan provision ratio (not less than 2.5%) and provision coverage ratio (not less than 150%).
Therefore, based on the above two points, the final loan loss reserve scale that banks should accrue needs to meet both the calculation requirements of the specified caliber and the total amount stipulated by the supervision, and the adjustable item lies in the special reserve that is not explicitly stipulated in the calculation formula and is accrued by banks themselves.
5. Loan provision rate and provision coverage ratio
Calculation formula: loan provision rate = loan loss provision (actual provision) ÷ loan balance.
Provision coverage ratio = loan loss provision (actual provision)-balance of non-performing loans
Observing the calculation formula, we can find that the loan provision ratio and the provision coverage ratio have the same molecular term, and the denominator is just two items in the calculation formula of non-performing loan ratio. So we introduced the non-performing loan ratio and found that there are the following relationships among them:
Loan provision ratio = non-performing loan ratio * provision coverage ratio
It is not difficult to find that when the non-performing loan ratio is lower than 1.67%, as long as the loan provision ratio is higher than 2.5%, the provision coverage ratio will inevitably be higher than 150%. At this time, we only need to look at the loan provision ratio as an indicator. When the non-performing loan ratio is higher than 1.67%, as long as the provision coverage ratio is higher than 150%, the loan provision ratio will inevitably be higher than 2.5%. At this time, we only need to pay attention to the provision coverage ratio.
In reality, it is not easy for banks to assess these two items. According to the financial report data of banks in the first quarter of 2020, we can find that several banks failed to meet the standards in terms of provision coverage ratio and loan provision ratio, and many banks were hovering near the regulatory red line.
What should I do if I want to meet the standards?
Denominator, it is almost impossible for all loan balances to experience negative growth, which means that the denominator will continue to grow. If we want to increase it, we can only increase the loan loss reserve, but it is not a good thing for banks to increase the loan loss reserve.
Earlier, we said that the loan loss reserve is a pool, and the water in it comes from bank profits. To increase the loan loss reserve, we must increase the proportion of profits allocated to this pool, so that the profit growth rate will be limited.
To make matters worse, if the economic growth rate declines, the return on real investment declines, and the bad debts issued by banks cannot be recovered, then the bad debts will be thrown into this pool and the water in the pool will be consumed (this process is called writing off bad debts), because this loan loss reserve is originally prepared to deal with bad debt losses.
In this way, the water level in the pool will drop, and it may not reach the water level required by the supervision (loan reserve adequacy ratio assessment limit). At this time, the bank must supplement it with profits, and its operating performance will be affected, and its capital will be reduced (profits could have been converted into capital), which may bring the pressure of capital adequacy assessment.
Therefore, when the economy is depressed, the credit risk is too high, and the probability of bad debts is high, banks will relatively shrink the allocation scale of credit assets, increase the concentration of loans (focusing on high-quality customers such as state-owned enterprises, state-owned enterprises and urban investment), avoid bad debt losses, and pay more attention to the allocation of low-risk assets such as interest rate bonds and interbank deposit certificates.
(IV) Profitability series
This series includes net interest margin, cost-income ratio, asset profit rate, capital profit rate and interest rate risk.Judging from the financial report data of listed banks’ annual reports in 2019, these four items are generally less stressful for banks. Although individual indicators of some banks are not up to standard, they are basically above the assessment requirements and will not become the constraints of banks.
However, from a longer-term perspective, these profit indicators will be an important reference for banks to formulate their own business strategies, which will have an important impact on the assets and liabilities of banks in the future.
For example, before 2011, the rapid economic development made loans the most profitable assets of banks, and financial disintermediation was not yet in-depth, and banks could still enjoy the policy dividends brought by interest rate control. At this time, the general business strategy of most banks is to attach importance to deposit and loan business, with assets investing more in loans with higher yield and liabilities paying attention to retail deposits. Under this strategy, the proportion of bank loans to total assets is at a high level, and the proportion of bank deposits to bank liabilities is also at a high point.
After 2011, the decline in real returns, the intensification of financial disintermediation and the completion of interest rate marketization have greatly challenged both ends of banks’ assets and liabilities, and various profit indicators have declined. Some banks have begun to change their business strategies, sink their qualifications and turn to small and micro enterprises; Some banks have turned to financial market business, and the dependence of debt end and asset end on peers has been increasing, and it has reached its peak in 2014-2016.
Later, due to the problems such as the rapid development of financial interbank business and the accumulation of risks, the regulatory authorities started a strict supervision mode, interbank liabilities and interbank assets were adjusted, asset prices fell sharply, and trading financial assets were floating, which caused harm to the bank’s profits and operations.
Some banks subsequently adjusted their assets on the balance sheet. On the one hand, trading financial assets will be converted into held-to-maturity investments priced by the cost method; on the other hand, the allocation ratio of bond assets will be increased to obtain a high rate of return; and on the other hand, under the circumstance that the inter-bank business has been damaged and hit, banks have begun to re-attach importance to the development of loan business and light asset business.
The debt side has also been adjusted. Inter-bank liabilities have undergone major adjustments under regulatory pressure and become more and more expensive. The yields of asset management products such as wealth management, cargo base and small collection of brokers have also risen, and the growth rate of retail deposits of banks has declined. However, compared with high-priced inter-bank funds, low-cost retail deposits are obviously a better choice at this time. Therefore, after the fourth quarter of 2016, the bank’s debt side has a tendency to gradually turn to retail.
2
MPA assessment system of central bank
(1) What is MPA?
MPA(MacroPrudential Assessment), the full name of which is Macro Prudential Assessment System, is a new supervision system for the assessment of commercial banks launched by the central bank in December 2015. It is different from China Banking and Insurance Regulatory Commission’s supervision system, which only pays attention to individual risks of banks. MPA will consider the stability of the whole financial system from the perspective of the whole.
Before the introduction of MPA system, the central bank originally supervised and controlled commercial banks by implementing dynamic adjustment of differential reserves and consensual loan management.
Simply put, it is to treat banks differently. For example, banks with poor "qualifications" (low capital adequacy ratio and poor asset quality) are required to pay more reserves to the central bank to reduce their loanable funds. By using the statutory reserve ratio as an important means, banks can lend according to the policy guidance of the central bank, and finally achieve the purpose of controlling the total amount and pace of bank lending.
However, with the rapid development of financial innovation, the original regulatory system has become increasingly stretched, and the reserve ratio has been difficult to control the bank’s lending behavior.
Banks have innovated various channels to transfer assets out of the channels, which are called inter-bank business, asset management business and investment banking business, but in fact they are still lending credit (for example, we used inter-bank subjects to make curve lending in the capital adequacy ratio assessment).
Moreover, the central bank can not grasp the substantive trends of banks, which poses a threat to the effectiveness of the central bank’s monetary policy implementation and the maintenance of financial stability. Therefore, the central bank further improved the original dynamic adjustment mechanism of differential reserve and introduced an "upgraded version" supervision system, namely MPA. So to some extent, MPA is not a brand-new tool.
The new supervision system MPA expands the original single index into multiple indexes, forming a comprehensive scoring system, which is used to comprehensively assess the financial risks of the banking system.
Compared with the original assessment system, MPA assessment content is more comprehensive: in addition to loans in the popular sense, it also includes debt investment, equity and other investments, buying assets for resale, and the balance of funds deposited in non-deposit financial institutions, which expands the supervision scope from narrow loans to broad loans, but at the same time retains the core of the original supervision system: the mechanism of capital adequacy ratio and differential reserve ratio.
(2) How to assess the MPA system?
MPA assessment implements a scoring system. It includes seven items: capital/leverage, assets and liabilities, liquidity, pricing behavior, asset quality, foreign debt risk and credit policy implementation, each with a full score of 100, and the central bank scores according to 15 sub-items under each item.
The following figure shows the entire MPA assessment system. It can be seen that there are many qualitative assessments in the seven major items of MPA, and banks can easily get full marks for many indicators, such as interest rate pricing with one-vote veto, compliance with the reserve system and implementation of credit policies.
At the same time, we can also see that many indicators in MPA are the same as the above-mentioned China Banking and Insurance Regulatory Commission regulatory system, such as leverage ratio, liquidity coverage ratio, non-performing loan ratio and provision coverage ratio, which we will not repeat here.
On the scoring standard, each assessment with a score of 90 or more is excellent, and a score of 60 or more is up to standard. Among them, the capital adequacy ratio and pricing behavior have one-vote veto power, and if any one of the conditions is unqualified, it will be directly rated as an unqualified institution. However, it should be noted that this score was not calculated by the central bank itself, but was first given to the secretariat of the self-discipline mechanism for preliminary calculation, and then reviewed by the macro-prudential evaluation Committee. Finally, the central bank only got a calculation result.
The central bank classifies financial institutions according to the calculation results obtained by it. All the seven categories of indicators are excellent A-rated institutions, and any one of the capital, leverage and pricing behavior fails to meet the standards, or any two or more of the remaining five categories fail to meet the standards, which are C-rated institutions and the rest are B-rated institutions.
After the grades are divided, the central bank will reward and punish institutions A, B and C accordingly. The most important means of rewards and punishments is to adopt different statutory reserve ratios, supplemented by other means of rewards and punishments.
For A-rated institutions, the central bank implements an incentive statutory reserve interest rate (which can be rewarded by 1.1-1.3 times), giving priority to granting small loans and rediscounts to support agriculture, giving priority to financial market access and approval of various financial bonds, and trying financial innovative products first.
For C-rated institutions, the central bank not only implements the binding and punitive statutory reserve interest rate, but also restricts the access to financial markets and the issuance of various financial bonds, and even cancels the qualification of primary dealers. In addition, if banks are short of liquidity and need to borrow money from the central bank, the interest will be higher than others (SLF interest rate for standing loan convenience).
Whether it is a reward or a punishment measure, the general period is three months after the assessment. After three months, the central bank will re-evaluate the rating according to the situation of each bank.
(C) Analysis of indicators of MPA assessment system
With an overall understanding of the MPA assessment system, it is necessary to find out the key and difficult points in the MPA assessment indicators.
From the perspective of assessment methods, we find that there are four major items that can be quantitatively examined: capital and leverage, assets and liabilities, liquidity and asset quality, so these four indicators are the key points.We will introduce their scoring standards in detail, and will not repeat some indicators that are duplicated in the above-mentioned regulatory system in China Banking and Insurance Regulatory Commission.
1. Capital and leverage
This project examines three indicators: capital adequacy ratio, leverage ratio and total loss absorption capacity. Leverage ratio is a regulatory indicator in China Banking and Insurance Regulatory Commission. As long as it is higher than 4%, it can get full marks. As we have already explained above, from the data of the first quarterly report in 2020, banks can basically get full marks of 20 in this item. The total loss absorption capacity belongs to the content of Basel IV research, and this index is not applicable until the relevant management requirements are clear.
The key indicator of this item is the capital adequacy ratio, with a score of 80, which is self-evident. If this indicator is not up to standard, then the bank will become a C-file institution.
Its scoring method is different from that of banking supervision. It first calculates the macro-prudential capital adequacy ratio (C*) according to the formula, and then compares the actual capital adequacy ratio of each institution with C*. If C≥C*, the score is 80 points. If C<C*, 0 points.
It should be noted that there is a tolerance index of 4 percentage points between the actual capital adequacy ratio (C) and the macro-prudential capital adequacy ratio (C*) at the beginning of the implementation of MPA, that is, when C is lower than C* but higher than (C*-4%), the bank scores 48-80 points; When c is lower than (C*-4%), score 0.
Under the condition that the bank’s own capital adequacy ratio can’t change in a short period of time, the key for banks to meet the standards lies in the size of macro-prudential capital adequacy ratio (C*). Its calculation is more complicated, which is linked to institutional characteristics, macroeconomic conditions, generalized credit growth rate, etc., and there is room for flexible adjustment. The specific calculation method is shown in the following figure.
To make it easier to understand, let’s give a concrete example to illustrate.
Assume that Bank A is the largest asset institution in the region. In the first quarter of 2020, the broad credit growth rate of Bank A is 16%, and the structural parameter is 1. At present, the macroeconomic heat parameter is 0.8, and the systemic important parameter is 1. The central bank’s requirement for reserve capital in the first quarter of 2020 is 2.5%, and no target GDP growth rate has been set this year. This paper assumes that the GDP growth rate is 6% and the CPI target growth rate is 3.5%, then the macro-prudential capital adequacy ratio of Bank A (.
C*= structural parameter ai× (Minimum capital adequacy ratio+reserve capital+systemically important additional capital+countercyclical buffer capital)
=1×[8%+2.5%+0.5%+0.5%×1+max（0.8*1*（16%-（6%+3.5%）），0）]
=11.5%+0.8*6.5%
=11.5%+5.2%
=16.7%
Therefore, the capital adequacy ratio of Bank A must be greater than or equal to 16.7%, and the capital and leverage items can be qualified, otherwise it will be rejected by one vote and rated as unqualified.
Judging from the calculation process and formula, structural parameters, systemic importance parameters and macroeconomic heat parameters are actually established coefficients, and systemically important additional capital, target GDP growth rate, target CPI growth rate, reserve capital and minimum capital adequacy ratio are basically out of the control of banks.
Therefore, if banks want to adjust the macro-prudential capital adequacy ratio (C*), they can only adjust the growth rate of broad credit. Take Bank A as an example, because the systemically important parameter × macroeconomic heat parameter is 0.8, which means that for every 1% increase in the growth rate of broad credit of Bank A, the regulatory requirements for capital adequacy ratio will increase by 0.8%, which is a strong constraint on the expansion of broad credit of banks.
At the same time, from another angle, under the condition that the actual capital adequacy ratio of banks is fixed, the assessment of macro-prudential capital adequacy ratio (C*) sets an implicit upper limit for the growth rate of generalized credit of banks. What is the upper limit? What is generalized credit? If we adjust it, we will wait until the next part of the balance sheet.
2. Assets and liabilities
This project examines three indicators: broad credit, growth rate of entrusted loans and growth rate of interbank liabilities.The corresponding scores of the three indicators are 60 points, 15 points and 25 points respectively. By controlling these three indicators, the central bank can match the growth rate of bank lending with M2 and control the proportion of interbank liabilities.
One thing to note here is that the central bank has divided financial institutions into different levels and corresponding different scoring standards. According to the different importance of banks, the central bank is divided into three levels: national systemically important institutions (N-SIFIs), regional systemically important institutions (R-SIFIs) and ordinary institutions (CFIs) (see Figure 44 for details).
(1) generalized credit
Generalized credit is the most critical and important item in the whole MPA assessment system, and the statistical caliber includes six items: loans, bond investments, equity and other investments, buy-back sales, deposit of funds from non-deposit financial institutions and off-balance sheet financing.
Among them, off-balance sheet financing is a new item that was newly included in the scope of broad credit in the first quarter of 2017. The reason for its inclusion is that in the past few years, many banks have turned to off-balance-sheet financing under the condition of limited on-balance-sheet credit line and capital adequacy ratio, and used off-balance-sheet financing to allocate credit and credit-like assets, so off-balance-sheet financing also plays the role of credit derivation to some extent.
Generalized credit under the new caliber = various loans+bond investment+equity and other investments+buy-back items+funds deposited in non-deposit financial institutions+(off-balance sheet wealth management balance-wealth management balance invested in cash and deposits)
At present, there are two main restrictions on the maximum growth rate of broad credit.First, the assets and liabilities are directly given, and N-SIFIs, R-SIFIS and CIFIs are required not to exceed the target growth rate of M2 by 20, 22 and 25 percentage points respectively.
After 2018, the government will not directly announce the target growth rate of M2. For example, in 2019, it stated that "the growth rate of M2 and social financing should match the nominal growth rate of GDP". According to the growth rate of M2 in the first half of this year, we expect the growth rate of M2 to be around 10.5% in 2020. According to the value of 10.5% this year, the growth rate of broad credit of various institutions can not exceed 30.5%, 32.5% and 35.5% at most.
The second is an implicit upper limit given by the macro-prudential capital adequacy ratio (C*), which we mentioned in the capital adequacy ratio assessment. The precondition of this implicit upper limit is that the actual capital adequacy ratio of the bank itself will remain unchanged in the short term, and the capital adequacy ratio assessment just meets the standard, that is, C * = C.
We made a simple calculation using the balance sheets of listed banks, as shown in the following figure. From the results, many banks’ actual growth rate of broad credit exceeds or approaches this implicit upper limit, and banks have great assessment pressure on this item.
Therefore, when faced with MPA assessment at the end of the quarter, banks have the incentive to reduce the year-on-year growth rate of generalized credit and achieve the goal of meeting the capital adequacy requirements.
So how can the broad credit be suppressed? Let’s go back to the components of broad credit.
1) The loans have a long term, and there is no circulation, so there is no way to suppress them;
2) Bond investment is mainly bond assets, and those with good liquidity can be thrown and pressed;
3) Equity and other investments mainly buy various asset management plans and brokerage collections, and banks will basically agree to expire or redeem before the end of the season, which can be pressed;
4) Deposits from non-deposit institutions and buy-back sales are mainly the money released by banks to non-banks, which can be suppressed;
5) Off-balance-sheet financing, banks will basically choose the category that expires before the end of the season when purchasing, which can be pressed;
Therefore, from the point of view, except for various loans, there is room for compression.
In order, bond investment can enjoy coupon, which is the last choice; Equity and other investments and off-balance sheet financing are basically promised to expire at the end of the quarter, and banks do not have to actively compress them. Therefore, once banks have the demand to reduce generalized credit, the first thing to bear the brunt is the money released to non-bank institutions, which also means that there will be greater pressure on non-bank funds at the end of the quarter.
To make matters worse, all kinds of asset management plans and securities firms’ pools and interbank financing basically promise to expire before the end of the quarter. Most of these securities firms’ pools and asset management plans and interbank financing adopt the method of maturity mismatch, which means that if they want to repay the bank’s principal and interest at the end of the quarter, they will either borrow money from the market or sell the bond assets with good liquidity, and the pressure on funds will be increased again, and the bond market may be greatly adjusted at the end of the quarter.
(2) Entrusted loan
The investigation of entrusted loans is the same as that of generalized credit, that is, the growth rate of entrusted loans of N-SIFIs, R-SIFIS and CIFIs banks is required not to exceed the target growth rate of M2 by 20, 22 and 25 percentage points respectively.
The reason why the entrusted loans are restricted is that in practice, many banks use entrusted loans to avoid the regulatory requirements.
Under normal circumstances, the entrusted loan funds are entrusted by enterprises, individuals and other clients to commercial banks to distribute funds to special lenders, and commercial banks only play the role of channels. In reality, many commercial banks use funds to issue entrusted loans by borrowing from securities firms for targeted asset management. Before the introduction of regulatory policies, entrusted loans were one of the important ways for commercial banks to invest in non-standard assets.
For example, Bank A first entrusts B brokerage to set up a targeted asset management plan. After the targeted asset management plan is established, the asset management plan entrusts another branch of Bank A to lend money to the financing company.
In this way, although the funds paid by Bank A to the financing company are nominally the funds of the targeted asset management plan, they are actually the funds of Bank A itself. Generally, most of the financiers here are the main customers of Bank A (such as real estate companies).
In this way, Bank A successfully circumvented the regulatory restrictions on loan investment and loan scale, and transformed the loan business into entrusted loan business or inter-bank business. Therefore, under the MPA supervision system, the regulatory authorities also restricted the growth rate of entrusted loans.
In addition to MPA’s restrictions on entrusted loans, strict financial supervision since 2017 and the Administrative Measures for Entrusted Loans of Commercial Banks promulgated later have imposed stricter restrictions on commercial banks’ non-standard investment through entrusted loans. It can be said that under the new management method, the investment mode of commercial banks by entrusted loans is completely blocked.
Under the influence of strict supervision, we can see that the year-on-year growth rate of entrusted loans in the market declined rapidly after 2017, and it entered a negative growth range after the management measures were officially implemented. Until now, the scale of entrusted loans has been declining. It can be said that at present, banks do not have any pressure of supervision and assessment on entrusted loans.
(3) Inter-bank liabilities
To understand the inter-bank liabilities, the most important thing is to understand the statistical caliber of inter-bank liabilities.
Before 2017, inter-bank liabilities mainly included inter-bank borrowing, inter-bank deposit, inter-bank loan, inter-bank agency payment, sell-back and other inter-bank liabilities after deducting settlement inter-bank deposits, which was limited by the upper limit of 33% in MPA assessment, so it was impossible to expand inter-bank liabilities on a large scale, especially in 2014-2016 when inter-bank business was booming.
Therefore, many banks began to absorb interbank funds with the help of interbank deposit certificates that were not included in interbank liabilities, and indirectly realized the expansion of interbank liabilities. However, with the prevalence of interbank regulatory arbitrage and the accumulation of liquidity risk, interbank deposit certificates, which were almost in a regulatory vacuum, have gradually attracted regulatory attention, and the public opinion that new and old deposits should be included in the regulatory scope is also rising.
Finally, in August 2017, the central bank formally proposed in the monetary policy implementation report that interbank deposit certificates issued by banks with assets of more than 500 billion yuan within one year will be included in the MPA interbank debt ratio index for assessment from the first quarter of 2018.
In May 2018, the central bank issued the Report on the Implementation of Monetary Policy in China in the First Quarter of 2018, and it is planned to include interbank deposit certificates issued by financial institutions with assets below 500 billion yuan in the MPA assessment in the first quarter of 2019, so far the interbank liabilities are basically complete.
We can also see that after strict financial supervision and interbank deposit certificates were included in the supervision system in 2017, the increase of interbank deposit certificates dropped significantly.
For the bank itself, after the path of unlimited expansion of inter-bank liabilities is completely blocked, the debt side of the bank pays more attention to retail deposits and residents’ wealth management, while the asset side will return to traditional assets such as loans due to strict investigation of inter-bank and wealth management idling.
3. Liquidity
Liquidity mainly includes liquidity coverage ratio (LCR), the proportion of net stable funds and compliance with the reserve system. Among them, the regulatory assessment requirements and standards of liquidity coverage ratio (LCR) and net stable capital ratio are basically the same as those in the banking supervision system, so I will not repeat them here.
Abiding by the reserve system, the reserve here is the statutory reserve, which mainly means to see whether the statutory deposit reserve of the bank in the reserve account meets the statutory requirements on time and whether there are losses such as mistakes. This item can basically get full marks.
4. Asset quality
There are two indicators under the asset quality assessment: non-performing loan ratio and provision coverage ratio, each accounting for 50 points. The score of provision coverage ratio is similar to that of China Banking and Insurance Regulatory Commission, with 150% as the standard value. When the bank’s provision coverage ratio is greater than 150%, the bank gets full marks; When it is between 100% and 150%, score 30-50 points; Less than 100%, get 0 points.
The NPL ratio is far from the standard of China Banking and Insurance Regulatory Commission. Unlike banking supervision, the central bank does not have a prescribed standard value, and its score is compared with the average value of the same type of institutions. For example, for R-SIFs and CFIs institutions, if the non-performing loan ratio of Bank A is lower than that of the same type of institutions, then it can get full marks; If it is above the average level but not more than 2%, score 30-50, otherwise score 0.
Let’s take an example to look at the calculation of this score. Assuming that the NPL ratio of a city commercial bank is 1.7%, the provision coverage ratio is 128%, and the average NPL ratio of banks in the same region and type is 1.74%, the NPL score of the bank is 50, while the provision coverage ratio is between 100% and 150%, and the score calculated by interpolation method is 30+(128%-100%) × (50-300). Finally, the bank’s asset quality score was 91.2(50+41.2), which was excellent.
As for the impact of these two assessments on the bank’s asset-liability behavior, we have made a detailed introduction in the banking supervision section, so I won’t repeat them here.
5. Pricing behavior, credit policy implementation and cross-border financing risk.
These three items are qualitative indicators in the MPA assessment system, and it is less difficult to reach the standard.Among them, the pricing behavior mainly depends on whether the bank’s interest rate pricing such as deposit and loan interest rate and Shibor conforms to the market order, and the general high probability is full score. The same is true for cross-border financing.
The credit policy is mainly to guide the credit invested by commercial banks to invest in the areas of banks’ intentions. For example, in 2018, the regulatory authorities indicated that the credit policy-oriented effect evaluation will increase the weight of micro-credit evaluation to 30% from 2018, focusing on guiding banking financial institutions to issue small and micro-enterprise loans with a single credit of 5 million yuan or less, as well as individual industrial and commercial households’ operating loans and small and micro-enterprise main operating loans.
Reporting/feedback
