Buckets of China’s interbank market under stress

On May 24, Chinese regulators announced to take over Baoshang Bank, a mid-sized bank from the Inner Mongolia. While all retail deposits were guaranteed by a 100% by the People’s Bank of China (PBoC), it was announced that interbank deposits will be fully protected only below RMB 50 m and amounts above on a case-by case basis. This surprised market participants strongly.

Highlights:

  • Back in late May 2019, China’s regulators took control of Baoshang Bank, a mid-sized bank from Inner Mongolia.
  • However, regulators decided not to guarantee 100% of parts of the liabilities, which was unprecedented, and lead to a broad-base reconsidering of counterparty risks of smaller regional banks, asset managers and brokers.
  • In some buckets of the interbank market, short-term interest rates spiked recently and some smaller banks could not cover their liquidity needs.
  • While the PBoC already stepped in, contagion fears nevertheless spread. We do not doubt the PBoC’s ability to calm the situation. However, as smaller banks are an important provider of credit to SMEs, the market stress comes at an unfortunate time, given the already heightened US-China trade war concerns.

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BUCKETS OF CHINA’S INTERBANK
MARKET UNDER STRESS

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