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

Interbank deposit rate self-regulation management is being further strengthened. According to multiple banking industry insiders, recently some member banks participating in market interest rate pricing self-regulation meetings were asked to enhance management of interbank demand deposit rates. The latest requirements specify that the scale of interbank demand deposits with a size above 1.4% of the 7-day reverse repurchase (OMO) policy rate should generally not exceed 10% to 20% of the total at the end of each quarter.

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

Interbank Deposit Rate Self-Regulation “Patch”

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

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

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

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

Huatai Securities estimates that currently, the interbank deposit scale in the banking system is about 40 trillion to 50 trillion yuan, with interbank demand deposits around 25 trillion to 30 trillion yuan. Considering that some deposit rates already meet the latest self-regulation requirements, industry-wide estimates suggest that about 40% to 50% of these deposits could be adjusted downward, leaving roughly 10 trillion yuan of interbank demand deposits with room for rate reduction.

Main Cause: Capital Circulation Expansion

The reason for this further upgrade in self-regulation is related to the expansion of interbank capital circulation and re-emergence of arbitrage opportunities.

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

A bank liquidity trader told the Shanghai Securities News that this pattern allows interbank funds to circulate within the financial system, which can easily push up the scale of high-yield interbank deposits and weaken the effect of previous self-regulation efforts to lower banks’ liability costs. “From a regulatory perspective, one goal of further strengthening interbank deposit rate self-regulation is to reduce these arbitrage opportunities, lower banks’ motivation to attract liabilities through high-yield interbank deposits, and guide interbank funding pricing closer to policy rates,” the person said.

Impact on Bank Liability Structure and Bond Market

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

Wang Xianshuang stated that on one hand, after the decline of interbank demand deposit rates, the space for non-bank institutions to conduct deposit arbitrage via repos will significantly shrink, potentially reducing repo demand and shifting some funds toward short-term certificates of deposit or bonds; on the other hand, banks’ interbank deposit scales may temporarily contract, with some liabilities shifting to instruments like interbank CDs.

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

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

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