New rules can control shadow banking: Moody’s

China’s newly proposed regulations for commercial banks’ liquidity risk is “credit positive” for banks as it will help curtail shadow banking, according to a report international ratings agency Moody’s Investors Service sent to the Global Times on Monday.

The China Banking Regulatory Commission (CBRC) on Wednesday published for public comment a draft revision of liquidity risk regulations for commercial banks.

The regulations include a liquidity matching ratio (LMR) for banks’ asset-liability management.

According to the new liquidity regulations, the LMR is a matching criterion for different fund sources.

For example, customer deposits with a residual maturity shorter than 12 months have an LMR of 70 percent, which can cover assets (such as loans and interbanking lending) with a residual maturity shorter than one year.

Funds with a residual maturity longer than one year have a 100 percent LMR, which will cover any type of assets, while those with a maturity shorter than three months, except for customer deposits, have an LMR of 0 percent, meaning that they can’t be used to invest in any assets.

According to the Moody’s statement, these regulations will “reduce banks’ reliance on short-term market funding while encouraging their efforts to attract and retain customer deposits.”

Domestic banks have in the past used short-term market funding for longer-maturity investment, known as shadow banking.

Earlier data also from Moody’s showed that China’s shadow banking sector reached a scale of about 64.5 trillion yuan ($9.75 trillion) in 2016, up 21 percent year-on-year. But the sector’s growth has slowed, compared with 30 percent growth in 2015.