Manual interest supplement, agreement deposit, bond market
In April, the Self-Regulatory Mechanism for Market Interest Rate Pricing issued the Initiative on Prohibiting the Use of "Manual Interest Supplement" to Collect Deposits with High Interest Rates to Maintain the Order of Competition in the Deposit Market, which clearly requires banks not to promise or pay back interest to customers in any form that exceeds the authorized upper limit of the deposit interest rate. At the same time, since April, many city commercial banks have started a new round of deposit interest rate cuts. How does the strict supervision of "manual interest supplement" and the reduction of deposit interest rates affect the cost of bank liabilities? What changes will be brought to the money and bond markets? This paper focuses on this.
How does the strict supervision of "manual interest payment" affect the cost of bank liabilities? It is estimated that under the condition that the proportion of agreed deposits in corporate demand deposits is 35%, 50% and 65% respectively, the deposit cost ratio of all listed banks will fall by 12.5BP, 8.7BP and 4.6BP respectively, and the debt cost ratio will fall by 9.2BP, 6.4BP and 4.6BP respectively.
How does the strict supervision of "manual interest payment" affect the bond market? From the point of view of "price". The prohibition of "manual interest payment" will reduce the overall debt-to-cost ratio of banks. We have calculated that under the circumstance that the proportion of agreement deposits to demand deposits is 35%, 50% and 65%, the prohibition of "manual interest supplement" may cause the bottom of the 10-year treasury bond yield to fall by 3.5bp, 2.4bp and 1.3bp respectively.
The strict supervision of "manual interest compensation" has a more direct impact on "quantity". The above factors are reflected in the money market, which is reflected in the lack of liabilities of banks, the strong demand for the issuance of interbank certificates of deposit, the decline in the scale of financial outflows, the abundance of non-bank funds, the large scale of goods-based financing as an important source of non-bank funds, and the stratification of funds at a low level; Reflected in the cash bond market, after the sharp increase in the scale of wealth management, the demand for bond purchases has increased, and the scale of net purchases of all bonds and net purchases of interbank certificates of deposit in April were at a seasonal high level.
The reduction in deposit rates is less indicative of the bottom of the bond market. Historical data show that the yield of 3-year treasury bonds is usually not lower than the cost of bank deposits, but the current yield of 3-year treasury bonds is around 2%, which is lower than the cost of bank deposits, which is mainly due to the deep strengthening of the participation of off-balance sheet funds in the bond market since the beginning of this year.
In April, the Self-Regulatory Mechanism for Market Interest Rate Pricing issued the Initiative on Prohibiting the Use of "Manual Interest Supplement" to Collect Deposits with High Interest Rates to Maintain the Order of Competition in the Deposit Market, which clearly requires banks not to promise or pay back interest to customers in any form that exceeds the authorized upper limit of the deposit interest rate. At the same time, since April, many city commercial banks have started a new round of deposit interest rate cuts. How does the strict supervision of "manual interest supplement" and the reduction of deposit interest rates affect the cost of bank liabilities? What changes will be brought to the money and bond markets? This paper focuses on this. I. How Does the Strict Supervision of "Manual Interest Supplement" Affect the Cost of Bank Liabilities Although some operations related to "manual interest supplementation" also exist in corporate fixed deposits and individual deposits, from the perspective of different types of deposit cost rates of banks, deposit pricing behaviors that exceed the self-discipline limit such as "manual interest supplement" may exist in corporate demand deposits at most. In recent years, the competition of financial institutions for corporate deposits, especially corporate demand deposits, has intensified, which has led to the continuous rise in the cost rate of corporate demand deposits. From the data ratio of the changes in the deposit cost rates of A-share listed banks in 2020, it can be found that since 2020, the cost rates of individual time deposits and corporate time deposits of A-share listed banks have started to decline, and the cost rate of personal demand deposits has also declined after the regulators strengthened the interest rate supervision of innovative deposit products such as smart deposits in 2021. At the same time, the cost rate of corporate demand deposits continued to rise. At the end of 2023, the cost ratio of corporate demand deposits of A-share listed banks was close to a high of 1.3%. This situation has also led to the average cost ratio of deposits of A-share listed banks in 2023 to surpass the average cost ratio of retail deposits again.
Judging from the current interest rates of various types of corporate demand deposits, the current corporate demand deposits mainly include general corporate demand deposits and agreement deposits. In May 2023, under the requirements of the self-regulatory mechanism, the upper limit of the agreement deposit interest rate has been adjusted from the previous benchmark interest rate plus 65BP to the benchmark interest rate plus 10BP (for large state-owned banks) or 20BP (for other banks). 》[1]。 Under the relevant requirements of the self-regulatory mechanism, in 2023, the cost ratio of corporate demand deposits of many banks will exceed the upper limit of the agreed deposit interest rate of such banks. This means that there are still many banks that break through the self-discipline mechanism of interest rates through "manual interest supplement" and innovative deposit varieties.
Considering that banks do not have specific deposit classification data in corporate, retail, demand and time deposits, combined with the above analysis, in order to better estimate the potential impact of the strict supervision of "manual interest supplement" on the cost ratio of banks' liabilities, we use the data of the 2023 annual reports published by banks to make static calculations, and make a series of assumptions: Hypothesis 1: Considering that the cost rate of corporate time deposits is relatively normal, the cost rate of corporate demand deposits has soared significantly. At the same time, the operation of "manual interest payment" is mostly concentrated in the corporate deposits of large enterprises. Therefore, assuming that the "manual interest supplement" is concentrated in the current deposits of enterprises, there is no "manual interest supplement" in corporate time deposits.
Hypothesis 2: There are only two types of corporate demand deposits, one is ordinary corporate demand deposits, and the interest rate is 0.2% of the current demand deposit interest rate of most banks; The second is agreement deposits, and due to the fierce competition for high-interest deposits of corporate demand deposits, all banks adopt the highest interest rate allowed by the self-discipline mechanism to solicit deposits for agreement deposits. That is, large state-owned banks adopt an agreed deposit interest rate of 1.25% (1.15% + 10BP), and joint-stock banks and local small and medium-sized banks adopt an agreed deposit interest rate of 1.35% (1.15% + 20BP). At the same time, the behavior of exceeding the upper limit of the self-discipline pricing mechanism in corporate demand deposits is limited to the behavior of "manual interest payment". Assumption 3: A-share listed banks that publish the relevant deposit cost ratios are representative of the overall banking situation. At the same time, there are three situations in which the proportion of agreed deposits of all banks exists: under the benchmark proportion scenario, the agreed deposits account for 50% of the current deposits of enterprises; In the scenario of the lowest proportion, the agreed deposit accounts for 35% of the company's demand deposit; In the highest proportion scenario, the agreed deposits account for 65% of the company's demand deposits. The above ratio is mainly based on our previous calculation of the proportion of A-share listed banks' agreed deposits in corporate demand deposits during the reduction of the agreed deposit rate in May 2023.
Under the above assumptions, we estimate the impact of strict supervision of "manual interest supplement" on the cost of bank deposits and the cost of liabilities under different scenarios. IN THE BENCHMARK PROPORTION SCENARIO, THE DEPOSIT COST RATIO OF ALL LISTED BANKS WILL FALL BY 8.74BP, THE DEBT COST RATIO WILL FALL BY 6.45BP, THE DEPOSIT COST RATIO OF LARGE STATE-OWNED BANKS, JOINT-STOCK BANKS, AND LOCAL SMALL AND MEDIUM-SIZED BANKS WILL FALL BY 5.88BP, 16.48BP AND 3.74BP RESPECTIVELY, AND THE DEBT COST RATIO WILL FALL BY 5.11BP, 10.61BP AND 2.49BP RESPECTIVELY. IN THE LOWEST PROPORTION SCENARIO, THE DEPOSIT COST RATIO OF ALL LISTED BANKS WILL FALL BY 12.48BP, THE DEBT COST RATIO WILL FALL BY 9.22BP, THE DEPOSIT COST RATIO OF LARGE STATE-OWNED BANKS, JOINT-STOCK BANKS, AND LOCAL SMALL AND MEDIUM-SIZED BANKS WILL FALL BY 9.69BP, 21.85BP AND 7.28BP RESPECTIVELY, AND THE DEBT COST RATIO WILL FALL BY 8.42BP, 14.07BP AND 4.84BP RESPECTIVELY. In the scenario of the highest proportion, the deposit cost ratio of all listed banks will fall by 4.64BP, the debt cost ratio will fall by 3.43BP, the deposit cost ratio of large state-owned banks, joint-stock banks, and local small and medium-sized banks will fall by 2.45BP, 11.12BP and 0.67BP respectively, and the debt cost ratio will fall by 2.12BP, 7.16BP and 0.45BP respectively. It is not difficult to find that the strict supervision of "manual interest supplement" has the greatest impact on the deposit and debt cost ratio of joint-stock banks.
It should be pointed out that, based on our assumptions above, according to the calculation, in the scenario of the lowest proportion of agreed deposits, the benchmark proportion scenario and the highest proportion scenario, the overall "manual interest payment" overpayment scale of A-share listed banks in 2023 will be 201.781 billion yuan, 141.227 billion yuan and 75.008 billion yuan respectively. If the subsidy for all deposits involving "manual interest supplement" is calculated as 100BP, then the scale of deposits of listed banks involved in the strict supervision of "manual interest supplement" will be 20.18 trillion yuan, 14.12 trillion yuan, and 7.5 trillion yuan respectively under the three scenarios; If calculated according to the assumption that the subsidy scale of all deposits involving "manual interest supplement" is 150BP, then the scale of deposits of listed banks involved in strict supervision of "manual interest supplement" will be 13.45 trillion yuan, 7.06 trillion yuan and 3.75 trillion yuan respectively under the three scenarios. Among them, the maximum possibility is that the subsidy for "manual interest supplement" under the benchmark scenario is 100BP to 150BP, so that the scale of deposits of listed banks involved in strict supervision of "manual interest supplement" will reach 7.06 trillion yuan to 14.12 trillion yuan.
Taking into account the estimated size of corporate and individual deposits of the sample listed banks at the end of 2023, the size of deposits of all depository companies, non-financial institutions and households accounted for 65.53%. Then the scale of all deposits involved in the strict supervision of "manual interest supplement" may reach 10.77 trillion yuan to 21.55 trillion yuan. 2. How does the strict supervision of "manual interest compensation" affect the bond market? After the "manual interest supplement" was strictly regulated, the yield on bank deposits fell. From the perspective of "price", deposits are the liabilities of banks, and changes in deposit interest rates will change the bank's debt cost ratio, bonds are the bank's investable assets, and bond yields are part of the bank's asset returns. Strict supervision of "manual interest supplement" will reduce the overall debt cost ratio of banks, thereby easing the pressure on banks' interest margins. Judging from the data, the average trend of the interest-bearing debt cost ratio of listed banks is roughly consistent with the trend of the 10-year treasury bond yield. Based on the results of the above calculation of the impact of the strict supervision of "manual interest supplement" on the debt cost of listed banks, we further calculate the regression results of the average 10-year treasury bond yield and the average debt cost ratio of listed banks since 2010: under the three circumstances where the proportion of agreed deposits to demand deposits is 35%, 50% and 65%, the impact of the prohibition of "manual interest supplement" on the interest-bearing debt cost ratio of listed banks is -9.22bp, -6.45bp and -3.43bp respectively. It may affect the bottom of the 10-year Treasury bond yield to fall by 3.5bp, 2.4bp and 1.3bp respectively.
From the perspective of "volume", the yield of bank deposits has declined, residents' funds have flowed from deposits to non-bank institutions such as wealth management and commodity bases, bank deposits have lost, and the scale of net financing of large banks has declined, and the average daily net financing scale of large banks has dropped to 3.01 trillion yuan in April, the lowest level since the beginning of this year, while the scale of cargo base and wealth management in April is larger, and the share of cargo base in April remains above 12 trillion shares, a year-on-year increase of 14%, and the increase is greater than the same period in 2022 and 2023. The balance of cargo-based reverse repurchase is also greater than the seasonal level; In April, the scale of wealth management was 27.90 trillion yuan, an increase of 2.27 trillion yuan from March, and the growth scale was also significantly higher than the level of the same period from 2021 to 2023, and the monthly net investment scale of wealth management funds decreased to 54.6 billion yuan. The above factors are reflected in the money market, which is reflected in the lack of liabilities of banks (especially large banks), the strong demand for the issuance of interbank certificates of deposit, the abundant non-bank funds, and the large scale of goods-based financing as an important source of non-bank funds, GC007 and R007 are approaching DR007, and the capital stratification is at a low level; Reflected in the cash bond market, after the sharp increase in the scale of wealth management, the demand for bond purchases has increased, and the scale of net purchases of all bonds and net purchases of interbank certificates of deposit in April were at a seasonal high level.
3. How does the decline in deposit rates affect the bond market? In addition, we have observed that since April, many city commercial banks have started a new round of deposit rate cuts, and the 3-year and 5-year time deposit rates of some banks have remained flat or even "inverted". Judging from the impact of the deposit rate reduction in the previous period, since 2022, major banks have carried out four rounds of deposit rate reductions, and the medium and long-term (2-year to 5-year) time deposit interest rates have fallen even more, and the deposit rate reduction may not cause the 10-year treasury bond yield to fall in the short term. From a principled point of view, the decline in deposit interest rates needs to be transmitted to the decline in the cost of bank liabilities in order to boost the downward trend of bond market interest rates, but due to the prominent phenomenon of deposit regularization, which is reflected in the liability side of banks, from 2022 to 2023, the deposit cost rate of listed banks will rise instead of falling. Based on the 2023 annual report, the deposit cost rate of listed banks is 2.18%, according to the above calculation, under the benchmark scenario, the strict supervision of "manual interest supplement" will cause the deposit cost rate of listed banks to fall by 8.74BP, so it is estimated that the deposit cost rate of listed banks may fall to around 2.1% after the strict supervision of "manual interest supplement", the overall duration of deposits is usually less than 3 years, the current 3-year treasury bond yield is around 2%, and the bond market yield has been lower than the bank deposit cost. This is mainly due to the deepening of the participation of off-balance sheet funds in the bond market since the beginning of this year, the scale of net bond purchases by insurance, wealth management and other institutions is at a seasonal high level, and the scale of bond transactions by funds is also relatively large. In the context of the deepening of the participation of off-balance sheet institutions in the bond market, the reduction of deposit interest rates will weaken the constraints on the bond market, but after the decline in the attractiveness of deposits, deposit funds may flow out to non-bank institutions or be bullish on the bond market in the medium term.
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