Original title: where will the bank structured deposits go under the "heavy fist" regulation? Source: Puyi Standard
I. status quo: what is the development of bank structured deposits during the transition period?
There is a lot of chaos in structured deposits, and supervision and control are strengthened.With the introduction of the 2018 "guidance on standardizing the Asset Management Business of Financial institutions" (hereinafter referred to as the "New regulations on Asset Management") and its supporting documents, as well as the increasing downward pressure on the macro-economy, bank structured deposits began to grow rapidly. However, the problem of non-compliance represented by pseudo-structured deposits emerges, banks take deposits at high interest rates through structured deposits from time to time, and the price of capital on the debt side of banks remains high for a long time. To this end, supervision has issued documents to regulate banks' structured deposit business, and issued a notice on standardizing the development of structured deposit business in October 2019, requiring all types of banks to speed up the rectification of non-compliant structured deposits and set an one-year transition period.
However, the sudden epidemic since 2020 has slowed down the pace of rectification and reform of bank structured deposits, and the problem of non-compliance of bank structured deposits has been on the rise. From January to April 2020, the scale of structured deposits increased for four consecutive months, and exceeded 12 trillion yuan for the first time in April. As a result, regulators stepped in again, issuing documents and window guidance in June, requiring banks to reduce the volume and price of structured deposits.
Table 1: regulatory requirements for banks' structured deposits since the new rules on asset management
Source: Puyi standard collation
Under the "heavy fist" of supervision and regulation, the structured deposit business of banks is becoming standardized.At the beginning of 2020, due to the influence of COVID-19 's epidemic, the central bank took many measures to maintain reasonable and abundant capital, which also led to a big deviation between the interest rate of funds and the interest rate of structured deposits. on the contrary, high-cost active general liabilities such as structured deposits have become an important carrier of capital arbitrage, and the scale is growing rapidly. At the end of April, structured deposits in Chinese banks reached 12.14 trillion, the highest in recent years.
The excessive growth of structured deposits has attracted great attention from regulators. In order to reduce the financing costs of the real economy, prevent banks from vicious competition for deposits and crack down on capital idling arbitrage, regulation provides window guidance to joint-stock banks while issuing a series of documents. As a result, structured deposits of all types of banks stood at 8.98 trillion at the end of September, the lowest level since the new regulations, and banks are expected to meet the pressure reduction targets set by regulators by the end of this year.
Figure 1: the evolution of bank structured deposits from January 2015 to September 2020
Source: people's Bank of China, Puyi Standard arrangement
Structured deposits have fallen by 1.82 trillion during the year.According to the latest data on the size of bank structured deposits, by the end of September 2020, bank structured deposits were 8.98 trillion, down 1.82 trillion from the beginning of the year, a drop of 16.84 per cent, and a drop of 3.16 trillion, or 26.07 per cent, from the peak in April. Among them, Chinese-funded small and medium-sized banks are the main force of structural deposit pressure drop, which at the end of September was 1.42 trillion lower than at the beginning of the year, a drop of 20.83%. Specifically, the structural deposits of Chinese-funded small and medium-sized banks are still dominant in the scale of bank structural deposits. at the end of September 2020, the structural deposits of Chinese small and medium-sized banks were 5.4 trillion, accounting for 60.14%. Among them, the proportion of unit structural deposits is the highest, reaching 70%. By comparison, at the end of September, the size of structured deposits in large Chinese banking institutions was 3.58 trillion, accounting for 39.86%, down 400 billion from the beginning of the year, or 10%, of which there was little difference between individual and unit structured deposits.
Figure 2: the composition of bank structured deposits from January 2015 to September 2020
Source: people's Bank of China, Puyi Standard arrangement
The volume and price of structured deposits in joint-stock banks are the highest.In terms of the number of products, by the end of September 2020, all types of banks had co-existing structural deposits.[The screening conditions are: structural, capital preservation and capital preservation floating RMB banking products that still exist on September 30, 2020.]10945, of which the stock bank has the largest number of surviving products, reaching 7356, and the highest expected return of 4.31 per cent is also reported on average for its structured products. Considering the situation of the national development of joint-stock commercial banks and the fund-raising ability of a single product, the actual fund-raising scale of structured deposit products of joint-stock banks will be higher than that of other types of banks. This may also be an important reason why regulators mainly put forward a clear target for the pressure drop of structured deposit products for joint-stock commercial banks during the window guidance.
Figure 3: the number and income of existing structural deposits in various types of banks at the end of September 2020
Source: Puyi Standard
Ping an BankThere is no dust in the number of products.Industrial bankProduct revenue ranks first.In terms of the top 10 banks in terms of the number of existing structured deposit products at the end of September 2020, Ping an Bank ranked first with 5919 products, while Societe Generale ranked first among the top 10 institutions on average, reaching 4.61 per cent. At present, after the supervision window guides the stock banks to reduce the structural deposit products, there are still differences between the stock banks, and the structural deposit pressure of some stock banks is still large.
Figure 4: the top ten banks in the number of structured deposits at the end of September 2020
Source: Puyi Standard
II. Looking back: a review of the development of structured deposits
(1) the development of structured deposits
According to the definition of structured deposit products in the Standard for Statistical Classification and coding of deposits (for trial implementation) issued and implemented by the people's Bank of China on August 27, 2010, structured deposits refer to deposits embedded in financial derivatives absorbed by financial institutions by linking them to the fluctuations of interest rates, exchange rates, indices, etc., or to the credit status of an entity. A business product that enables depositors to obtain higher returns on the basis of certain risks.
In short, structured deposits are a kind of deposit products, but what distinguishes them from traditional deposit products is that these products are embedded with financial derivatives-options. For investors, the purchase of structured deposit products can obtain two aspects of income, one is the fixed interest generated by the product deposits, and the other is the investment income linked to the fluctuation of the underlying asset price.
Figure 5: composition of structured deposits
Source: Puyi standard collation
From the perspective of the development of structured products, overseas structured products have been developed for decades. On March 18, 1987, Chase Bank of America issued the world's first capital preservation index certificate of deposit. As for the domestic, the development of structured products is relatively late due to the lag of the development of domestic derivatives. Structured products were introduced into the domestic market at the beginning of this century. In 2002, foreign banks first launched structured products in China. China Everbright BankThis was followed by the introduction of foreign currency structured deposits in September 2002.
From the point of view of the causes of structured deposit products, it is actually the inevitable outcome of the domestic interest rate marketization.For a long time, deposits have always been the ballast stone of commercial banks, and due to the influence of the market environment of low deposit interest rates at the end of the 20th century and the market-oriented reform of foreign currency interest rates since 2000, commercial banks are under great pressure to absorb deposits. At the same time, with the gradual promotion of the marketization of domestic interest rates, products represented by money funds have realized the "deposit relocation" of commercial banks through more attractive market-oriented interest rates. The interest rate pricing of bank deposits is restricted by the self-regulatory pricing mechanism. Therefore, under the two-track interest rate system, Chinese banks began to follow the example of foreign banks to sell structured deposit products, and continue to absorb deposits through capital preservation, large certificates of deposit and so on.
In March 2004, the interim measures for the Administration of Derivatives Trading in Financial institutions began to be implemented, marking the establishment of the legal status of derivatives in China. In September 2005, the China Banking Regulatory Commission issued the interim measures for the Administration of personal Finance Business of Commercial Banks, which brought structured deposit business into the category of integrated financial management business, which made the legal status of structured products initially clear. Since then, until the release of the draft of the new regulations on asset management, the structured deposit business has not been popular in China.
However, with the introduction of financial deleveraging and risk prevention policies since 2016, the traditional sources of funds of banks have been limited to a certain extent, and structured deposits have gradually become a channel for commercial banks to obtain general funds. At the same time, the phenomenon of idle funds and arbitrage chaos caused by the gradual outbreak of domestic interbank business has attracted the attention of supervision. In 2018, the interbank certificate of deposit was gradually included in the MPA interbank debt ratio assessment, and the interbank supervision became stricter, which also reduced the ability of commercial banks to increase deposits through interbank business expansion. The introduction of the new rules and supporting rules of asset management has become an important factor to promote the development of structured deposits by banks.
The new rules of asset management require banks to break the transition from just exchange to net worth. Banks urgently need structured deposits as alternative products to cope with the pressure of capital diversion and meet the risk preference of capital preservation customers. On the other hand, the advantages of structural deposits, such as not being bound by the new rules of asset management, including the scale of deposits in the balance sheet, and their returns are higher than those of general deposits, make banks actively develop structured deposits as new deposit-taking tools in response to the current situation of intensified deposit competition. small and medium-sized banks are particularly enthusiastic. As can be seen from figure 6 below, the scale of structured deposits has increased rapidly since 2017.
Figure 6: Chronicle of structured deposits from January 2015 to September 2020
Source: Puyi standard collation
In 2020, under the impact of the COVID-19 epidemic, the central bank took many measures to maintain reasonable and ample capital, and the cost for institutions to obtain funds continued to decline, but the yield on structural deposits remained high. The arbitrage space generated by the reduction in financing costs has led to a substantial increase in structured deposits. As can be seen from figure 7 below, the center of the average expected highest yield of bank structured deposit products has moved up significantly since 2020. At the same time, new structural deposits issued by various types of banks have increased, especially in April 2020. The large volume of structured deposit products by joint-stock banks has become an important driver to push the scale of structured deposits to a new high. However, as regulators once again issued documents to regulate banks' structured deposit business, especially in June, the regulatory window instructed share banks to reduce the size of structured deposits, the number of new structured deposit products issued by various types of banks declined, and the average expected highest yield on structured deposits also moved steadily down.
Figure 7: evolution of the quantity and yield of newly issued structured deposit products from May 2018 to September 2020
Source: Puyi Standard
(2) the problems existing in the development of structured deposits and their causes
The emergence and evolution of structured deposits has its inevitability. Structured deposits also enrich the financial product system and create more opportunities for banks and investors, but its rapid development also brings some problems and hidden dangers.
On the one hand, the "fake structural deposits" in the structured deposit market have been banned repeatedly, and high interest rates have increased the financing costs of the real economy.Pseudo-structured deposits are mainly expressed in two ways: first, banks set impossible exercise conditions on the options of structured deposits, and the products themselves are not truly linked to derivatives. Such pseudo-structured deposits have no substantial structural operations, and the money absorbed by banks is likely to be used for other investments rather than into derivatives markets. Second, banks design derivatives linked to structured deposits into one-way trigger exercise. Through the clause design, to ensure that the exercise conditions of the linked derivatives fall within the set range with a great probability, the highest rate of return is almost 100% of the deterministic events, and the original floating income of the derivatives has essentially become fixed income. For example, the current price of Brent crude oil is 40 yuan per barrel, but the linked condition is up to 300 US dollars per barrel and so on. Such structured deposits have essentially become fixed-income "rigid payment" products, which do not meet the requirements of the new asset management rules to break the new exchange requirements. At the same time, some banks collect deposits with high interest through structured deposits, which undoubtedly drives up the cost of the bank's debt end. Under the influence of the price mechanism, the rise of the interest rate on the bank's debt side will be transmitted to the bank asset end, which is not conducive to reducing the financing cost of the real economy, and it is difficult to alleviate the financing difficulties and expensive problems of small and medium-sized enterprises.
For "pseudo structural deposits", before the new rules of asset management, in order to obtain general deposit funds, some small and medium-sized banks without derivative qualifications entrusted large banks with qualifications to carry out structural deposit business, which essentially did not embed financial derivatives in the product structure, but achieved the expected rate of return of the products in disguise through FTP in the bank, thus small and medium-sized banks achieved the goal of collecting deposits at high interest rates. After the new rules of asset management, the channel behavior of the above-mentioned small and medium-sized banks-large banks has been effectively curbed, but because the new rules of capital management have restricted the development of capital preservation and financial management of banks, under the pressure of liquidity, some banks, especially small and medium-sized banks, still resort to structural deposits. Because the structural deposit customers of banks are basically large customers, they are more sensitive to the fluctuation of yield, in order to prevent the loss of customers. In particular, some banks with weak customer stickiness have to issue a large number of "fake structural deposits".
On the other hand, the excessive growth of structured deposits breeds capital idling arbitrage, which is not conducive to the stability of the financial system.Since 2020, in order to deal with the impact of the sudden epidemic on the real economy, the central bank has increased counter-cyclical regulation, successively by reducing the deposit reserve ratio, increasing the rediscount amount of loans and other measures to alleviate the financing difficulties of enterprises and support the development of the real economy. However, liquidity easing also makes the interest rate in the bond market Xiaobai Maimai Inc market significantly lower, while the structural deposit interest rate remains at a high level, which provides conditions for some institutions to carry out bill-structured deposit arbitrage, and the phenomenon of idle funds in the financial system is on the rise. in turn, it increases the accumulation, spread and spread of financial risks in the financial system, which is not conducive to the stability of the financial system.
To this end, in October 2019, the CBIC issued the Circular on further standardizing the structured Deposit Business of Commercial Banks, and set an one-year transition period. at the same time, supervision will carry out window guidance in June 2020. the problem of false structural deposits and structured deposit fund arbitrage has been alleviated to a certain extent.
III. Prospect: analysis on the development trend of bank structured deposits
Generally speaking, the rise of structured deposits is that under the background of interest rate marketization, the two-track interest rate system promotes banks to increase the issuance of structured deposits to absorb general funds. In recent years, the new rules of financial risk prevention and deleveraging superimposed asset management make banks rely more on structural deposits to meet the needs of low-risk customers and obtain deposit funds at the same time. Further, the 2020 epidemic led to a decline in institutional financing costs and high interest rates on structured deposits, resulting in arbitrage space that eventually pushed structured deposits to record highs.
However, under the influence of the notice on further regulating the structured Deposit Business of Commercial Banks, the Circular on strengthening the Management of Deposit interest rates, and the guidance of the regulatory window, by the end of September 2020, the structured deposit business of banks has dropped to 8.98 trillion, falling back to the level before the new regulations on asset management, and there is no danger of achieving the regulatory pressure reduction target by the end of this year.
For the future development of bank structured deposit business, this paper believes that the short-term structural deposit pressure drop will have a certain impact on the liquidity of small and medium-sized banks, while in the medium to long term, the number, scale and product yield of structured deposits may show a downward trend.
In the short termSince small and medium-sized banks account for more than 60% of the structural deposits, and the proportion of unit structural deposits of small and medium-sized banks is about 70%, and if the structural deposits of small and medium-sized banks are reduced too quickly, it is bound to reduce the structural deposits of small and medium-sized banks. Small and medium-sized banks face passive asset selling, resulting in greater liquidity pressure. Compared with large national banks, small and medium-sized banks themselves lack advantages in cross-regional operations, derivatives management qualifications, derivatives professionals, and so on. The pressure drop in structured deposits may promote some small and medium-sized banks to strive to obtain derivatives trading business qualifications, tap investor demand, promote product innovation, enhance deposit absorption capacity, and promote the growth of core deposits. However, regulatory pressure on structured deposits will also cause some small and medium-sized banks to abandon structured deposits and focus on basic deposit and loan businesses. In the long run, this will help to reduce the cost of bank financial management and on-balance sheet deposits, and then reduce the financing costs of physical enterprises.
In the medium to long termThe number, size and yield of structured deposit products are expected to fall. In fact, before the outbreak of the epidemic in 2020, the issuance of structured deposits by banks was already at a low level, the size of structured deposits had dropped to a new low of 9.6 trillion at the end of 2019, and the average highest reported yield on structured deposits also gradually fell. However, due to the factors of the epidemic, lower interest rates on funds and higher yields on structured deposits in the context of loose liquidity in the market have spawned institutional arbitrage, which not only pushed up the scale of structured deposits, but also attracted the focus of regulatory attention. At present, the size and yield of structured deposits have also fallen from their previous highs. The economic downturn superimposed cost reduction targets may drive structural deposit yields to continue to decline, and the incentive for commercial banks to carry out this business may be further weakened. However, in the context of bank net worth transformation, structured deposits will still be an important means for banks to undertake the financial choice of investors with low risk appetite, and it is still unknown whether customers can accept real structured deposit products.
In the long runStructured deposits and structured financial products are designed flexibly and can meet the diversified investment and financial needs of bank clientele. With the increasing standardization of supervision, structured deposits and structured financial products of commercial banks are expected to become new profit growth points of commercial banks in the future. With reference to international experience, we can find that structured products have become an important part of the international capital market and financial derivatives market, and still in the process of rapid growth, domestic structured products still have a lot of room for development.