Recently, the official account of the self-regulation mechanism of market interest rate pricing released the Initiative on Optimizing the Self regulatory Management of Non bank Interbank Deposit Interest Rate (hereinafter referred to as the Initiative) and the Self regulatory Initiative on Introducing "Interest Rate Adjustment Basket Clauses" in the Deposit Service Agreement, which incorporated the interest rate of non bank current deposits into the self-regulation management, and proposed that the bank should add "Interest Rate Adjustment Basket Clauses" in the deposit service agreement signed between the customer and the bank to ensure that during the duration of the agreement, the adjustment of the listing interest rate of bank deposits or the internal authorized upper limit of deposit interest rate can be reflected in the actual deposit business according to the agreement in a timely manner. Both initiatives came into effect on December 1st. So, what impact will the two initiatives have on the market as they come into effect? Liao Zhiming, Assistant Director and Chief Fixed Income Analyst of Huayuan Securities Research Institute, predicts that the interest rates for non interbank current deposits will be fully reduced to the central bank's 7-day reverse repo rate or below. According to market analysts, similar to the initiative released in April to prohibit the maintenance of competitive order in the deposit market through manual interest rate and high interest deposit collection, although this regulation is an initiative, the pricing behavior norms for non interbank deposits will be strictly enforced. After standardizing the pricing behavior of general deposits in April, non interbank deposits increased significantly, and there were some distortions in the pricing of non interbank deposits. This regulation targets non interbank deposits, achieving full coverage of bank deposits and effectively reducing the cost of bank liabilities, "said the market insider. Non interbank current deposit interest rate: with the central bank's 7-day reverse repo rate as the upper limit. This initiative clarifies that "non interbank deposits" refer to interbank deposits absorbed by commercial banks from non bank financial institutions (including non corporate products). Among them, non bank financial institutions refer to financial institutions that hold financial institution licenses other than banks, including but not limited to financial infrastructure institutions, securities companies, fund companies, insurance companies, commercial bank wealth management subsidiaries, finance companies, and insurance asset management companies. As of the end of October 2024, the balance of non interbank deposits in financial institutions reached 31.2 trillion yuan, of which the non interbank demand scale may reach 15 trillion yuan. Among them, the deposit balance of non deposit financial institutions in the four major banks reached 15.4 trillion yuan, while that of small and medium-sized banks reached 14.8 trillion yuan. In recent years, the balance of non interbank deposits has significantly increased due to the diversion of personal current deposits by monetary funds and cash management wealth management products. Liao Zhiming analyzed that individuals who purchase monetary funds and cash management wealth management products (both of which are cash products) have their personal deposits diverted, and cash products are then deposited back into banks or allocated interbank certificates of deposit at higher interest rates, which is equivalent to converting personal deposits into non interbank deposits or interbank certificates of deposit. Banks offer higher deposit interest rates for cash products, which increases the arbitrage space between general deposits and non interbank deposits, and instead tends to accelerate the loss of personal current deposits. So, with the "Initiative" requiring the inclusion of non interbank deposit interest rates in self regulatory management, what impact will it have on the pricing of non interbank demand deposits? According to Liao Zhiming's analysis, it is unreasonable for non interbank demand deposits to have a term of only one day and an interest rate higher than the central bank's 7-day reverse repo rate. The self-discipline mechanism requires that the pricing of non interbank deposits be reasonably determined based on the 7-day reverse repurchase operation interest rate in the open market, while deposit self-discipline management is for interest rate upper limit management. Considering that the term of demand deposits is significantly shorter than 7 days, it is expected that the central bank's 7-day reverse repurchase interest rate will be the upper limit of the non interbank demand deposit interest rate. After this regulation, we expect the interbank current deposit interest rate of financial infrastructure institutions to drop to around 0.35%. The upper limit of the non interbank current deposit interest rate is the central bank's 7-day reverse repo rate, which is currently 1.5%. The current range for pricing non interbank current deposits is 0% to 1.5%. Banks can try to lower the interbank current interest rate as much as possible to control debt costs. We expect that the interest rate for non interbank current deposits will drop to 1.5% or below across the board Liao Zhiming told the Financial Times reporter that in the future, the upper limit of interest rates for non bank current deposits will follow the timely changes in the central bank's 7-day reverse repo rate, which significantly reduces the arbitrage space between general deposits and non bank deposits and helps non bank current deposits return to their payment and settlement attributes. The high interbank deposit interest rates have raised the cost of bank liabilities. So, which banks have a high proportion of interbank deposits and are growing rapidly? Data shows that for banks, the balance of interbank deposits in small and medium-sized banks has remained stable since 2022, but the balance of interbank deposits in the four major banks has significantly increased. The four major interbank deposits will experience significant growth in 2024. The increase in interbank deposits among the four major banks in the first three quarters of 2024 reached 5.28 trillion yuan, significantly exceeding the level of the same period in the previous three years. The significant increase in interbank deposits among the four major banks is related to the standardization of manual interest payments, which has led to the return of deposits previously made through insurance asset management plans to interbank deposits and the removal of moisture from general deposit data Liao Zhiming analyzed that the total interbank liabilities and payable bonds of the four major banks in the third quarter of 2024 amounted to 29.2 trillion yuan, accounting for 19.0% of the total liabilities. Since the beginning of 2024, the total proportion of interbank liabilities and payable bonds among the four major banks has significantly increased. According to its analysis, the standardized manual interest payment in the second quarter has reduced the moisture content of corporate deposit data and also promoted the conversion of general deposits to non interbank deposits. From April to August 2024, the four major banks' corporate deposits decreased by 3.6 trillion yuan, while non bank interbank deposits increased by 2.5 trillion yuan during the same period. The balance of corporate deposits in small and medium-sized banks is relatively stable. In addition, standardizing manual interest payments has reduced the attractiveness of deposits, which may increase the motivation for enterprises to repay loans, and also enhance the motivation for enterprises to purchase wealth management, promoting the conversion of corporate deposits to non interbank deposits. At the same time, the current high interbank deposit interest rates objectively exist. In early November 2024, some major banks offered interest rates as high as 1.8% to non interbank demand deposits, significantly exceeding the central bank's 7-day reverse repo rate. The interest rate for futures margin deposits (which are non interbank demand deposits) was as high as 1.9%. However, the interest rate for one-year interbank deposits may exceed 2%. The interest rate for interbank deposits of listed banks is significantly higher, "said Liao Zhiming. In addition, the average interest rate of interbank deposits (including interbank lending) of major A-share listed banks has increased from 2.15% in 2021 to 2.42% in the first half of 2024, while the policy interest rate has significantly decreased during the same period. In Liao Zhiming's view, the excessively high pricing of interbank deposits has significantly increased the interest bearing liability cost ratio of banks. According to regulatory rules, interbank deposits have a maximum term of 1 year, while general deposits have a maximum term of 5 years. However, the average interest rate of interbank deposits is significantly higher than the average interest rate of general deposits of A-share listed banks in the first half of 2024, indicating that interbank deposit pricing is unreasonable. It is expected that cash products will significantly reduce the proportion of non interbank fixed deposit investments. The regulatory requirements for cash management wealth management and money market funds are basically the same, and the investment liquidity restricted assets cannot exceed 10% of the net asset value of the product. After this regulation, non interbank fixed deposits are all liquidity restricted assets, and the investment ratio of cash products cannot exceed 10%. In addition, the interest rate of non interbank current deposits is expected to decrease to 1.5% or below, which will significantly drive down the asset yield of the money market. The industry expects that the pre fee yield of money market funds may decrease by 30 basis points, and the current weighted average comprehensive fee rate of money market funds will reach 48.5 basis points. The pressure to reduce fees will significantly increase, especially the sales and service fee rates need to be significantly lowered. The significant decrease in the yield of cash products will alleviate the pressure of personal current deposits in banks, and the growth of cash product scale will significantly slow down. According to data from Huayuan Securities Research Institute, currently, there are a large number of non interbank deposits held in cash products - the total size of cash management wealth management and money market funds is about 21 trillion yuan, with an estimated investment of 9.2 trillion yuan in bank deposits, including nearly 3 trillion yuan in interbank demand deposits and over 6 trillion yuan in interbank fixed deposits. According to its expectation, cash products need to significantly reduce the proportion of interbank fixed deposit investments. Due to the limited liquidity of non interbank fixed deposits, the investment ratio of monetary funds and cash management wealth management cannot exceed 10%. It is expected that the investment ratio of non interbank fixed deposits in cash products will significantly decrease, and instead invest in interbank certificates of deposit, short-term bonds, and non interbank current deposits. The overall impact on bank liquidity is controllable. Some investors believe that the standardized pricing of non interbank deposits will lead to the loss of bank deposits and a shortage of liabilities. But Liao Zhiming believes that "the actual impact is counterintuitive, as funds ultimately land in the banking system." The pricing standards for non interbank deposits will not lead to a shortage of deposits in banks, but will instead alleviate the pressure on general deposits, slow down the conversion of general deposits to non interbank deposits, and reduce the cost of bank liabilities. The behavior between non banks does not affect the total amount of liabilities in the banking system, at most it changes the form of liabilities. For example, due to the high interest rates of non interbank deposits, it has actually increased the attractiveness of cash products and intensified the conversion of personal current deposits to non interbank deposits Liao Zhiming stated that after the standardization of non interbank deposit pricing, the yield of cash products is expected to significantly decrease, which will to some extent alleviate the pressure of loss of current deposits in the banking system and reduce the cost of bank liabilities. Liao Zhiming predicts that "after the implementation of this initiative, the interbank current deposit interest rate will be fully reduced to 1.5% or below, and will follow the changes in the central bank's 7-day reverse repo rate in the future. This will reduce bank interest expenses by more than 50 billion yuan per year, and is expected to lower the interest bearing liability cost ratio of commercial banks by about 2 basis points." The funding interest rate curve is expected to steepen, and the industry expects that the standardized pricing of non bank interbank current deposits will have a significant impact on the funding interest rate. In the past period of time, some large interbank demand interest rates have reached as high as 1.8%. Since late September 2024, national bank fixed deposit interest rates have been comprehensively lowered by 25 basis points, the central bank's reverse repo rate has been lowered by 20 basis points, and the MLF rate has been lowered by 30 basis points. The central bank's 7-day reverse repo rate is only 1.50%, and it is unreasonable to pay interest rates on demand deposits that exceed this policy rate Liao Zhiming stated that the excessively high demand interest rates of some major banks have significantly affected short-term interest rates, resulting in high interbank deposit interest rates in October and raising the cost of bank liabilities, which is not conducive to the transmission of monetary policy. In the past period of time, the non bank interbank demand interest rates of large banks have been too high, and money market funds have even borrowed money to inflate their accounts, which has hindered the downward trend of repo rates and short-term interbank deposit rates. After this pricing regulation, the funding interest rate curve is expected to steepen. In the future, the funding interest rate will closely follow the changes in the central government's policy interest rate. The standardization of pricing behavior for early withdrawal of non bank fixed deposits will temporarily encourage monetary funds to increase the investment ratio of interbank certificates of deposit and short-term bonds, which may result in significantly lower interbank certificate of deposit interest rates than interbank fixed deposit interest rates of the same period. (New Society)