China Extends Crackdown on Off-Balance-Sheet Loans

Cutbacks now will further slow things:

China Extends Crackdown on Off-Balance-Sheet Loans

July 4 (Reuters) — China’s bank regulator has cracked down on off-balance-sheet lending by the country’s banks, sources told Reuters on Monday, its latest step to prevent over-zealous and risky lending from hurting its financial system.

China Banking Regulatory Commission (CBRC) has ordered banks to check all their deals in discounted commercial bills after discovering misconduct among some banks, two sources said.

Chinese banks have in the past year taken to off-balance-sheet lending, or keeping loans outside balance sheets after authorities clamped down on bank loans as part of their fight against inflation.

Last week the regulator tightened control on sales of wealth management products to ward off potential risks, and the regulator had earlier told banks to include all their loans extended via trust investment programs into their account books.

Discounted bills, an important source of financing for firms with no access to formal bank loans, accounted for about 2.5 percent of the 49.5 trillion yuan ($7.7 trillion) of total outstanding loans at the end of March, according to data from the Chinese central bank.

The regulator’s latest move comes after discovering that some rural credit cooperatives and banks in the central Henan province were issuing loans through discounted commercial bills and keeping them outside their loan books.

Under China’s banking laws, banks’ deals in discounted commercial bills should be reflected on their balance sheets.

Banks have been asked to investigate all deals linked to discounted commercial bills and submit their findings by Monday, sources said.

Under the review, banks were ordered to verify that bills issued were based on real transactions, and were ordered to track how extended credit was spent, they added.

Banks were also instructed to stop discounting bills that they issued to get funds for property and stock investments.

Analysts welcomed the move towards stringent regulation, which would also boost transparency.

“There is some concern that some borrowers were using these discounted bills as collateral for further borrowing,” said Mike Werner, a China banking analyst with Sanford Bernstein.

“So the idea that the CBRC is going to increase diligence covering this area of the market is not surprising.”

The regulator said bank branches found with serious misconduct would be barred from the discounted commercial bill market entirely, the sources added.

CBRC was not immediately available for comment when contacted by Reuters.

As China tightens policy and rein in lending to tame 34-month high inflation of 5.5 percent, many companies are struggling to get loans.

For these firms, discounted commercial bills are an important source of financing. They let companies bring bills or drafts to banks and request for money to be disbursed before they mature.

mtg apps dip

How does that go again about low rates helping housing?

Mortgage Applications Dipped Last Week

June 29 (Reuters) — Applications for U.S. home mortgages slipped last week as demand waned, even as mortgage rates dropped, an industry group said Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 2.7 percent in the week ended June 24.

The MBA’s seasonally adjusted index of refinancing applications fell 2.6 percent, while the gauge of loan requests for home purchases lost 3.0 percent.

The refinance share of mortgage activity increased to 69.5 percent of total applications from 69.2 percent the week before.

Fixed 30-year mortgage rates averaged 4.46 percent in the week, down from 4.57 percent.

Small banks being crushed by Fed’s game of musical chairs

Small banks, already penalized with a higher cost of funds than the large banks (link) have more recently been forced to contract due to ‘wholesale funding’ restrictions being imposed by the regulators.

Bank regulators distinguish between what they call ‘retail’ and ‘wholesale’ funding, and have set limits of small banks for ‘wholesale’ funding. This policy is meant to reduce the liquidity risk of a bank not being able to roll over its funding should depositors decide to take their dollars to another bank. The theory is that ‘retail’ deposits are ‘sticky’ and less likely to move to another bank, while ‘wholesale’ deposits are more likely to move. And the ‘better’ the ‘account relationship’ the more likely the funds are to stay with the bank. Oddly, when I inquired if the maturity of the deposit is a consideration the regulators responded ‘no.’ So that means a 10 year CD obtained through a broker is considered a wholesale deposit, which must be limited, while money market deposits from local depositors that can leave the next day are the core retail deposits required by the regulators for ‘stability.’

But apart from this obvious regulatory failure to recognize what’s more stable and what’s less stable for individual banks, there is also a highly problematic macro issue. In the banking system as a whole, loans create deposits, meaning that for each loan made by a bank (bank assets) there exists a bank deposit of the same amount originally created at the time of the loan as that bank’s liability. In short, for the banking system as a whole, loans equal deposits.

The problem is that money center banks attract more of these total deposits than the small banks in the normal course of business. That leaves the small banks short of deposits by an equal amount. This is easily resolved by the small banks needing funding borrowing the excess funds held by the large banks. And if the large banks decide to keep their excess funds at the Federal Reserve Bank the small banks can simply borrow from the Fed to cover their shortage. In any case the total funding of the banking system remains equal to the total loans outstanding, with the Fed acting as a ‘broker’ to facilitate system wide liquidity. However, when regulators restrict this ‘wholesale funding’ between banks, and also deem borrowings from the Fed ‘wholesale funding,’ they put powerful forces in place that force the small banks to either pay higher rates to attract deposits from the large banks, which is often impossible as large corporate customers can’t deal with small banks, or force the small banks to cut back on lending to reduce their dependence on wholesale funding.

The net result is a misguided regulatory policy that is both increasing the cost of funds to small banks and forcing small banks to cut back on lending.

The remedy is quite simple, have the Fed offer funding (fed funds) to all member banks at it’s target interest rate, which is the rate the Fed desires to in fact be the cost of funds for its banking system as a matter of public policy. In any case, bank borrowing and lending is rightly constrained by capital and other regulatory requirements, and not available funding, which is always attainable at a price. Using the liability side of banking for market discipline, as is currently the practice for small banks, is always evidence of a lack of understanding of banking fundamentals and counter to further public purpose.

Please distribute this to your favorite regulator, Congressman, and Fed official, thanks!

mtg apps for new purchases fall again

Seems the fall off after the tax credit ended April 30th has yet to fully run its course:

US Mortgage Applications Soar on Refinance Demand

July 7th (Reuters) —Refinancing drove total U.S. mortgage applications to a nine-month high last week, while demand for loans to purchase homes sunk to a near 13-year low as buyers remained sidelined after the expiration of federal tax credits.

Mortgage rates stuck around record lows, the Mortgage Bankers Association said on Wednesday, giving homeowners another chance to cut monthly payments by refinancing.

Refinancing requests jumped 9.2 percent in the week ended July 2 to the highest level since May 2009, lifting total applications by 6.7 percent, seasonally adjusted, to the highest level since early October 2009.

Demand for mortgages to buy homes slipped 2 percent. It was the eighth weekly drop in the nine weeks since the federal tax credits for homebuyers expired on April 30.

“For the month of June, purchase applications declined almost 15 percent relative to the prior month and were down more than 30 percent compared to April, the last month in which buyers were eligible for the tax credit,” Michael Fratantoni, MBA’s vice president of research and economics, said in a statement.

The average 30-year mortgage rate was little changed in the week ended July 2, climbing 0.01 percentage point to 4.68 percent.

The borrowing rate lingered just above the record low of 4.61 percent set in March 2009, according to the MBA’s records that date back to 1990.

Fifteen-year mortgage rates rose to 4.11 percent last week from the record low 4.06 percent set the prior week.

Refinancings accounted for 78.7 percent of all applications last week, the highest share since April 2009, the industry group said.

Tepid employment growth and a surprisingly steep slump in pending home sales kept interest rates low.

Home purchases will stay weak over the next few months as the housing market adjusts to the end of government incentives, and prices should bottom around the third quarter, said Robert Andrews, senior research analyst at IBISWorld in Santa Monica, California.

Fallout from record defaults and foreclosures are also likely to sway many younger buyers from making such a big commitment in the near term, he said.

“People in my generation, people 20 to 30 years old, saw the downside risk associated with housing, so I think there’s going to be a bit weaker demand over the next few years,” said Andrews.

Refinancing, likewise, is unlikely to approach the levels seen last year when mortgage rates were near current levels.

Borrowers who could qualify for refinancing have in most cases already refinanced, most analysts agree.

China Big 4 Banks’ New Loans Drop to Year’s Low, Caijing Says


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China Big 4 Banks’ New Loans Drop to Year’s Low, Caijing Says

Oct. 12 (Bloomberg) — China’s four biggest commercial banks
extended new yuan-denominated loans of about 110 billion yuan ($16
billion) in September, the lowest monthly figure in 2009, Caijing
magazine reported, citing industry data.

China Construction Bank Corp. had the highest new loans, totalling
44 billion yuan, Industrial & Commercial Bank of China Ltd. and
Agricultural Bank of China each lent about 30 billion yuan while Bank of
China Ltd.’s new yuan loans totalled around 3 billion yuan, the magazine
said, without giving a total figure for overall new lending for the month.


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