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The June 2013 Interbank Market Crisis

문서에서 Credit and Credibility (페이지 34-37)

Banks started to expand assets aggressively in 2012 and needed some funding mechanism to do so. The absence of readily available deposit funding saw banks, particularly small banks, turn to WMPs with increasing frequency. WMPs were attractive because they allowed banks to raise funds for lending and could be structured to count as deposits for regulatory purposes. For example, a bank WMP of three-month duration might expire on the last day of the month, with the customer holding the WMP being repaid that

23 The light scrutiny of the underlying assets within WMPs is described in detail in Wang Yao, “Shadow Banking with Chinese Characteristics,” Chapter 4 in Andrew Sheng and Ng Chow Soon, Shadow Banking in China: An Opportunity for Financial Reform (Hoboken: Wiley, 2016), 111-114.

24 Rhodium Group, China Markets Research, “NBFI, Inc.,” April 26, 2017.

day. The customer might choose to roll over the WMP investment into another three-month product, but the bank could make the new product’s effective date the next day, the first day of the new month. When the regulator looked at the bank’s balance sheet at the end of the month, the WMP did not exist, having expired that day. All that was left was the investor’s deposit. For banks that needed to maintain a 75 percent loan-to-deposit ratio (the limit effective in China before 2015), this was a critical consideration.

The bank could keep a toxic loan off its balance sheet while keeping a deposit on its balance sheet. The attractiveness of these structures was obvious.

The downside to the banks, of course, was higher costs. They had to offer WMP investors higher and higher rates to keep these investments captive within their bank. Large banks were not as concerned, as they had relatively large, stable household deposit bases, and could simply offer marginally higher rates than benchmark deposit rates. Smaller banks, however, needed to compete for funding and had to offer higher rates than larger banks without necessarily locking up customers’ funding for long periods of time.

The consequence of this was that smaller banks’ margins were squeezed as they had to meet the rising cost of funding via WMPs with higher returns from real assets, often longer-term loans or bonds.

This margin squeeze introduced a significant maturity mismatch for smaller banks. All banks borrow short-term and lend long-term to some extent, but small banks’ increasing reliance upon WMP funding, with most of these WMPs of one- to six-month duration, made it difficult to find assets within China’s financial system that would provide the required rates of return, particularly assets that were also short-term. For a while, many banks would simply raise money from investors via WMPs and then relend funds in the money market at the corresponding SHIBOR (Shanghai Inter-Bank Offering Rate) rates, so there was no effective maturity mismatch. However, as more banks did this, SHIBOR rates naturally fell, reducing the attractiveness of the strategy.

Figure 2-4: SHIBOR Money Market Rates, Oct 2011-Dec 2012 Percent

Source: Bloomberg.

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

8-Oct-11 29-Oct-11 19-Nov-11 10-Dec-11 31-Dec-11 21-Jan-12 11-Feb-12 3-Mar-12 24-Mar-12 14-Apr-12 5-May-12 26-May-12 16-Jun-12 7-Jul-12 28-Jul-12 18-Aug-12 8-Sep-12 29-Sep-12 20-Oct-12 10-Nov-12 1-Dec-12 22-Dec-12

3M SHIBOR 6M SHIBOR

Starting in late 2012, banks needing returns were either forced to add credit risk within their WMP portfolios or add longer-term assets. Credit risk had not really been priced into most of China’s financial markets, but the addition of longer-term assets created a new problem for banks. Previously, rolling over WMPs was not a matter of necessity: it was simply helpful in growing balance sheets and enhancing profitability. Now, however, returns from some longer-term assets would not be available until they matured, perhaps for several years. WMPs needed to generate returns so they could be repaid every few months. Unless a WMP investor maintained their investment within the bank, the bank would need to take an immediate loss on that WMP or borrow money aggressively in the interbank money market to repay the customer.

This maturity mismatch was the key ingredient in the most acute crisis China’s financial system has faced this century, an abrupt liquidity squeeze in June 2013 that froze China’s money markets. The PBOC and China’s financial regulators were aware of the maturity mismatches developing within China’s financial system and the risks that could result. However, their regulatory approach did not work, with WMPs slipping through the bureaucratic cracks. No regulator had authorized their creation, so no regulatory institution was responsible for supervising them.

The inadequacy of the regulatory tool kit led China’s central bank to try blunter measures. With approval from central authorities, the central bank took advantage of a seasonally tight liquidity period to try to shock the market out of its complacency and force banks to better account for the risks building on their balance sheets. On June 6, 2013, tight liquidity conditions and the increasing complexity of some off-balance sheet forms of financing caused a technical default on an interbank payment of 6 billion yuan between Industrial Bank and Everbright Bank.25 The market quickly reacted, with overnight interbank lending rates jumping to 8.0 percent on June 6 from 4.7 percent on June 5. This was not an unprecedented development and in the past the PBOC had stepped in to provide assistance. But the next day, instead of calming the markets, the PBOC refused to provide additional funding. Money market rates skyrocketed as a three-day holiday started, with overnight rates reaching 8.7 percent and overnight SHIBOR reaching 9.6 percent.26 After the holiday, the PBOC broke its silence at a meeting with banks reportedly held on Monday, June 17, delivering the message that banks needed to take better account of their speculative funding and asset positions and that no central bank assistance would be forthcoming.

All hell broke loose. Banks themselves did not know how to interpret the PBOC’s change in behavior, and many consequently pulled back from regular interbank lending activity. By June 20, there were no lenders left in the market and smaller banks desperate to repay WMP investors were scrambling for funds.

Overnight interbank money rates jumped to between 20 and 30 percent, effectively signaling there was no liquidity available in the market. The PBOC was forced to capitulate by the end of the day, providing short-term funding that reduced rates to more manageable levels. But they did so quietly, so markets were not assuaged. The scramble for liquidity continued and rapidly resulted in sales of virtually any liquid asset in China’s financial markets. Equity markets plummeted over 10 percent in just two days. Finally, the PBOC issued a statement on June 25 promising to provide sufficient liquidity to the market when necessary.27

25 David Keohane, “Swimming Naked in China,” Financial Times Alphaville June 10, 2013, https://ftalphaville.ft.com/2013/06/10/1529962/swimming-naked-in-china/.

26 Data from Bloomberg Database, Ticker symbol RP01, accessed July 31, 2018.

27 Bob Davis and Lingling Wei, “China’s Central Bank Acts on Cash Crunch,” Wall Street Journal, June 26, 2013, https://www.wsj.com/articles/SB10001424127887323683504578566842205728724.

The PBOC’s liquidity experiment had almost caused a systemic financial crisis, and the central bank itself was shocked by the market response it created. Clearly, bringing the financial system to a screeching halt was not part of the central bank’s plan. The mechanism through which the liquidity crisis developed, however, was rooted in the banks’ increasing use of WMPs as a critical funding mechanism. Some banks had been buying WMPs from each other in a bid to boost returns. At the time, many WMPs were being offered at interest rates in the range of 4.5 to 6.0 percent. When short-term interbank rates rose above that level, the logic of holding onto WMPs suddenly disappeared; one could make more money lending in the interbank market. This caused a surge of WMP redemptions, forcing banks that did not have the short-term assets to provide the necessary payments to scramble for funding and borrow in the market, pushing interbank rates higher. Had the squeeze only lasted for a day or two with expectations of improvement in a week or so, perhaps the market meltdown could have avoided. But the uncertainty created by the PBOC’s unclear policy signals raised doubts that more funding would be made available. Banks believed that they had to borrow now, or potentially never. By June 20, there were no more lenders left.

The PBOC’s failure to predict the outcome was not surprising, precisely because most of the financing instruments that drove the market’s movement were designed to avoid regulatory scrutiny. The volume of WMPs had grown larger than the central bank understood precisely because the scope of banks’ reliance on these instruments was largely invisible to regulators. As a result, the demand for money required to redeem maturing WMPs was far greater than the PBOC anticipated when it decided to shock the system and drive banks to reduce their risky activities.

Ironically, the interbank crisis of June 2013 had the opposite effect to the one the PBOC intended. Banks now saw very clearly that the PBOC and other regulators had no policy tools that could regulate their shadow banking activities. They knew that in the event of significant financial stress the PBOC would have to back down and provide the market with emergency funding. They knew that defaults, particularly among banks, would be far too difficult politically to be allowed. As a result, they knew the shadow

banking party could continue unabated. Moral hazard was entrenched, rather than broken, during the June 2013 crisis.

문서에서 Credit and Credibility (페이지 34-37)