By Cheng Leng, Ryan Woo
YINGKOU (China): Bundles of yuan notes were stacked high behind the counters of branches of Yingkou Coastal Bank in early November, as the northeast China lender fought off a run on deposits while onsite government officials battled rumours of a funding crunch.
Yingkou was the latest small bank to have its deposit-reliant funding base undermined by depositors, spooked by the funding crunch that led to the shock state-led rescue of tiny regional lender Baoshang Bank. To help repair the damage, Yingkou hiked its already high deposit interest rates.
The run came just as smaller lenders’ reliance on deposits for funding shot up this year after Baoshang’s rescue sent interbank interest rates spiking, raising borrowing costs.
Funding was already under pressure from government efforts since 2016 to deleverage the financial system. Since August, government-mandated cuts in lending rates to shore up a slowing economy have only exacerbated the pressure.
With less income from lending and without the full suite of funding options available to much larger peers, the interest rates that China’s legion of small banks may have to offer to attract deposits could further undermine their stability, analysts said.
Dai Zhifeng, a banking analyst with Zhongtai Securities, said the funding difficulties risked distorting small banks’ behaviour.
“Lacking core competitiveness, some of them have turned to high-risk, short-sighted operations,” he said, adding that a liquidity crunch was possible at some institutions.
At Yingkou, “untruthful rumours about the bank’s deep financial crisis spread online”, the city police said, triggering a run on deposits on Nov 6 when a Reuters witness saw piles of cash behind counters at six city-centre branches.
The local government stepped in to allay concerns, placing officials at Yingkou’s biggest branch to help calm depositors, and hanging notices saying the bank had sufficient assets and that its operations and management were in good standing.
Deposits made up 58% of Yingkou’s funding as of June-end. In the wake of the run, it raised its rate for one-year time deposits to 4.4% from 4.2% and kept the rate on its flagship three-month wealth management product above 5%, showed marketing materials seen by Reuters.
By comparison, the popular money market fund Yu’ebao backed by e-commerce giant Alibaba Group Holding Ltd offers a 2% annualised rate, while China’s benchmark rate for a one-year time deposit is 1.75%.
“I thought about the risks of smaller lenders, but an interest rate of 4%-plus on deposits was too attractive for me,” said Sun Wensheng, a futures trader who deposited 420,000 yuan (US$59,772.86) with Yingkou just before the bank run.
The China Banking and Insurance Regulatory Commission (CBIRC) did not immediately respond to a request for comment on the risk to small lenders from higher deposit rates. Yingkou did not respond to a request for comment. – Reuters
