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Chinese central bank to raise automatic pledge financing ceiling for banks

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Chinese central bank to raise automatic pledge financing ceiling for banks

The People's Bank of China announced new rules that will lift the ceiling of automatic pledge financing to lenders, Reuters reported Dec. 15, citing the central bank.

The ceiling for automatic pledge financing will be raised to 4% from 2% of paid-in capital for state-backed lenders. The ceiling will be raised to 10% from 2% for shareholding banks, while city commercial banks will see a ceiling upgrade to 15% from 5% for automatic pledge financing.

Under automatic pledge financing, banks that have temporarily consumed their reserves can automatically borrow money from the central bank using bonds as pledge to satisfy settlement needs.

The move to raise the financing ceiling is in a bid to enhance efficiency and avert risks in the country's payment and settlement system. It also comes as the country is stepping up its efforts to curb shadow banking, while also seeking to prevent a liquidity crisis as banks struggle to meet tighter regulations.

The new guidelines, which will take effect Jan. 29, 2018, will not have any impact on China's base money or liquidity in the banking system, the PBOC said in a statement.

In addition, the type of bonds banks can use as pledge will be expanded to include local government bonds, while the rates charged will be fixed.