Advertisement
Banking & finance
BusinessBanking & Finance

Chinese banks test repo-linked corporate loans for more market-based pricing

Lenders are shifting loan benchmarks to short-term market rates, which analysts say heightens volatility and tests risk controls

2-MIN READ2-MIN
Listen
The depository-institutions repo rate is derived from actual short-term interbank transactions and more directly reflects banks’ funding costs and liquidity. Photo: AFP
Chelsea Yang
Chinese banks are rushing to test a new way of pricing corporate loans against short-term market funding costs, a move that analysts say could make borrowing rates more responsive to monetary conditions but also test lenders’ risk management capabilities.

The shift to the overnight or seven-day depository-institutions repo rate (DR) from the monthly-released loan prime rate (LPR) follows Beijing’s June decision to change lending benchmarks to better reflect market conditions.

Bank of China, one of the nation’s biggest state-controlled lenders, has rolled out DR-linked corporate loans in Shanghai, Ningbo in eastern China’s Zhejiang province, and in the provinces of Fujian, Hebei and Henan, according to an online statement from the bank.

Unlike LPR, which is based on quotations from designated banks and used to price corporate and household loans, DR is derived from actual short-term interbank transactions and more directly reflects banks’ funding costs and liquidity.

“DR makes loan pricing more sensitive to short-term funding conditions, but it also exposes banks to greater interest-rate volatility,” said Zhang Lin, chief macro researcher at the Beijing-headquartered Far East Credit Research Institute.

“That will raise the bar for pricing and risk management.”
Advertisement
Select Voice
Select Speed
1.00x