Interbank Demand Deposit Self-Discipline "2.0" May Bring Banks Relief of 0.7bp

Source: 21st Century Business Herald Author: Yu Jixin

Recently, discussions about “Industry Self-Regulation ‘2.0’ for Demand Deposits” have been heating up within the industry.

On March 12, according to Cailian Press, the market interest rate pricing self-regulation mechanism convened a meeting with some bank members, requiring strengthened self-discipline management. The proportion of industry demand deposits exceeding the policy rate of 1.4% (7-day reverse repo OMO rate) at the end of each quarter should not exceed 10%–20%.

A person from the financial market department of a state-owned major bank told 21st Century Business Herald that this self-regulation has been in place “for some time” and is currently promoting a reduction in the industry’s operational costs.

An asset management center staff member from a city commercial bank also told reporters that the bank had previously cut down high-interest demand deposits exceeding the policy rate of 1.4%.

Additionally, some informed sources revealed that as early as the end of last year, there was market speculation that adjustments related to MPA assessments might be implemented in the second quarter of this year. By mid to late March, as the quarter-end approached, expectations for specific rules to be clarified increased again.

The source said: “We heard that the terms back then were more stringent than the current rumors. Based on current speculation, although the overall approach still aims to guide liability costs downward, the actual implementation might be relatively more lenient, and the real impact on banks could be lighter than expected.” Overall, it seems that the voices for adjustments are more concentrated among large banks.

Market discussion: MPA assessment expected to “link” to high-interest demand deposits

Currently, the transmission efficiency of deposit and loan interest rates shows significant differences. On one hand, loan interest rates follow the policy rate downward more smoothly along the path “7-day OMO rate → LPR → loan interest rate,” showing a “fast decline” trend. On the other hand, deposit interest rates are constrained by banks’ “scale obsession” and the trend toward fixed-term deposit structures, making costs more sticky and slower to decline. This asymmetric transmission has become a key reason for the continued pressure on banks’ net interest margins.

Against this backdrop, unblocking the transmission chain of deposit interest rates has become a focus.

Liu Chengxiang, Chief Analyst of Banking at Kaiyuan Securities, told 21st Century Business Herald that demand deposits are sizable and tend to trigger irrational competition among banks under the trend of “wealthification” of deposits, which could become a key focus of future self-regulation.

He predicts that “Self-Regulation 2.0 for Demand Deposits” may be incorporated into the pricing behavior assessment under the Qualified Prudential Evaluation (EPA) system and linked more closely with the Macro Prudential Assessment (MPA) system.

If the “Self-Regulation 2.0” version of demand deposits is ultimately implemented, its impact is expected to gradually transmit from banks’ liabilities to the yields of asset management products. A wave of adjustments around bank liability cost management and the upgrade of monetary interest rate transmission mechanisms is underway.

It is understood that banks’ deposit pricing behaviors are constrained by both EPA and MPA systems. EPA is implemented through the market interest rate self-regulation mechanism, focusing on evaluating and regulating banks’ deposit rate pricing behaviors, affecting their qualification to issue large certificates of deposit and interbank certificates. MPA is a comprehensive assessment by the People’s Bank of China, whose “pricing behavior” indicators directly adopt quarterly EPA assessment results and are linked to substantive measures such as reserve requirement ratios and market access. Together, they form an effective dual management mechanism.

If the scale of demand deposits is limited, where will the funds flow? As of March 12, a trader from a state-owned bank’s financial market department told reporters that the market has already responded in advance—recently actively allocating interbank certificates of deposit, while the bond market has strengthened, and long-term bond yields have “fallen sharply.”

From “1.0” to “2.0,” the interest rate transmission is in progress

In fact, strengthening the management of demand deposit interest rates is not a new topic. Recent regulatory actions, such as manual interest top-ups, self-regulation mechanisms for demand deposits, and interest rate floor clauses targeting arbitrage behaviors, have effectively promoted a decline in bank deposit costs.

Looking back at the previous round of self-regulation, on November 29, 2024, the market interest rate self-regulation mechanism issued the “Proposal for Optimizing the Self-Regulation Management of Non-Banking Interbank Deposits” and the “Self-Regulation Initiative to Introduce ‘Interest Rate Adjustment Floor Clauses’ into Deposit Service Agreements.” The former aims to include non-bank interbank demand deposits into self-regulation, pushing their interest rates closer to policy rates; the latter aims to ensure deposit interest rates can quickly adjust following policy guidance, reducing cross-bank deposit transfers.

The People’s Bank of China’s chief economist Wen Bin’s team analyzed that the motivation for the previous demand deposit interest rate management was twofold: on one hand, the net interest margin of commercial banks continued to decline, with high costs of interbank liabilities being a significant disturbance; on the other hand, to expand monetary policy space, it was necessary to further unblock the interest rate transmission system. At that time, the deviation between loan/deposit interest rates and policy rates was large, impairing transmission efficiency.

A fund manager from a joint-stock bank told 21st Century Business Herald that the new regulations likely target the partial high-interest demand deposits driven by some branches’ “scale obsession” to meet new deposit growth targets. The underlying reason is often distorted behavior caused by branches’ pursuit of growth. However, he believes that, compared to the past, such situations are no longer widespread.

In terms of effects, Yingye Research pointed out that after the self-regulation rules were issued at the end of November 2024, based on the semi-annual report data for 2025, the cost of interbank liabilities for listed national banks decreased by about 30–40 basis points (bp), and total liability costs decreased by about 3–4 bp.

Bank liability structures also changed. The average proportion of interbank deposits for listed national banks dropped from about 10% to around 9%. Among them, state-owned large banks continued to regard interbank deposits as an important liability source, increasing the proportion of fixed-term deposits and extending durations; joint-stock banks mostly reduced their interbank deposit scale and proportion, but the share of demand deposits increased.

Bank liability costs decline, cash management yields may be affected

Regarding the specific future direction of further regulation of demand deposits, Liu Chengxiang told reporters that the assessment rules might continue the daily average limit approach from version 1.0, setting upper limits on the proportion of deposits exceeding the OMO rate each quarter, with graded deductions for excess. He estimates that about 16 trillion yuan of interbank demand deposits are involved; if implemented, it could boost net interest margins of listed banks by approximately 0.7 bp.

If the “Self-Regulation 2.0” version is further implemented, what potential impacts could it have on banks and the asset management market?

Lou Feipeng, a researcher at China Postal Savings Bank, told 21st Century Business Herald that regulators might strengthen management of high-interest demand deposits. This could impact banks’ liability costs—reducing high-interest demand deposits could lower banks’ funding costs and help stabilize net interest margins. On the asset management side, yields of cash management products and money funds might decline, possibly prompting some funds to shift toward interbank certificates of deposit and similar assets.

A fund manager from a joint-stock bank admitted that regulating demand behavior from this perspective has limited overall impact on banks’ liability costs. He said: “For banks, interbank liabilities mainly serve as liquidity supplements. Their role as leverage to boost yields has significantly weakened. Without a clear improvement in loan demand, the cost of interbank liabilities isn’t very high.” He also pointed out that if bank deposits mature and flow more into non-bank institutions, the difficulty for banks to “reduce costs and improve efficiency” could increase accordingly.

Regarding the future impact on the bank wealth management market, Liu Chengxiang’s team further analyzed: if the interest rate for interbank demand deposits in wealth management and public funds drops from 1.6% to 1.4%, the overall yield of all wealth management products could decline by about 1.47 bp, with cash management products dropping about 2.56 bp; all public fund yields could decline by about 1.43 bp, with money funds dropping about 3 bp. Funds might shift toward increasing allocations to interbank certificates of deposit, short-term deposits, and bonds with maturities under three years.

A fixed-income investment manager at a city commercial bank’s wealth management subsidiary told 21st Century Business Herald that the short-term impact of declining demand deposit rates is limited. But in the long term, driven by industry self-discipline and other factors, a general downward trend in yields is inevitable. He expects yields of cash management products to be directly affected by 2–3 basis points and plans to actively seek alternative asset classes.

He added: “Currently, the prices of interbank certificates of deposit are already falling. If we don’t proactively adjust strategies, future yields could face larger declines. Meanwhile, finding high-quality assets that match risk and return will be a challenge for investment.”

(Edited by: Wen Jing)