China Securities
Updated: 2006-4-29 05:45
People's Bank of China announced yesterday, the Automatic Pledge Financing Business will be officially effective on payment system on May 8. During the initial stage of this operation, the central bank will charge interest rate 2.97% for non-overnight financing. In order to urge financial institutions to return fund in intraday time, the punitive interest rate for over-night fund will be 10.44% high. Industrial and Commercial Bank of China, Industrial Bank and Bank of Beijing will be the first batch of the financial institutions authorized the business.
Automatic Pledge Financing Business allows financial institutions from banking industry to perform as the direct participant of payment system. Through automatic pledge financing system, banks can make up the lack of daily position from People's Bank of China by pledging their bonds and have pledge automatically released after returning the fund. Automatic Pledge Financing, which can supply financing facility for payment and clearing system, is a type of mechanism that adopted by most central banks in the world. It is a kind of important measure that can keep away from the liquidity risk and improve the efficiency of payment and clearing.
Su Ning, the vice president of central bank, declared that, after operating the mechanism, financial institutions from banking industry would not need to keep big amount of excess reserves in central bank. This will help banks reduce operational cost and improve profitability. The reduction of excess reserve also will promote the increase of social capital, smooth transmission mechanism of monetary policy, and improve the effectiveness of monetary policies.
Up to February this year, financial institutions from banking industry held bonds amount to 5.7 trillion in total. This supplied necessary condition for the operation of automatic pledge financing. The bonds applicable to automatic pledge financing should be the bonds mandated by central clearing and settlement house, including government bonds, central bank bonds and policy-related financial bonds.
According to the central bank, among financial institutions who supply deposit service, there are 691 are qualified for applying for automatic pledge financing. In order to reasonably control the scale of automatic pledge financing as a whole, coordinate the operation of monetary policy, the central bank will set financing limit for system participants. During the initial stage of operation, the upper limit will be 2% of paid-in capital for state-owned commercial banks and shareholding commercial banks, 5% of paid-in capital for city commercial banks and credit unions in both urban and rural areas. The central bank also will directly set the financing limit for its members in line with the need of macro-control.