Bank rules eased in Shanghai FTZ

China's banking regulator has simplified administrative approvals and lifted the loan-to-deposit requirement for banks in the Shanghai free trade zone, allowing them to have greater flexibility in supporting business and testing the water for further financial reform, according to a report by Xinhua News Agency on Wednesday.

According to the new rules issued by the China Banking Regulatory Commission through its Shanghai branch on Wednesday, banks do not have to get approval from local banking authorities before setting up branches or appointing executives in the China (Shanghai) Pilot Free Trade Zone (FTZ), Xinhua reported.

Instead, they will be able to file with the authorities afterwards.

Furthermore, banks' branches in the FTZ will not have to meet the normal loan-to-deposit requirement. Banks have also been advised to set up independent liquidity risk management systems and give necessary funding support for their lending business in the FTZ.

"The new regulations give banks more freedom to conduct business in the FTZ," a Beijing-based banker told the Global Times Wednesday on condition of anonymity.

Normally, the establishment of new bank branches and appointment of executives requires approval from the regulator, and it can take a month for the executives to be officially appointed, he said.

Currently, banks are required to have a loan-to-deposit ratio of 75 percent, which means that they are only allowed to lend up to 75 percent of the deposits they have.

The ratio may vary among different branches, so long as the bank's overall loan-to-deposit ratio meets the requirement.

Bank branches in first-tier cities like Beijing, Shanghai and Guangzhou have tighter limits, with loan-to-deposit ratios as low as 50 percent.

Under the new rules, bank branches in the FTZ may lend freely without the loan restriction, which will help free up more capital to support the local economy, the banker noted.

However, "the new practice could make it more difficult for the bank headquarters to balance the internal interests among branches within and outside the FTZ," he said.

Scrapping the loan-to-deposit requirement could even help rein in shadow banking activities, he said, adding that a lot of off-balance-sheet lending or shadow banking activities are motivated by restrictions on bank lending.

The banking industry has long been calling for the elimination of the loan-to-deposit requirement, given the increasing pressure on attracting bank deposits amid interest rate liberalization and fierce competition from high-yield wealth management products offered by online financial service providers.

The loan-to-deposit requirement will be gradually phased out, and the pilot program in the FTZ will serve as a test ground for a nationwide rollout later, Guo Tianyong, a finance professor at the Central University of Finance and Economics, told the Global Times on Wednesday.

A total of 31 financial institutions including 20 foreign banks have registered with the FTZ, with total lending of 65.35 billion yuan ($10.6 billion) by the end of the first quarter, according to media reports citing the Shanghai banking regulator.

"The new rules are welcome," Standard Chartered Bank told the Global Times in an e-mail on Wednesday. Standard Chartered has a sub-branch registered in the FTZ.

Clients want more transparent and efficient financial services, the bank said, adding that it hoped for further improvements in the FTZ.

The FTZ is developing a free trade account system to facilitate financial investment, Zhu Min, deputy director of the Shanghai FTZ administrative committee, said at the Boao Forum for Asia on April 11.

Key programs for the FTZ include easing the cross-border use of the yuan, liberalizing interest rates for loans, and facilitating offshore financing and outbound investment.