Deposit rules will keep banks in line

China's banking regulators recently announced new rules to prevent banks from temporarily inflating deposits to meet regulatory requirements.

For a long time now, banks have been offering depositors a variety of incentives, some of which are illegal, at the end of each month, quarter or year to ensure they comply with deposit requirements for the period in question. For example, many banks offer higher interest rates for a limited time to attract deposits.

The wild swings in deposit rates damage the banks' public image and undermine their credibility. Financial panics can start this way.

The new rules require banking regulators to establish a strict statistical monitoring system to track how deposit levels fluctuate at commercial banks. Banks with wild swings in deposit levels will have to correct the problem in a timely manner or face penalties.

The rules will help prevent banks from inflating their deposits ahead of making their reports to regulators, but they won't stop banks from trying to attract as much money as possible from depositors.

That won't happen until regulators move ahead on the government's long-term plans to liberalize interest rates and lower requirements to establish small and medium-sized financial institutions.