High-yield interbank demand deposits scale down significantly

Ask AI · Why are new regulations targeting the reduction of high-yield interbank deposit scales?

Reporter Chen Zhi

Starting March 16, Wang Shu’s workload has become busier.

As an investment manager responsible for multiple cash management financial products at a bank’s wealth management subsidiary, she is closely monitoring investment opportunities in short-term bonds, AAA-rated medium-term notes, and 1–3 month interbank certificates of deposit.

Any fixed-income investment that can replace interbank demand deposits and offers comparable yields, she won’t miss.

Behind this is the imminent significant compression of the scale of interbank demand deposits with interest rates above 1.40%, leading to downward pressure on the yields of monetary management financial products.

Since March, a “new regulation” on strengthening self-regulation of interbank deposit interest rates has caused waves in the banking sector. Some bank members participating in the market interest rate pricing self-regulation mechanism meeting are required to keep the scale of interbank demand deposits with interest rates above 7-day reverse repurchase policy rate +1.40% within 10%–20% at the end of each quarter.

Kaiyuan Securities’ banking team released a report indicating that last year in the first half, listed banks’ high-yield interbank demand deposits (interest rate above 1.40%) totaled about 11.69 trillion yuan, accounting for 44.44% of total interbank deposits. “If implemented according to the new regulation, banks will need to reduce at least 5 trillion yuan of high-yield interbank demand deposits,” Xie Jun revealed. As a business supervisor of the interbank department at a joint-stock bank, he openly states that the bank he works for has a proportion of over 20% of high-yield interbank demand deposits.

Why is regulation targeting high-yield interbank demand deposits? What deeper considerations are behind this?

Preemptive Measures

Under the new regulation, banks are acting quickly.

To comply, Xie Jun has adopted several measures to reduce these deposits, including suspending new issuance of high-yield interbank demand deposits and negotiating with some non-bank institutions to lower the deposit interest rates to within 1.40%.

He revealed that the bank’s finance department is quite proactive about the reduction efforts. Previously, they complained that last year’s interest payments on interbank deposits reached 2.025%, squeezing the bank’s net interest margin by about 4 basis points. If this situation continues, the bank’s net interest margin is likely to fall below 1.40% this year, below the industry average.

Data from the National Financial Regulatory Administration shows that the net interest margin of commercial banks fell to 1.42% in the fourth quarter of last year.

Sources indicate that if high-yield interbank demand deposits are significantly reduced, state-owned large banks and joint-stock banks will be the biggest beneficiaries.

Open Source Securities’ estimates show that by the first half of 2025, the high-yield interbank demand deposit scales of large state-owned banks and joint-stock banks will be 7.82 trillion yuan and 3.44 trillion yuan, respectively, accounting for 66.95% and 29.45% of the entire industry. If the proportion of high-yield interbank demand deposits drops below 10%, the overall funding cost for large state-owned banks and joint-stock banks will decrease by 0.75 and 0.98 basis points, respectively, with net interest margins rising by about 0.69 and 0.95 basis points.

Despite the benefits, some joint-stock banks are already preparing for the potential loss of high-yield interbank demand deposits.

Zhao Yongqing, head of deposit business at a Shanghai branch of a joint-stock bank, is working on strategies to increase general deposits to offset the potential outflow of high-yield interbank demand deposits.

“We estimate that if a large amount of interbank demand deposits with interest rates above 1.40% drop to within 1.40%, we could lose over 3 billion yuan in these deposits, so we urgently need to attract more general deposits,” he said. Since March 16, Zhao has been discussing with multiple branches in his district, launching marketing activities like “Deposit for Cooking Oil” and offering “extra 2–5 basis points interest rate rewards for new online accounts” to attract more retail deposits. He also encourages branch managers to visit business buildings and industrial parks to promote services like salary payments, trade settlement, and cash management, aiming to attract more corporate demand deposits.

To motivate staff, Zhao is persuading branch leaders to give extra performance bonuses to top performers.

During the interview, he admitted he might be “worrying too much.” On March 18, after talking with the bank’s interbank department head, he learned that the pressure of interbank deposit outflows is likely lower than expected because the annualized interest rate on interbank certificates of deposit of one-year term at large state-owned and joint-stock banks is below 1.55%, close to the average interest rate of demand deposits (1.40%), reducing the motivation for non-bank financial institutions to shift deposits.

Additionally, with the central bank continuously injecting large amounts of medium- and long-term low-cost funds through tools like outright reverse repos and MLF (Medium-term Lending Facility), the bank’s interbank department plans to raise more funds in the borrowing market to partly fill the liability gap.

Analysis from Industrial Securities’ fixed income team suggests that the new regulation is unlikely to cause a significant funding gap on the banks’ liabilities side.

“We still need to prepare in advance,” Zhao said. Since the end of last year, after the one-year deposit rate was cut to 0.95%, many branches reported a noticeable decrease in new corporate and individual deposits, with more funds flowing into stocks and wealth management products upon maturity. Therefore, increasing deposit marketing to hedge against the dual outflow of interbank and general deposits remains necessary.

Regulatory “Patching”

Why is regulation focusing on high-yield interbank demand deposits?

This new regulation appears to be a “patch” on the non-bank interbank deposit self-regulation framework established at the end of 2024, but its deeper purpose is to further improve the transmission efficiency of monetary policy, guiding deposit and loan rates downward.

Unlike funds from enterprises and individuals, non-bank interbank deposits are those collected by commercial banks from non-bank financial institutions such as securities firms, insurance companies, and trusts.

Since last year, non-bank interbank deposits have grown faster than personal and corporate deposits. Data from the central bank shows that as of the end of January this year, non-bank interbank deposits reached 36.3 trillion yuan, accounting for 10.80% of total deposits held by financial institutions within the country.

The reasons include: first, after the release of the “Self-Regulatory Initiative on Optimizing Non-Bank Interbank Deposit Rates” in November 2024, non-bank interbank deposits sharply declined by about 3 trillion yuan, resulting in a low base at the start of 2025; second, under the influence of declining interest rates, many residents and enterprises moved their deposits into bank wealth management products or directly invested in stocks, causing a significant increase in non-bank institution deposits and indirectly pushing up the scale of non-bank interbank deposits; third, the relatively high interest rates on interbank demand deposits attract large amounts of funds from non-bank financial institutions seeking higher risk-free returns.

However, these high rates also raise the cost of bank liabilities.

In the first three quarters of 2025, the average interest paid on deposits at Xie Jun’s bank was 1.47%. But because the interest rate on interbank demand deposits exceeds 1.40%, he estimates that last year’s average interest paid on interbank and other financial institution deposits was about 2.025%.

He believes this is a major reason for the new regulation: “It aims to lower banks’ liability financing costs and ease the downward pressure on net interest margins.”

In fact, the new regulation also “patches” the self-regulation of interbank deposit interest rates.

In November 2024, the market interest rate pricing self-regulation mechanism issued the “Self-Regulatory Initiative on Optimizing Non-Bank Interbank Deposit Rates,” which incorporated non-bank interbank demand deposits into the self-regulation framework. It set specific arrangements, such as referencing the 7-day reverse repo rate for pricing non-bank interbank demand deposits, and if banks and non-bank institutions agree on early withdrawal of fixed-term interbank deposits, the early withdrawal rate should generally not exceed the excess reserve rate.

In practice, many interbank demand deposits still have interest rates above the 1.40% 7-day reverse repo rate, revealing some gray operational space for banks.

The Macroprudential Assessment (MPA) may evaluate non-bank interbank demand deposit rates using a weighted average approach. Under this mechanism, some banks have used a high-low matching strategy to ensure the overall weighted rate of interbank demand deposits remains below 1.40%, while continuing to expand high-yield interbank demand deposit business to absorb more funds and fill the liability gap.

In the first half of last year, due to early mortgage repayments, persistent flows of deposits into wealth management and stocks, and increased corporate fund withdrawals for operations, Xie Jun’s bank faced high pressure of general deposit outflows. As a result, the bank quickly increased issuance of high-yield interbank demand deposits, raising over 300 billion yuan at interest rates above 1.40%, accounting for about 30% of total interbank deposit issuance during that period. Through weighted interest calculations, the overall weighted rate of these interbank deposits was slightly below 1.40%.

Additionally, Xie observed that some banks borrow funds from the interbank market at 1.40% and then purchase high-yield interbank demand deposits to arbitrage the interest rate difference. This capital rotation and arbitrage impact the efficiency of funds flowing into the real economy and have drawn regulatory attention.

“Previously, regulators focused on price management of interbank demand deposit rates. This new regulation shifts the focus to scale reduction, which caught the market somewhat off guard,” Xie said.

A report from China Post Securities’ fixed income team states that the regulation extends from price control to scale constraints, aiming to compress the space for high-yield interbank demand deposits, further improve the transmission of policy rates to bank liabilities, curb capital rotation arbitrage, and reduce banks’ funding costs, effectively easing downward pressure on net interest margins.

Earnings Under Pressure

Faced with a significant reduction in high-yield interbank demand deposits, Wang Shu repeatedly lamented during the interview that “asset allocation will be even more challenging in the future.”

To ensure that cash management financial products consistently outperform benchmark returns, she allocates at least 20% of each product to high-yield interbank demand deposits.

These cash management products benchmark against the People’s Bank of China’s 7-day notice deposit rate (currently 1.35%). By allocating a certain proportion (average yield around 1.55%) of high-yield interbank demand deposits, she can raise the overall yield of the investment portfolio to about 1.37%.

She revealed that many investment managers at subsidiaries are using this approach to “boost” product yields, making high-yield interbank demand deposits a key allocation for money-market products.

Yang Yewei, a fixed income analyst at Guosheng Securities, estimates that by the end of 2025, the scale of interbank demand deposits from bank wealth management subsidiaries will be about 10.1 trillion yuan, roughly 30% of total interbank deposits. Additionally, deposits from money market funds and insurance companies will reach 4.9 trillion yuan and 3 trillion yuan, respectively, totaling over 50%. However, as the scale of high-yield interbank demand deposits shrinks significantly, related asset management products will face downward pressure on yields.

Liu Chengxiang, a banking analyst at Kaiyuan Securities, believes that if the interest rates on interbank demand deposits obtained by bank wealth management subsidiaries and public funds drop from 1.60% to 1.40%, the overall yield of related financial products will decline by about 1.47 basis points. Among these, cash-type products and money market funds will see yield drops of 2.56 and 3 basis points, respectively, because these asset management products require high liquidity and have a high proportion of interbank demand deposits, making their performance more sensitive to rate changes.

Wang Shu has already felt the downward pressure on the yields of cash management products. Since March 16, she has received notices from several banks suspending issuance of high-yield interbank demand deposit products. Additionally, two banks have approached her to negotiate lowering some high-yield interbank demand deposit rates below 1.40%. She estimates this would reduce the average yield of her managed cash products by about 2.3 basis points, dropping below the benchmark of 1.35%.

In the past three days, she has started seeking alternative investment options, including short-term high-rated bonds, AAA-rated medium-term notes, and short-term interbank certificates of deposit, aiming to keep product yields around 1.37%.

However, finding suitable substitutes is not easy. Due to the new regulation, market expectations are that the central bank’s monetary policy rate will also decline, with overall interbank demand deposit rates dropping about 10 basis points, dragging down yields on certificates of deposit and short-term bonds accordingly.

On March 19, Wang Shu found that some joint-stock banks’ 1-year interbank certificates of deposit rates had fallen below 1.50%, and AAA-rated medium-term notes for 1 year had dropped below 1.55%, making them unlikely to replace her original high-yield interbank demand deposits at 1.55%.

Therefore, she plans to adjust the product benchmark to “70% linked to the PBOC’s 7-day notice deposit rate + 30% bank demand deposit rate” to ease the yield pressure.

Over the past week, she noticed many institutions are anticipating yield pressures on cash management products and are starting to redeem their holdings.

In her view, banks need to further cut deposit rates to keep the spread between cash management products and 1-year deposits around 40 basis points, maintaining the attractiveness of the former.

(At the respondent’s request, “Xie Jun” is a pseudonym.)