Viewpoint... Behind Internet deposits-the plight of small and medium-sized banks and supervision.

Key words:Internet deposits Small and medium-sized banks develop bank supervision.

The scale of deposits of small and medium-sized banks has been declining under the impact of Internet finance, and deposits have been diverted by various Internet wealth management products, which makes the pressure on small and medium-sized banks to collect deposits increasing. The Internet deposit business relies on the Internet, breaking through geographical restrictions, greatly expanding customer channels, and being able to absorb customers from all over the country. And can take advantage of third-party platform users and traffic, broaden the audience.

Buying Internet deposit products is extremely convenient. Customers can browse the Internet deposit products provided by various banks on the Internet platform, including bank name, deposit term, yield, starting purchase amount, interest-bearing rules and other information. The purchase process of Internet deposit products is short, the account opening is simple, and you can stay indoors. For customers, Internet deposits can be withdrawn at any time, can be paid on the same day, and the transfer is convenient, which is very attractive.

The selling point of Internet deposit products is their attractive interest rates, which are usually much higher than the interest rates on bank term deposits of the same maturity. Deposit business is a very low-risk financial product in the eyes of the public, so customers will only choose deposit products based on the level of interest rates, regardless of which bank provides the product.

Interest rates on Internet deposit products are abnormally high. Internet deposit products are fixed term, mainly 3-year and 5-year. According to statistics, the 1-year interest rate is up to 2.25 per cent, the 3-year is up to 4.215 per cent, and the 5-year is up to 4.875 per cent, all of which are close to or at the upper limit of the national self-regulatory pricing mechanism. The interest rate of Internet deposits is also much higher than the bank time deposit interest rate at that time. In the sales process of Internet deposits, deposit insurance is often used as a selling point, with the words "capital preservation and interest protection" marked, and interest rates are raised in disguise through segmented interest calculation, which intensifies the interest rate competition among banks and distorts the mechanism of marketization of deposit interest rates. The competition of commercial banks in the deposit market has always been fierce. The main means of competition is interest rate, which is the competition of capital price, which is more obvious in Internet deposits. Internet finance has exacerbated the risk-taking of banks and accelerated the concentration of financial risks. National policy is leading banks to cut deposit rates because it helps to reduce costs on the liability side of the bank and reduce pressure on net interest margins, encouraging banks to operate soundly. At the same time, the deposit interest rate down can be transmitted to the loan side, banks in the reduction of deposit interest rates at the same time will also reduce the loan interest rate, which is conducive to reducing the financing costs of enterprises, better serve the real economy.

The overall business risk of the bank increases. Internet finance mainly aggravates the risk-taking of commercial banks by worsening the deposit structure and raising the cost of interest payment. Although the scale of bank deposits has expanded in the short term, the high interest rate of Internet deposit products has greatly increased the cost of bank debt, which forces banks to increase their risk appetite and pursue high-risk and high-yield investments, which aggravates the bank's operational risks and is not conducive to the sound operation of banks. Some banks alleviate the pressure of their own liquidity by absorbing a large number of Internet deposits. The increase in the number of deposits makes the indicators of bank liquidity (such as capital adequacy ratio, debt ratio, and liquid asset ratio) increase on the surface, but due to the Internet The instability of deposits, these indicators are actually overestimated, which will bring wrong information to the regulatory agencies, resulting in regulatory loopholes.

The development of Internet deposit business has also changed the deposit structure of banks. Some small and medium-sized banks have reached more than 60% of all deposits in just one year, which raises questions about the operation and management capabilities of these small and medium-sized banks. Demand deposits are more liquid than time deposits, and an increase in the proportion of demand deposits increases the liquidity risk of banks. The stability of deposits is closely related to the liquidity risk of banks, and the more stable the source of funds, the less difficult it is for commercial banks to manage their use of funds and the less likely they are to encounter liquidity risk. Although Internet deposits are time deposits, their users are sensitive to interest rates, their stability is weak, and they are likely to be withdrawn at any time within the agreed period. Credit business is the main source of profit for commercial banks, and matching short-term liabilities with long-term assets is an important way for banks to obtain spreads, and the greater the degree of maturity mismatch, the greater the gains that commercial banks may obtain. However, an increase in the degree of maturity mismatch also increases liquidity risk. Compared with traditional time deposits, the maturity of assets is shortened. If banks still allocate these funds to long-term asset projects according to the traditional thinking, it will greatly increase the difficulty of liquidity management for banks and may trigger a liquidity crisis.

There is a conflict between carrying out Internet deposit business and the positioning of small and medium-sized banks. Internet deposits absorb deposits from all over the country, in effect expanding the scope of business to the whole country. The positioning of small and medium-sized banks is a supplement to inclusive financial services, mainly serving local agriculture, small and medium-sized enterprises and individual industrial and commercial households. Compared with large banks, small and medium-sized banks can give full play to their geographical and policy advantages and grant loans more accurately by virtue of their understanding of local economic development. The homogenization of banking business is more serious, the competition is extremely fierce, small and medium-sized banks in the asset-liability side and integrated operation can not compete with large banks. Due to the pressure of capital, profit and future development, small and medium-sized banks have carried out cross-regional operations. Article 52 of the proposed revision of the Commercial Banking Law, published in 2020, stipulates: "Regional commercial banks such as urban commercial banks, rural commercial banks and urban banks shall conduct business activities within their domicile and shall not conduct business across regions without approval. The banking regulatory authority under the State Council shall formulate specific regulations on the business scope of different types of commercial banks, the types and amounts of acceptable deposits, and the types and sizes of customer groups."

Taking into account the functions and status of small and medium-sized banks in financial services, and out of consideration of the risk management capabilities of small and medium-sized banks, the country's local positioning of small and medium-sized banks remains unchanged. In the digital age, banks can operate nationwide through the Internet, thus becoming a de facto national bank. Whether to restrict the cross regional operation of banks is a question. On the one hand, small and medium-sized banks do have the need to operate across regions; on the other hand, small and medium-sized banks have limited risk management and may not be able to cope with national operations. Deregulation is a necessary way to promote the reform of China's banking market, and empirical studies have shown that cross-regional operation of urban commercial banks can improve the quality of loans, because diversified customers and business combinations can effectively reduce the concentration of loans, so moderate cross-regional operation is conducive to enhancing the competitiveness of small and medium-sized banks.

1. The pressure on small and medium-sized banks to take deposits has only increased.

Internet finance and the bank's liability business there is direct competition, will divert deposits, in the asset business area of misplaced competition, in the intermediary business area of the division. The rise of Internet finance has changed the consumption preference of financial consumers. They pay attention to the yield and risk of products. Funds and financial products are popular. Those with high risk preference will seek higher income projects, further aggravating the diversion of deposits. Small and micro enterprises can also obtain lower-cost financing support in Internet finance. All these have increased the cost of capital in the traditional banking industry, increased the pressure on the net interest margin, and the impact of Internet finance on small and medium-sized banks is more obvious.

The pricing method of the deposit interest rate ceiling has undergone a reform from the benchmark interest rate multiplied by a multiple to the benchmark interest rate plus a basis point. The pricing method of the benchmark interest rate multiplied by a multiple has a significant leverage effect. In April 2022, the central bank guided the interest rate self-discipline mechanism to establish a market-oriented adjustment mechanism for deposit interest rates. The member banks of the self-discipline mechanism refer to the bond market interest rate represented by the 10-year treasury bond yield and the one-year loan market quotation rate (LPR). The representative loan market interest rate reasonably adjusts the deposit interest rate level. The interest rate self-discipline mechanism further encourages small and medium banks to lower the upper limit of deposit interest rate. Interest rate plays an important guiding role in the allocation of resources, and the formation and transmission mechanism of market-oriented interest rate is also more conducive to the rational allocation of resources. At present, the policy direction is to strengthen the supervision of deposit interest rates, guide the cost of bank debt down, so as to pass on to the loan side, reduce the comprehensive financing costs of enterprises. However, since the adjustment of the deposit interest rate quotation method, the interest rate of short-term large certificates of deposit has risen slightly, while the interest rate of long-term large certificates of deposit has fallen and converged, and there is no great difference in interest rates among the large certificates of deposit products provided by various banks, so customers tend to choose large banks, resulting in the loss of customers of small and medium-sized banks, and the difficulty of collecting deposits has further increased. And the size of structured deposits continue to reduce pressure and interest rates continue to fall, banks are becoming less attractive to depositors, but deposits are still the main source of funds on the liability side of the bank, and the pressure on small and medium-sized banks to take deposits is still great.

2. The future development path of small and medium-sized banks

The essence of finance is credit transactions based on security and trust under the constraints of an effective system, and bank credit plays a fundamental role in the financial system. In recent years, the frequent occurrence of bank risk events, such as the bankruptcy of Baoshang Bank and the difficulty of withdrawing funds from Henan Village Bank, has further affected the public's confidence in financial institutions, especially the crisis of confidence in small and medium-sized banks. Financial consumers should not only consider the management and risk control ability of small and medium-sized banks, but also pay attention to the moral hazard of shareholders of small and medium-sized banks. Although there is a deposit insurance protection mechanism, some depositors prefer to choose deposit products provided by large state-owned banks rather than deposit products with slightly higher interest rates provided by small and medium-sized banks. For a variety of asset management products, investors are more inclined to large state-owned banks and joint-stock banks.

Small and medium-sized banks should change their previous business strategy of relying on high interest rates to collect deposits and cultivate their core competitiveness. Guide commercial banks to compete in service capabilities, not in the price of funds. When small and medium-sized banks compete with large banks, their capital strength and debt management capabilities are not dominant, and there are problems such as serious homogenization of product business and serious internal controllers. Their core competitiveness is centered on innovation capabilities, supported by location advantages and marketing advantages, and linked by organization and management. Therefore, the future development of small and medium-sized banks should take a differentiated route, the introduction of characteristic business products is the development path, business model and business layout is the key, cultivate good customer relations, accelerate the transformation of intermediate business.

The reason behind the pressure on small and medium-sized banks to collect reserves is the high liquidity pressure, and capital replenishment is an effective means to alleviate the liquidity pressure of small and medium-sized banks. At present, commercial banks can obtain profits through business operations to increase capital, or through IPOs, issuance of additional shares, issuance of preferred shares, perpetual bonds, subordinated debt and other ways to finance and replenish capital, however, small and medium-sized banks are subject to the weak ability of endogenous capital replenishment, exogenous financing channels are limited, small and medium-sized banks also have difficulties in capital replenishment. Enhancing profitability is the main means for small and medium-sized banks to replenish their capital, with strong autonomy, low cost and without diluting the equity of existing shareholders. In addition to developing its own unique business, controlling credit risk and reducing the rate of non-performing assets are also conducive to capital growth. Large, small and medium-sized banks should actively build and put into use financial technology, which can help identify credit risks in all stages and links of loans, further ensure the health of loans and reduce the rate of non-performing assets. The threshold for replenishing capital through exogenous channels is too high for most small and medium-sized banks, and perpetual debt is an innovative financing tool in recent years, which can also be issued by unlisted commercial banks, so small and medium-sized banks can try to participate.

The credit crisis faced by small and medium-sized banks is caused by the failure of corporate governance. For commercial banks, the lack of the governance role of major shareholders will lead to insider control problems, and excessive intervention in bank operations will also bring moral hazard. In China's practice, the moral hazard of large shareholders to small and medium-sized banks is more prominent: large shareholders dominate, maliciously control banks and even the entire group, transfer assets, hollowing out funds. The solution to this should be to optimize the equity structure, and a good equity structure has some checks and balances. The bank's equity structure is too concentrated, will bring the problem of major shareholder control, equity institutions are too decentralized, major shareholders can not effectively check the management, there will be the problem of insider control. The supervision of corporate governance of small and medium-sized banks can refer to the experience of financial holding group supervision, and carry out penetrating supervision.

For the regulation of Internet deposit business can be designed in two ways: one is to prohibit, clear the stock, prevent increment. In the first scheme, all banks are prohibited from carrying out new Internet deposit business, and the Internet deposit business that has not yet expired will be settled naturally after maturity, and new ones are not allowed. The second option is based on the application of a commercial bank, and the regulatory agency comprehensively considers the bank's capital adequacy ratio, liquidity management capabilities, corporate governance and other factors to decide whether to allow it to carry out Internet deposit business and strictly control the scale of Internet deposits.

The supervision of deposits is mainly prudential supervision, which is based on concerns about the anti-risk ability and self-control ability of small and medium-sized banks. Since January 2021, China's regulatory agencies have first prohibited commercial banks from carrying out Internet deposit business through third-party platforms, and then prohibited local corporate banks from collecting deposits in different places through various channels, reiterating the local positioning of local corporate banks. The Regulations on the Administration of Savings stipulate that "no unit or individual other than a savings institution may handle savings business", which shows that the current legal provisions and regulatory attitude of our country do not allow the brokerage deposit business. With regard to whether China will be able to open up its brokerage deposit business in the future, the experience of U.S. regulation shows that only banks with capital adequacy ratios are able to absorb intermediary deposits, and that higher turnover rates and different deposit insurance rates are set for intermediary deposits in liquidity management. The brokerage deposit business has certain requirements for the corporate governance of banks, the professionalism of regulatory agencies, the maturity of investors, and the perfection of supporting systems. It is possible to liberalize these conditions when they are mature.