Here's how the deposit deviation requirement will affect China banks

Changes are coming, that's for sure.

In China, in response to the recently introduced Document No. 236 requiring that on any day banks’ deposits should not be more than 3% higher than the daily average amount, some banks will need to change their operating behaviour in order to comply with the new rule.

According to a research note from Barclays, for instance, a senior manager at a local bank (which was not named in the report) said that the bank now prohibits its staff from taking deposits and/or granting new loans in the last three days of the month.

That executive said that this was to address an event in case there is an unexpectedly large inflow of deposits that inflates the month-end base.

Here's more from Barclays:

They will also smooth the maturities of their WMPs throughout the month instead of this being concentrated near month-end as before.

In contrast, prior to the introduction of the regulation, banks usually operated in the opposite way so as to expand their end-of-month deposit bases.

Since the change in definition of loan-to-deposit ratio (LDR) earlier in the year, according to the banks we met with, LDR is no longer a strong binding constraint for many banks, and there is no immediate pressure for the regulators to abolish the rule at the moment.

On the contrary, the loan quota still seems to be binding at some banks.