Does China’s new MPA system hint at lesser RRR cuts in the near term?

By FXStreet FXStreet (Mumbai) – New Macro Prudential Assessment system, or MPA , announced by the PBoC on 29th December will be used more as a lever for enforcing financial stability and not merely as a tool used to increase or remove liquidity from the system. The objective is to control risk factors. The central bank stated that while calculating ratios for individual banks, their stock and bond markets exposure will be considered. Growth in lending, rates on loans and capital adequacy are the other factors that will be looked at.

Banks are required to put aside a percentage of their deposits that they can’t lend out. This is the required reserve ratio and an increase or slash of this ratio impacts cash supply in the banking system. Currently, the central bank pays a 1.62 per cent annual interest rate on banks’ required reserves and 0.72 per cent on extra reserves parked at the central bank.

In its announcement last week, the PBoC declared that it will use the MPA system to assess banks’ capital adequacy as well as to check financial institutions’ interest-rate pricing. The central bank said it will assess data on a quarterly basis. It will however provide guidance to …read more

Source:: FX Street