Existing Mortgage Rate Adjustment Today: Role of Interest Rate Self-Regulation Mechanism

• News
• 2024-10-12

On October 25th, major commercial banks including Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, Postal Savings Bank of China, and Bank of Communications, conducted a batch centralized adjustment of the interest rates for eligible existing housing loans, adjusting the interest rates of existing housing loans with an added point margin higher than -30 basis points to no less than -30 basis points. The adjustment was operated uniformly by the banks, and the vast majority of borrowers did not need to visit bank branches or actively operate online banking.

This adjustment is an implementation measure actively carried out by the relevant banks to implement the spirit of the People's Bank of China's announcement on September 29th and the Market Interest Rate Pricing Self-Disciplinary Mechanism (hereinafter referred to as "Interest Rate Self-Disciplinary Mechanism") initiative. After the adjustment, it is expected that the average interest rate for existing housing loans will decrease by about 0.5 percentage points, saving a total of 150 billion yuan in interest expenditure, benefiting 50 million households and 150 million residents.

Advertisement

It is worth mentioning that the Interest Rate Self-Disciplinary Mechanism and its self-discipline initiative played an important role in this adjustment of existing housing loan interest rates. What kind of organization is the Interest Rate Self-Disciplinary Mechanism, and whether its self-discipline initiative can be effectively implemented has also become a concern for society and the public.

What are the new features of this adjustment of existing housing loan interest rates?

The reporter noticed that the adjustment of existing housing loan interest rates at the end of August last year directly specified the reduction amount and implementation time in the notice. However, the relevant rules for this adjustment were clarified through self-discipline initiatives.

On September 29, 2024, the People's Bank of China issued Announcement No. 11 of 2024, allowing the added point margin of existing housing loan interest rates based on the LPR to be dynamically adjusted by the lending and borrowing parties according to changes in the borrower's credit, market supply and demand, and other factors.

Industry experts believe that this further deepens interest rate marketization reform at the institutional level while maintaining the seriousness of contracts.

According to the requirements of the announcement, the lending and borrowing parties should adjust the added point margin on a one-to-one basis based on market-oriented principles. The People's Bank of China guided the Interest Rate Self-Disciplinary Mechanism to carry out another batch adjustment of eligible existing housing loan interest rates before October 31 through industry self-discipline initiatives, reducing the higher existing housing loan interest rates to the level of newly issued housing loan interest rates nationwide, allowing borrowers to benefit as soon as possible and avoiding the high time cost of one-to-one negotiations.

What is the Interest Rate Self-Disciplinary Mechanism?

It is worth mentioning that the Interest Rate Self-Disciplinary Mechanism and its self-discipline initiative played an important role in this adjustment of existing housing loan interest rates.What kind of organization is the Interest Rate Self-Discipline Mechanism, what kind of force does its self-discipline initiative have, and whether it can be effectively implemented are all issues of concern to society and the public.

In 2013, in accordance with the decisions and arrangements of the Party Central Committee and the State Council on further deepening the reform of interest rate marketization, the People's Bank of China guided the establishment of the Interest Rate Self-Discipline Mechanism.

The Interest Rate Self-Discipline Mechanism is a market pricing self-discipline and coordination mechanism composed of market entities such as banking financial institutions. By selecting financial institutions that meet the requirements of macro-prudential management, have strong pricing capabilities, and have relatively sound corporate governance, it grants them more market pricing rights, establishes a fair competition incentive and restraint mechanism, strengthens industry self-discipline, maintains market competition order, and promotes the orderly progress of interest rate marketization reform.

As of October 2024, the Interest Rate Self-Discipline Mechanism has 1,877 members, including all large commercial banks, joint-stock commercial banks, and the vast majority of city commercial banks, rural commercial banks, and rural credit cooperatives. Among them, 15 systemically important banks are the core members of the Interest Rate Self-Discipline Mechanism, such as Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, Postal Savings Bank of China, etc.

The Interest Rate Self-Discipline Mechanism has one director, who is responsible for convening and presiding over the working meetings of the Interest Rate Self-Discipline Mechanism. The current director of the Interest Rate Self-Discipline Mechanism is the Industrial and Commercial Bank of China.

The Interest Rate Self-Discipline Mechanism mainly carries out industry self-discipline through "self-discipline initiatives". "Self-discipline initiatives" are industry self-discipline documents initiated by the director under the guidance of the People's Bank of China and passed by a vote of the core members. After the vote, the self-discipline initiative needs to be reported to the People's Bank of China for approval to take effect. After the initiative takes effect, the People's Bank of China and its branches will guide the Interest Rate Self-Discipline Mechanism to take a variety of incentive and restraint measures to guide financial institutions to implement the initiative.

Since its establishment, the Interest Rate Self-Discipline Mechanism has been based on being a "policy assistant" for the People's Bank of China, strengthening industry self-discipline, ensuring the effective implementation of policy intentions at the financial institution level, promoting orderly market interest rate pricing, and improving the quality and efficiency of financial services to the real economy.

In the early stage, the Interest Rate Self-Discipline Mechanism played an important role in rectifying illegal manual interest supplementation and establishing a deposit bidding and reporting mechanism, effectively maintaining market competition order and enhancing bank pricing capabilities.

On September 29, in response to the requirements of the Central Political Bureau meeting, the Interest Rate Self-Discipline Mechanism issued the "Initiative on Batch Adjustment of Existing Housing Loan Interest Rates", timely responding to public concerns.