The People's Bank of China (PBC) promulgated regulations Wednesday governing bond issuance by financial institutions in the interbank market.

The regulations, for the first time, allow financial companies affiliated to group firms to issue bonds in the interbank market to help meet the funding needs of the group.

The regulations take effect on June 1 and will replace rules enacted in 1998 that governed bond issuance of the three policy banks.

They will also be supplementary to last year's regulations on the issuance of subordinated debt by commercial banks, should the issuance take place in the interbank market.

The new rules "are conducive to standardizing the issuance of financial bonds in the interbank bond market, and ensure the smooth issuance of financial bonds by commercial banks and financial companies of group firms," the PBOC said in a statement.

The issuance of financial bonds will help adjust a widespread maturity mismatch in the asset liability management of deposit-taking financial institutions, and will help commercial banks raise long-term funds from sources other than deposits, the bank said.

Being able to issue bonds will help group companies reduce their reliance on bank loans, and subsequently lessen systemic risk in the banking system, which provides more than 80 per cent of the funding for the economy, it said.

Financial companies of group firms are required to have a minimum 10 per cent capital adequacy ratio and sound corporate governance mechanisms, while commercial banks need to have a 4 per cent minimal core capital adequacy ratio, three consecutive years of profit preceding the issuance, and adequate bad loan provisions, before they can issue bonds.

(China Daily May 12, 2005)