It benefits banks' funding structure and lifts profits.
The increasing use of medium-term facilities has two direct benefits for Chinese banks: it benefits commercial banks' funding structure and it lowers funding costs and lift profits, Moody's Investors Service reports.
In 2017, China's central bank People's Bank of China (PBOC) expanded two medium-term facilities, namely the medium-term lending facility (MLF) and the pledged supplementary lending (PSL), as vehicles for the bank's balance sheet expansion.
Here's more from Moody's:
The use of the MLF and the PSL improves the PBOC’s monetary management by allowing the central bank to fine-tune its liquidity provision at an operational level without interfering with the government’s broad monetary direction. Given their longer tenors, the MLF and the PSL allow the central bank to communicate a longer term view on its liquidity provision, which increases predictability for market participants, including banks. This is in line with a visible decline in interbank repo rate volatility since mid-2017, when the central bank made a clear shift to the one-year MLF.
The increasing use of the MLF benefits commercial banks' funding structure. The MLF as a form of market funding is more stable than alternatives, such as repos and interbank liabilities. The longer one-year tenor currently offered on the MLF also means that banks find these liabilities to be a better match to their assets in terms of duration. It also lowers funding costs and provides a profit lift for recipient banks because interest rates on MLF funding are lower than market rates for the same tenors.
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