When asset-management products (funds, bank wealth management products, securities firm asset management, trusts, etc.) enter the two-tier banking system, they do not create base money; instead, by converting household deposits into non-bank deposits (reserve ratio = zero) and through cross-bank custody triggering base-money transfers, they redistribute the reserve stock and the deposit-type composition within the banking system.
The Framework As It Stands
This section is based on compiled research notes: it preserves the original framework’s structure, terminology, and key formulations, including editorial bridging and externally verified factual annotations; diagrams were drawn by the compiler following the original text’s structure.
Core Mechanism and Hidden Threads
Asset-management products enter the two-tier banking system as a new actor, on the operational premise that funds delivered by investors must be held at a custodian bank, which simultaneously handles both custody and deposit functions.
Main-line judgment: asset-management/wealth-management products “break beyond” the two-tier banking system; the core is not bypassing banks but rather changing the distribution of bank reserves and the type of deposits — once household deposits become non-bank deposits, the reserve ratio drops to 0%, and all originally required reserve deposits are fully released as excess reserves available for further lending and deposit creation. This is the most important mechanism through which asset-management products affect bank liquidity.
Three hidden threads:
- Hidden Thread A — The “Breaking Beyond” Is in Essence a Redistribution of Reserves: under same-bank custody, total deposits are unchanged, their nature changes (household → non-bank), and required reserves are released as excess; under cross-bank custody, base money is physically moved from the issuing bank to the custodian bank, and the issuing bank’s reserves may fall to zero.
- Hidden Thread B — Uncertainty in Deposit Type and Reserve Computation: each investment made by a wealth management product rewrites the deposit structure of the custodian bank (non-bank deposits no reserve requirement → corporate deposits require reserves → buying government bonds makes the deposit disappear), and the bank’s reserve-computation department may not be notified in advance, relying instead on internal coordination.
- Hidden Thread C — High Wealth-Management Rates Reflect Interbank Competition for Money: when Bank B sells wealth management products to Bank A’s clients, it is in substance taking Bank A’s base money; some abnormally high wealth-management rates reflect interbank competition for clients and deposits; CDs are the offset tool used by the issuing bank to borrow back funds in the opposite direction.
Proposition Structure
- Asset-management products (funds / bank wealth management / securities firm asset management / trusts) enter Modern Money Creation: Money as Debt as a new actor; the operational premise is that funds must be deposited in the custodian bank, which simultaneously handles custody and deposit functions.
- A wealth management product can be viewed as a non-natural-person, non-legal-entity subject that can independently open accounts, with its own balance sheet (liability side corresponds to investor shares, asset side corresponds to deposits and invested assets).
- After a household buys a wealth management product, total bank deposits are unchanged, but the nature shifts from household deposit to non-bank deposit (non-bank = non-bank financial institution, here referring to the wealth management product).
- [Core mechanism] The reserve requirement for non-bank deposits is 0%: all required reserves originally held against household deposits become excess reserves in full, available for further lending and deposit creation — this is the important mechanism through which asset-management products affect bank liquidity.
- Wealth management investments rewrite the deposit types of the custodian bank: buying corporate bonds → funds lent to enterprises, bank non-bank deposits decrease, corporate deposits increase (corporate deposits require reserves); buying government bonds → funds enter the Treasury, deposits disappear, deposits held at the central bank decrease (exit bank balance sheet but remain on central bank balance sheet).
- The custodian bank’s deposit types change continuously, while wealth management investment operations may not notify the bank in advance, depending on the bank’s internal interdepartmental coordination mechanism — creating great uncertainty in computing and managing reserve requirements.
- Same-bank custody vs. cross-bank custody: when custody is with the issuing bank itself, total deposits unchanged, only type changes, base money does not leave; when custody is with another bank, base money transfers from the issuing bank to the custodian bank, the issuing bank’s central-bank deposits may be entirely transferred out to zero, requiring it to apply to the central bank for a relending facility to replenish reserves.
- The substance of cross-bank custody = Bank B, by issuing wealth management products sold to Bank A’s clients, takes Bank A’s base money; this explains why some wealth management product rates are abnormally high — the underlying motive may be interbank competition for clients and deposits through wealth management products.
- The issuing bank can issue CDs (certificates of deposit, essentially short-term bank bonds) to borrow back funds from wealth management products, partially offsetting the base-money outflow caused by cross-bank custodial wealth management.
Reasoning Chain
flowchart TD A["Asset-management/wealth-management enters two-tier banking system<br/>Funds must be deposited in custodian bank"] --> B["Household deposits → non-bank deposits<br/>Total unchanged, nature changes"] B --> C["Non-bank deposit reserve ratio 0%<br/>All original required reserves released as excess reserves"] C --> D["Excess reserves available for further lending and deposit creation<br/>= core impact on bank liquidity"] B --> E["Wealth management investment rewrites deposit types"] E --> E1["Buy corporate bonds → corporate deposits (require reserves)"] E --> E2["Buy government bonds → enter Treasury, deposits disappear, central bank deposits fall"] E1 --> F["Reserve computation uncertain<br/>Investments not notified in advance, depends on departmental coordination"] E2 --> F B --> G["Cross-bank custody: base money transfers from Bank A to Bank B"] G --> H["Bank A's central-bank deposits fall to zero → must apply for relending"] H --> I["Substance = Bank B takes Bank A's base money<br/>Some high wealth-management rates = interbank competition for deposits"] I --> J["Bank A issues CDs to borrow back funds from wealth management<br/>Partially offsets base-money outflow"]
Key Teaching Examples (original course figures, not current data)
- Same-bank custody baseline: central bank relending gives Bank 100 (base money); bank lends 200, creates 200 deposits; issues 200 wealth management products, after households purchase: 200 household deposits → 200 non-bank deposits, total deposits unchanged, original 100 required reserves all become excess reserves.
- Scenario 2 — Buy corporate bonds: wealth management product uses 10 to buy corporate bonds → bank non-bank deposits fall by 10 (to 190), corporate deposits rise by 10.
- Scenario 3 — Buy government bonds: wealth management product subscribes to 20 in government bonds → central-bank deposits fall from 100 to 80, 20 enters the Treasury (exits bank balance sheet but remains on central bank balance sheet).
- Scenario 4 — Cross-bank custody: household 200 deposits buy 100 wealth management product, custody at Bank B → Bank B adds 100 non-bank deposits, central-bank deposits 100 (transferred in from Bank A via remittance); Bank A’s 100 central-bank deposits are entirely transferred out to zero, applies for 50 in relending to restore central-bank deposits to 50.
- Scenario 5 — CD borrowback: wealth management product uses 20 to buy CDs issued by Bank A → Bank A’s central-bank deposits rise from 50 to 70 (funds borrowed back via CDs); Bank B’s non-bank deposits fall from 100 to 80, central-bank deposits from 100 to 80.
⚠️ The above figures are course teaching examples; (course estimate). Some scenarios (such as transactions between wealth management products and banks’ proprietary books) are restricted under current regulation and constitute “hypothetical scenarios for teaching purposes not to be casually replicated in practice” (course framing).
Analytical Method: T-Account Decomposition of Asset-Management Actions’ Impact on Liquidity
| # | Step | How to Record / What to Look For |
|---|---|---|
| 1 | Identify the entity and custodian bank | First determine same-bank custody or cross-bank custody |
| 2 | Fundraising stage | Household deposits → non-bank deposits; non-bank deposit reserve ratio 0% → original required reserves released as excess |
| 3 | Investment stage | Determine deposit type by asset: buy corporate bonds → corporate deposits (require reserves); buy government bonds → enter Treasury, deposits disappear, central-bank deposits fall |
| 4 | Reserve computation | Deposit types change continuously, investment not notified in advance → computation department faces uncertainty |
| 5 | Cross-bank judgment | Custody at another bank → base money transfers, issuing bank’s central-bank deposits may fall to zero requiring relending; note issuing bank using CDs to borrow back |
| 6 | Interpret anomalies | Abnormally high wealth-management rates → signal of interbank competition for base money/deposits, not pure yield-to-client |
Compiler’s Perspective
Coordinates: Category = Banking & Real Estate · axis_h = Shu (Methods) · axis_v = Why It Is So
Connecting layer:
The five scenarios above share a hidden institutional logic: the rule that the non-bank deposit reserve ratio is 0% causes every flow of funds from household to wealth management product to silently release required reserves at the regulatory level. In cross-bank custody scenario 4, Bank A passively loses all 100 units of its central-bank deposits solely because “a client bought cross-bank wealth management” and must apply for 50 in relending — not because of any deterioration in its own asset quality, but purely because regulatory design allows base money to transfer across banks along custodial relationships.
Reading high-yield bank wealth management products as “banks yielding to clients” is a classic error — abnormally high-rate wealth management products reflect Bank B actively using the custodial mechanism to compete for base money from Bank A; the extra yield obtained by clients comes at the cost of Bank A involuntarily losing its liquidity buffer. Regulatory design (the institutional layer), not bankers’ character, is the starting point of this game.
Proprietary increment: CDs (certificates of deposit) in this framework are not a financing tool but a liquidity-defense weapon — their appearance is precisely the marker that the issuing bank has already been placed on the passive end of cross-bank wealth-management competition and is using new debt to hedge already-lost base money. In scenario 5, after wealth management buys 20 in CDs, Bank A’s central-bank deposits rise from 50 back to 70; but these 20 are in substance “liabilities that must be repaid in the future” exchanged for current liquidity buffer — the issuing bank’s balance sheet has expanded, not returned to the original position.
See Also
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Modern Money Creation: Money as Debt — the mechanism foundation of the two-tier banking system and loans creating deposits; the premise for this entry’s “asset management entering the two-tier system”
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The Structure of China’s Total Social Financing — viewing from a macro perspective the contribution of wealth management, trusts, and other broad credit channels to total social financing
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The Fed’s Balance-Sheet Reduction (QT) Mechanism — for comparison: the central bank actively withdrawing base money through its balance sheet, the mechanical counterpart to the passive cross-bank base-money transfer in wealth-management custody
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Bank Entity Liquidity Risk: The Two-Dimensional LCR and Asset-Quality Judgment
Source
- Compiled notes z-0182 · collected July 2026
- People’s Bank of China balance sheet (monthly public data, line items including deposits at the central bank / claims on other depository corporations, etc.)
- CBIRC “Guiding Opinions on Standardizing Asset Management Business of Financial Institutions” (2018, asset management regulations, governing non-bank deposit custodial relationships)