Banking Regulator Sets Its Sights Upon Commercial Municipal Lenders

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The China Banking Regulatory Commission has warned municipal lenders that it plans to step up scrutiny of the rapidly-expanding sector, as part of efforts to ensure that it concentrates on servicing the real economy.

Speaking at the 2017 Municipal Commercial Bank Annual Conference (2017年城商行年会), CBRC vice-governor Wang Zhaoxing (王兆星) said that “municipal commercial banks must strengthen their ability to provide financial services to the real economy, guard the bottom line against systemic financial risk and advance deepening of reform.

CBRC vice-governor Cao Yu (曹宇) pointed to the need to “fully recognise that suppressing malfeasance and the prevention of risk is a long-term work task, and strengthened regulation is the key theme for future work.

“[We] need to focus upon common forms of risk such as credit risk, liquidity risk and operating risk, as well as potentially overlooked forms of risk such as agency risk and money-laundering risk.”

Wang said that CBRC would set its sights upon the issue of the opaque equity structure of municipal banks.

“Particularly in the area of equity management, [we] must implement general principles and increase equity ownership transparency, dealing with the issues of hidden shareholders and proxy holding of equity.”

Wang said that municipal commercial lenders have assumed increasing clout within China’s financial sector, with data from CBRC indicating that their total assets as of the end October approached 31 trillion yuan (USD$4.69 trillion).

“Municipal commercial banks have already become an indispensable part of China’s multi-tier financial system.

“As keybanking sector financial institutions, municipal commercial banks have upheld the market orientation of ‘servicing local economies, servicing micro-enterprises, and servicing urban and rural households.'”

“Municipal commercial banks have seen extremely rapid growth in recent years, and their operating structures have undergone considerable change, as a result of market decisions made in response to the macro-economic environment, sector competition and their own limitations, as well as a series of problems including a shift towards the real from the empty, maturity mis-allocation, reduplicated leverage,and the continuous growth of risk.

With respect to risk, Wang said that municipal commercial lenders should focus upon several key areas.

“First is that the rapid growth of the financial market and the high leverage of financial institutions has increased the liquidity risk for banking sector financial institutions.

“Liquidity risk is the most threatening form of risk, and the form of risk most likely to trigger systemic risk. Small and medium-sized banks must pragmatically and properly perform pressure tests, properly form corresponding contingency plans, and strengthen operational drills.

“Secondly, cross-sector financial operations have expanded rapidly, and the lengthening of transaction chains has increased the difficulty of risk management.

“In recent years municipal commercial banks have undertaken asset management operations, with some already breaching regional and sector-based restrictions, as well as macro-economic adjustment policies and macro-prudential regulations.

“Some funds have flowed towards the real-estate sector and sectors with excessive capacity…substantive risk remains considerable, while some risk hasn’t yet been fully revealed.

“Additionally, the corporate management and risks controls of municipal commercial lenders are lagging, producing many ostensible and hidden forms of financial risk.

“Some municipal commercial banks have weak corporate management, with certain major bank shareholders viewing banks as their own ATM machines, obtaining bank funds by means of trust loans, asset management and repeat equity collateralization..this is what we are sounding the alarm about.”

 

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