China Banking Authority Targets Seven Key Areas for Regulatory Tightening
The China Banking Regulatory Commission has flagged tighter regulation of the financial sector across a total of seven key areas, including interbank operations, wealth management products and information disclosures.
The regulator launched a heavy-handed crackdown on the banking sector in March of last year, shortly after incumbent chairman Guo Shuqing took office in February.
China Securities Journal notes that in April 2014 CBRC issued the “Notice on Pragmatically Remedying Regulatory Shortcomings and Raising Regulatory Competence” (关于切实弥补监管短板提升监管效能的通知), which outlined a total of 26 regulatory deficiencies.
CBRC has since produced a total of 41 supplementary regulations directed at specific organisations or business operations.
According to the Journal the regulatory shortcomings that CBRC seeks to remedy lie in a total of seven key areas:
1.Regulation of commercial bank ownership
The “Commercial Bank Equity Regulation Provisional Measures“(商业银行股权管理暂行办法) were officially released on 5 January, focusing specifically on “hidden shareholders,” proxy shareholding, “insubstantial” equity investment sources, the illicit conduct of coordinated transactions, and the abuse of shareholders’ rights.
The Measures seek to increase transparency with respect to the final beneficiaries of equity ownership in Chinese banks.
2. Cross-market financial products.
According to CBRC cross-market or cross-sector financial products ares still subject to problems including “regulatory arbitrage” and “regulatory blanks.”
The regulator hopes to further standardise trust loans, bank-trust cooperation, cross-market financial products and off-balance sheet operations, in order to better control fund flows, increases in leverage, lengthening of the financing chain and regulatory arbitrage.
To this end in December of last year CBRC issued the “Notice on Standardisation of Bank-Trust Operations” (关于规范银信类业务的通知) while on 6 January of this year it issued the “Commercial Bank Entrusted Loan Administrative Measures” (商业银行委托贷款管理办法).
3. Asset management operations
CBRC is cooperating with the Chinese central bank to formulate unified rules for the rapidly expanding asset management sector, in order to address problems such as implicit payments, complex structures, maturity mismatches and lack of standardised regulation of various products.
The regulators also plan to unveil accompanying by-laws concerning wealth management product and trust operations.
4. Liquidity risk.
The regulator is introducing new liquidity risk management indices and tools based on international standards, in order to reduce excessive reliance on short-term wholesale financing as well as the extreme maturity mismatches that are especially prevalent amongst China’s smaller lenders.
5. Loan quality
China’s banking sector loan categories and standards are already in synch with international practices, yet CBRC remains concerned about the imprecision of certain categories, which could lead to insufficient provisions or profit inflation at commercial banks.
In order to address these issues, CBRC is formulating rules in relation to large-scale risk exposure, joint credit management and asset risk categorisation.
6. Capital controls.
CBRC has issued new rules to address the regulatory blanks or inadequacies in relation to capital controls for policy banks, financial asset management companies as well as the State Council’s China Development Bank.
7. Information disclosures.
CBRC has indicated that it will seek to improve transparency and strengthen market constraints in the banking sector via a range of measures including the regular publication of administrative penalties.
CBRC officials have said that they will make reference to international standards to ensure that information disclosures in the Chinese banking sector become more accurate and detailed, in order facilitate comparisons between banks.