Chinese Banks Banned from Using Trust Firms to Dodge Risk Controls

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The China Banking Regulatory Commission has set its sights on the use of trust firms by lenders to conceal risk levels, as part of a broader crackdown on the country’s shadow banking sector.

CBRC announced on Friday that commercial blanks would be prohibited from using partnerships with trust firms to channel funds into real estate, stocks, or local government financing vehicles.

The regulator has also imposed a ban on deals between banks and trust firms designed to dodge official risk controls.

Trust firms are considered a key segment of China’s immense shadow banking sector, and are often used by commercial lenders to engage in “regulatory arbitrage” and avoid capital or investment curbs.

According to CBRC the rapid growth of partnerships between commercial banks and trust firms contained “hidden dangers,” and trust firms should avoid “blind” growth.

Assets under management by China’s trust sector reached 23.1 trillion yuan as of the end of June, for a near five-fold increase over a five-year period.

CBRC has also called for banks to review their investment risk exposure via trust firms, and allocate sufficient provisions in the case of losses.

 

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