One of China’s leading financial scholars has weighed in on the recent decision by Chinese regulators to take over the problem-fraught Baoshang Bank.
On 24 May the Chinese central bank and the China Banking and Insurance Regulatory Commission (CBIRC) announced the launch of a takeover of Inner Mongolia’s Baoshang Bank (包商银) for a period of one year in the wake of “severe credit risk,” with management of the bank entrusted to leading state-owned lender China Construction Bank.
The move marks the first time that Chinese regulators have launched an official takeover of a commercial bank, as well as the second time in little over a year that they have taken over a financial institution following its actions with regard to Anbang Group in February 2018.
Dong Ximiao (董希淼 ), vice-head of Renmin University’s Chongyang Financial Institute, writes in an opinion piece that the move will “help to prevent and dissolve systemic financial risk, maintain financial and social stability, as well as protect the legal rights of the bank’s depositors and other clients.”
“The takeover of Baoshang Bank embodies the principles of the rule of law and the market, and plays a major role with regard to the long-term growth and financial risk prevention of China’s banking sector,” writes Dong.
“The focus of the Baoshang bank takeover is risk prevention… in recent years Baoshang Bank saw unrestrained expansion, while asset quality markedly dropped, equity level problems became numerous, hidden risks accumulated, and the bank failed to deliver annual reports for two consecutive years.
“Commercial banks differ from normal enterprises, their risk is unique and contagious…following the takeover Baoshang Bank has in fact obtained national trust, helping to stabilise market confidence and prevent problems such as bank runs.”
According to Dong the next step will be to establish comprehensive mechanisms for the disposal and withdrawal of high-risk financial institutions, with the takeover itself helping to explore measures for resolving such issues in future.
“Despite the law providing clear provisions, there is in fact no precedent domestically for bank takeovers, and specific execution still requires exploration during the process of implementation,” wrote Dong.
“This is especially the case with regard to handling of a bank’s relevant creditor’s rights and debts, which require consideration of original legal relationships and contractual provisions, as well as the prevention of liquidity risk and moral hazard.
“The law stipulates that commercial banks that have been taken over will not see any changes to their creditor and debtor relations as a result of takeovers, yet on 26 May the central bank and CBIRC said that public deposits and interbank debts of more than 50 million yuan prior to takeover will be subject to equal negotiation between the takeover team and creditors.”