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CBRC Targets Pledged Assets in Bid to Cut Credit Risks

By Wu Hongyuran, Han Yi and Dong Tongjian

(Beijing) — China's banking regulator has introduced a policy to improve the management of pledged assets in a bid to protect commercial lenders against credit risks amid a frothy housing market and volatile stock market.

The China Banking Regulatory Commission (CBRC) on Friday rolled out draft guidelines on the management of collateral assets that commercial lenders accept to enhance the credit quality of borrowers. The draft, pending public review until Jan. 15, presents clear requirements for the classification, value assessment, and stress tests of assets pledged.

Since the latter half of 2015, housing prices in China have jumped dramatically on inflows of borrowed money, which has resulted in a rapid increase of the value of pledged assets, as commercial banks have taken more real estate as collateral.

During last week's Central Economic Work Conference, the central government vowed to restrain property bubbles and curb price volatility.

Some commercial lenders have eased risk-management requirements pertaining to collateral assets when granting mortgages due to a scarcity of other profitable assets, the CBRC said.

Lenders face increased risks if they grant loans secured by assets with inflated values if borrowers fall behind on loan payments when a market bubble bursts.

"If there is a systematic aberration of the estimated value of the properties, banks' risk-resistance capacity in guarding against the drop of housing prices would be largely undermined," the regulator said.

The draft guidelines urge commercial banks to keep abreast of industrial policy changes regarding pledged assets, and to reassess the value of assets at least once a year, or with a frequency that's in line with the volatility of the collateral assets' value.

For pledged financial assets that are actively traded, real-time appraisals should be adopted to record daily changes based on market prices.

In January, the CBRC instructed commercial lenders to investigate pledged stocks, and a banker in Shanghai told Caixin that regulators required that a loan granted should not exceed more than half of the value of pledged stock.

The new guidelines mark a change by the CBRC to a more systematic approach to regulating collateral, according to an industry source.

"Previously, the CBRC had sporadically introduced regulatory measures concerning pledged assets, but without any systematic and comprehensive requirement," said a source at another big commercial lender. "The regulators are now proposing more stringent and precise requirements to regulate collateral at commercial banks."

Contact reporter Dong Tongjian (tongjiandong@caixin.com)

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