Three China Banks Disciplined for Failing to Curb Loan Growth
(Beijing) — China’s central bank is flexing its muscles in its fight against debt by punishing three commercial banks for lending practices that failed to meet “macro-prudential assessment” (MPA) standards, several sources told Caixin.
The disciplinary moves in recent months that targeted the Bank of Ningbo, Bank of Nanjing and Bank of Guiyang were not made public. But analysts familiar with the banks said they failed to meet MPA standards for “general lending,” which includes conventional loans to companies and individuals as well as bond purchases, off-balance-sheet investments, and various loans to other financial institutions.
The Nanjing bank was slapped with a three-month ban on access to loans through the central bank’s medium-term lending facility, according to a source, who did not say when the ban started.
Around the same time, the Ningbo bank in Zhejiang province and Guiyang bank in Guizhou province had their “primary dealer” privileges revoked for one year.
The People’s Bank of China introduced MPA standards more than a year ago in an attempt to set limits on bank-lending growth and prevent systemic risk by smoothing out the impact of the economy’s cyclical ups and downs. MPA standards are also part of an overall effort to rein in government and institutional debt, particularly “shadow banking” practices, which fall outside the scope of traditional loan monitoring and central-bank money supply controls.
The MPA system allows for categorizing each of the nation’s banks in order to monitor and compare their operations in a variety of fields, including especially making loans. Banks that perform well according to MPA standards are rewarded with, for example, preferential interest rates on reserve funds kept with the central bank. But banks falling short can be punished.
Since the MPA framework was implemented last year, the central bank has been adjusting the incentives mechanism. In February, for example, it announced that banks failing to meet MPA standards must pay higher interest rates when borrowing through the central bank’s short-term lending facility.
The central bank’s action against the Bank of Nanjing marked the first time a restriction has been placed on medium-term loans under the MPA framework, a source close to the central bank said.
And after losing primary dealer status, the Ningbo and Guiyang banks could no longer trade bonds directly with the central bank through the interbank market and lend funds raised from those bond sales to other financial institutions, according to knowledgeable sources. Primary dealers make money on these transactions by pocketing the difference in interest rates.
The disciplinary action leveled against the Nanjing bank is considered less serious than the primary dealer status revocations, as the latter can damage a targeted bank’s reputation as well as its ability to “obtain stable, large-sum and low-cost funds from the central bank and reloan the funds at higher interest rates to other banks,” said a bank risk control officer who asked not to be named.
Among China’s 25 publicly listed banks, the Bank of Nanjing ranked 17th in terms of market capitalization as of Monday. The Bank of Ningbo was No. 18 and the Bank of Guiyang No. 21.
The central bank assesses institutions every year while deciding whether to grant primary dealer status. It announced in early March that four securities firms and 44 banks, including the Bank of Nanjing, but not the Ningbo and Guiyang banks, had been approved as primary dealers for 2017.
The central bank started surveying bank performance in 2015 and used that data to finalize MPA standards before January 2016, setting in stone the parameters and a monitoring system for bank lending.
MPA standards are subject to change. And soon, according to a source close to the central bank, new tools designed to prod banks toward improving performance according to MPA standards are expected to be announced by the central bank.
“In the future, (bank discipline) methods will be expanded to other fields under the central bank’s jurisdiction, including the interbank market, the foreign exchange market, as well as the bonds market,” said a source close to the central bank.
For central bank officials who monitor banks, the general lending growth rate plays an important role in deciding whether a bank meets MPA standards.
The growth rate is a crucial factor for calculating a bank’s capital adequacy ratio, which is factored into MPA monitoring and subject to regulatory controls. Other MPA indicators include interest rate setting, liquidity conditions, cross-border financing risks and progress of implementing various central bank policies.
Over the past year, official documents have shed light on how the central bank designed and changed MPA standards.
For example, evaluated banks that earn a failing grade in quarterly MPA reviews would receive 10% to 30% less interest on reserve funds they keep with the PBOC than banks scoring a passing grade, according to the PBOC. Those with a higher-than-passing “A” grade can earn interest rates exceeding those for other banks.
Critics of MPA in the past called the grading system a weak control mechanism since a bank that gets a failing grade could still make money — perhaps even more money — by issuing loans that don’t meet MPA standards.
But the latest disciplinary action suggests the central bank has heard those critics and decided to add teeth to its enforcement mechanism, analysts said.
“Actually, the central bank has quite a few tools,” a bank manager said. “They include, for example, the authority to approve subordinated bond issues and the rate of capital contribution to a deposit insurance mechanism.”
“As the central bank sees fit, all of these tools can be included as incentives into the MPA system,” he said.
Contact reporter Wang Yuqian (firstname.lastname@example.org)