Banking Watchdog Unleashes Regulatory Frenzy
(Beijing) — In the two months since the arrival of its new chairman, China’s top banking regulator has been flexing its muscles in a regulatory upheaval aimed at sweeping out some long-standing problems in the industry.
Since late March, the China Banking Regulatory Commission (CBRC) has issued at least seven policy documents with new and tightened regulations that target the goals of reducing systemic risk, as well as deleveraging and enhancing governance of the banking sector. The sector has been plagued by mounting bad loans and rising risks from “shadow lending” activities — business similar to those provided by commercial banks but conducted by enterprises not under regulatory oversight.
The documents identified major risks facing the country’s banking system, the world’s biggest in term of assets, with an emphasis on bad loans, real estate sector funding, interbank borrowing, internet finance, and wealth management products. Lenders are required to step up risk control efforts.
The commission also said it will clean up industry malpractice such as improper trading and incentives, and preferential hiring practices, among others.
“The (newly issued) documents are still warm,” Fang Heying, deputy president of Citic Bank, said to Caixin after an April 13 CBRC news conference. Fang said his bank is studying the new regulations and making plans for internal inspections.
The CBRC has bared its teeth. In the first quarter, the commission has imposed fines of 190 million yuan ($27.6 million) on dozens of banking institutions for hiding bad loans, circumventing regulations and charging fees illicitly, the regulator revealed in early April. Those caught in the dragnet included China Merchants Bank Co. Ltd., Ping An Bank Co. Ltd., and the Bank of Communications Co. Ltd.
Liu Fushou, director of CBRC’s legal department, said on April 7 that more cases are under investigation, and “regulators will slap harsh punishments on market violators to curb frequent misbehavior.”
The regulatory frenzy began after Guo Shuqing, a former chairman of China Construction Bank Corp. and four-year governor of Shandong province, took the helm as CBRC chairman in February.
Guo has promised to tackle the “various phenomena of disorder” in the banking industry by cracking down on shadow lending, strengthening supervision of banks’ wealth management products, and taking resolute action to root out corruption and hold officials responsible for mistakes and negligence.
The regulatory body itself is under closer scrutiny. Caixin learned from other sources that CBRC Assistant Chairman Yang Jiacai, has been under investigation since April 9 for suspected links to a loan scandal involving the Bank of Communications in Wuhan, Hubei province. The fall of Yang followed that of another top financial regulator — Xiang Junbo, the chairman of the insurance regulatory body.
The CBRC has also stepped up internal inspections of staff compliance and said it will look at whether ex-regulators who now work at banks used relationships to streamline the supervisory process, and whether financial institutions intentionally ordered employees to take jobs at regulatory agencies for the sake of insider influence.
The stream of new and tightened rules has sparked debate on whether this marks the start of an overhaul of banking regulations or if it is just part of a sporadic campaign.
“Do not underestimate the regulatory efforts,” said Zeng Gang, banking industry research chief at the Institute of Finance and Banking of the Chinese Academy of Social Sciences. Zeng said he expects stricter rules to be issued targeting banks’ misdemeanors. He also said the unfolding regulatory efforts will force financial institutions to rein in improper innovative businesses and adjust business structure, leading to uncertainties surrounding the revenue prospects for the industry.
“If all the misconduct identified in the documents is checked and punished, it will incite a revolution,” said a senior CBRC official who declined to be named.
Since late March, the CBRC has ordered self-inspections and set up spot checks targeting banking practices that violate industry rules, take advantage of regulatory loopholes or engage in risky innovations.
Zeng said the commission’s top concerns are risks associated with lax supervision of investment products interconnecting the banking, securities and insurance sectors; financial institutions’ shareholders; and wealth management business.
Risks hidden behind the prevalent cross-section products and expanding shadow lending through wealth management products have caught regulators’ attention in recent years. Since February, the central bank and the three financial regulators for the banking, securities and insurance industries have worked together on new overarching regulations for the asset management industry, which is run by financial institutions. Earlier this year, the People’s Bank of China decided to include asset management plans (AMPs) in its Macro Prudential Assessment system, a points-based framework adopted by the central bank at the start of 2016 to gauge risks in bank-credit exposure.
The CBRC is also drafting a separate regulation on wealth-management products that will direct banks to invest wealth management funds into more-transparent assets and rein in excess leverage.
“Risk control was identified as the main priority for the financial industry in last year’s top policy setting conference,” an executive at a commercial bank said.
In a recent policy document issued on April 10, the CBRC asked banks to inspect their investments in government projects, investment funds and private-public partnership projects that use wealth management funds to curb shadow-lending activities through off-balance-sheet business.
The commission also required banks that undertake entrusted investments through other financial institutions such as mutual fund managers, trust companies, securities firms and private funds to exam such investments to make sure the practices are transparent and under proper risk control. Chinese banks have long been allowed to buy investment products from other financial institutions and to outsource the management of their investments to third-party professional asset managers. But such practices have been criticized in recent years for adding excess financial leverage and increasing risk.
The CBRC is also taking aim at internal governance of commercial banks after the emergence of several cases of lenders that were overwhelmingly controlled by a single shareholder who was exposed to credit risks after funding troubled companies or being involved in connected-party transactions.
One such bank is Jilin Jiutai Rural Commercial Bank Co. Ltd., which extended 1.35 billion yuan in loans to debt-ridden China Huishan Dairy Holdings Co. Ltd., which has been in default on some of its loans since late March. Huishan Chairman Yang Kai is the largest shareholder of Hong Kong-listed Jiutai Bank.
In a letter issued on April 12, the CBRC said it will closely monitor banks’ equity transactions to tighten scrutiny on shareholders and their capital sources to make sure bank assets are protected from influential shareholders and executives seeking illicit gains.
“The series of documents has set clear targets, and we are busily studying the implementation,” an official at a local CBRC office said. “Whether measures such as spot checks can be fully carried out will determine the final results” of the policies, he said.
There is some debate about how harsh policy implementation should be. A commercial bank executive said regulators have to consider market reactions and give banks room to adapt to the tightening regulatory environment. “It is unrealistic to try to solve all problems in a few months as many have existed for more than six years,” the executive said.
But a CBRC official said it is time for the regulator to take firm action to fix long-standing problems as quickly as possible to avoid a bigger crisis in the future.
But the implementation of the policies will face great challenges, partly due to the commission’s inspection and investigation capacities as well as the vested interests that have developed between government agencies and financial institutions over the years, a senior CBRC official said. Some of the problems are the result of regulators’ conniving, the official said.
“It will be very difficult for the policies to be implemented exactly,” he said.
Contact reporter Han Wei (email@example.com)