Caixin
Feb 19, 2013 05:33 PM

Regulator Warns Banks about Pooling Wealth Management Funds

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(Beijing) – A regulator has vowed to take tougher measures against banks that continue wealth management operations in violation of regulations.

In September 2011, the China Banking Regulatory Commission (CBRC) released a policy requiring banks to stop pooling money from different wealth products and using the funds to invest and repay old loans. The collective management makes it almost impossible to access the performance of each wealth product because gains and losses are shared across the board.

Not all banks have complied with the CBRC's requirements. Officials from the regulator said the size of the capital pool at some banks had even grown larger since the new rules were put in place.

However, the regulator's tolerance may be wearing thin. In late January, senior CBRC official Wang Yanyou set a three-month deadline for banks to get in line with the requirement.

Those that need extra time to sort through existing products may do so with the CBRC's approval, but the CBRC would punish continued defiance by revoking the bank's license for all wealth management businesses, he added.

Specifically, Wang said, wealth products that do not guarantee full principal repayment must be managed separately, each accounting for its own loss and gain. Others that cannot be treated as independent must be closely monitored for value fluctuations and adjusted based on regular risk assessment.

These measures are aimed at reducing the maturity mismatch between wealth money and investment targets. The conflict arose because banks often channeled funds from wealth products to securities or trust companies. The latter in turn invest the money in projects such as property development and highway construction that take a long time to produce returns.

The spread between the interest rate on a three-month bank wealth product and that for using the money could be 6 percent, a source from a trust company said. Banks get to earn part of the profit at low ostensible costs, he said, because they do not need to go to all the trouble of finding investment opportunities and managing portfolios.

But the hidden costs were large, Wang said, because banks, especially smaller ones, were likely to lose control over where and how the money was spent, and become vulnerable to unexpected losses.

Some banks use wealth management products as a tool for off-balance-sheet lending. They channel funds raised from wealth products to their own debt financing tools, such as bank notes, with the help of another financial institution, which wraps up the money as an outsider's investment.

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