Nov 16, 2017 06:17 AM

New Rules Released on Policy Banks to Enhance Risk Control

The China Banking Regulatory Commission requires policy banks to create the capital restraint mechanism. Photo: Visual China
The China Banking Regulatory Commission requires policy banks to create the capital restraint mechanism. Photo: Visual China

China's banking regulator on Wednesday issued regulations for the first time specifically designed for the nation’s three state-owned policy banks, clarifying their business positions and enhancing oversight of risk control.

The special rules for supervision and management measures apply to the country’s three giant policy lenders – the China Development Bank (CDB), the Export-Import Bank of China (EximBank) and the Agricultural Development Bank of China (ADB) – according to Zhou Minyuan, head of the China Banking Regulatory Commission's policy banks supervision department.

Under the new rules, the CBRC requires the policy banks to establish a capital restraint mechanism with a capital adequacy ratio as a core regulatory indicator, though the commission didn’t set a specific ratio.

The regulator will set requirements on capital adequacy ratios for the three policy banks based on the requirements for commercial banks, said Xu Qinghong, deputy head of the CBRC’s policy banks supervision department.

The rules also include specific requirement on corporate governance and internal controls. The CDB will have an external board of supervisors, something that is already in place at the two other banks.

China established the three policy lenders in 1994 under the direct jurisdiction of the State Council as part of a banking sector overhaul that relieved the major state-owned commercial banks from their role in carrying out government-directed spending. Supervision and management of the policy lenders has mainly followed rules outlined in a 1993 State Council document on financial sector reform, without any specific law or regulation.

But as the policy banks’ businesses have expanded over the years, the institutions have become the subject of complaints that they are increasingly competing with commercial banks while enjoying greater policy support. The industry has called for new rules to fill the regulatory vacuum.

The new regulatory documents clarify business roles for each of the policy lenders. The CDB should focus on mid- and long-term investment financing, especially in strategic and underdeveloped sectors. The EximBank is aimed at supporting the development of international trade and cooperation, as well as Chinese companies expanding globally. The ABD mainly provides support for national food security and poverty reduction, the CBRC said.

Compared with a draft version released in August, the final rules remove requirements that the policy banks shall have no unfair competition with commercial banks but instead assign them a complementary role to cooperate with commercial banks.

As of the end of September, total assets of the three policy banks reached 25.12 trillion yuan ($3.79 trillion), data from the CBRC showed. The banks extended loans of 1.42 trillion yuan to projects related to the Belt and Road Initiative, China’s massive plan aiming to connect Asia, Europe, the Middle East and Africa with a vast logistics and transport network.

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