Caixin
Dec 30, 2017 05:38 AM
ECONOMY

Regulator Tightens Rules Related to Bad Asset Recovery

New guidelines encourage the four national companies set up to recover assets in bad-loan cases to engage in debt-for-equity projects to support the country’s debt-relief efforts. Above: China Huarong Asset Management Co. in exhibition. Photo: Visual China
New guidelines encourage the four national companies set up to recover assets in bad-loan cases to engage in debt-for-equity projects to support the country’s debt-relief efforts. Above: China Huarong Asset Management Co. in exhibition. Photo: Visual China

The China Banking Regulatory Commission released new guidelines for the country’s four national asset-management companies (AMC), clarifying requirements about their capital adequacy ratio, leverage ratio and risk control.

The new rules provide more detailed requirements based on a 2014 regulation of the country’s four national AMCs – China Great Wall Asset Management Co., China Orient Asset Management Co., China Huarong and China Cinda. The guidelines were released on Friday and take effect on Jan. 1.

The four national AMCs were set up in 1999 to take over bad loans from institutions and recover as much money as possible from the assets by selling or restructuring them or applying other workout methods.

The new guidelines kept the 2014 requirement that the parent company of each AMC should has a capital-adequacy ratio of no less than 12.5%. But the rules elaborated that the parent companies’ adequacy ratio for core capital should not stay below 9% while the tier one capital-adequacy ratio must be above 10%, both of which are higher than the related requirements on commercial banks.

The new rules said debt-for-equity swap projects won’t be included in the capital requirement in a bid to encourage AMCs’ participation in such projects to support central governments’ debt-relief efforts.

“It will push forward the debt-for-equity swap projects,” said Lu Zhengwei, chief economist of Industrial Securities.

The new rules also set different risk weight on the AMCs’ investment activities. Bad-asset acquisition and debt-for-equity swap investment are given a relatively lower risk weight compared with equity investments in financial institutions, reflecting the regulator’s intention to encourage AMCs to focus on their core business, an industry source said.

The new rules also require parent companies’ of the AMCs to keep a leverage ratio above 6% and carefully monitor risks related to credit conditions, market fluctuation and business operations.

Contact reporter Han Wei (weihan@caixin.com)

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