Caixin View: New Financial Conglomerate Supervision A Needed Fix To Lax Enforcement
The Chinese government’s plan to roll out new rules and set up a new regulatory structure later this year will likely fix the long-standing problem of weak supervision of powerful financial conglomerates, a welcome move.
Weak enforcement, rather than insufficient rules, has historically been the main problem with regulating these companies. To address the problem, the government will make the People’s Bank of China (PBOC) the sole regulator of financial holding companies and conglomerates to ensure strict enforcement of the new rules, Caixin has learned.
Financial conglomerates engage in more than one kind of financial service — like banking, insurance and securities — which in the past cut across the remits of multiple regulators. Many non-financial companies pushed into the financial sector in pursuit of cheap liquidity and opportunities to fund questionable acquisitions. Weak oversight aided by regulatory arbitrage -- playing watchdogs off against each other -- allowed these groups to flourish.
“For these financial holding companies, it is difficult to understand the (complex) structure of their assets and liabilities, so when risks manifest themselves, there could be a significant domino effect,”a senior regulatory source had previously told Caixin. Anbang Insurance Group Co. Ltd., whose former chairman is currently appealing an 18-year jail sentence, debt-ridden HNA Group Co. Ltd., and the mysterious Tomorrow Holdings, whose chairman is reportedly assisting authorities with their investigations, are all examples of such conglomerates.
The new regulations will build on a pilot scheme run by the PBOC that has been running since last December. Proper governance structures, capital adequacy ratios, and leverage limits are all likely to be part of the new rules, which will be enforced by the PBOC alone.
Until now, lack of adequate enforcement stymied efforts to control financial conglomerates. Existing rules stipulate that a bank shareholder may have either non-controlling stakes in up to two banks or a controlling stake in one. Shareholders in insurance and securities companies are not allowed to control more than one financial firm. Yet companies like Tomorrow, Anbang, and HNA were all still able to make multiple investments and acquisitions in the financial industry.
There's good reason to think enforcement will stricter under the PBOC. First, having just one agency in charge is an improvement over the 2002 attempt at regulating these conglomerates, which floundered over questions of divided supervision — although stronger legal backing, analogous to aspects of the 2010 Dodd-Frank act in the U.S., is also likely to be necessary to support the PBOC's enhanced role. Second, China's recently released blueprint for tackling risks in its sprawling financial system through 2020 puts strong emphasis on supervision of financial conglomerates. Third, the five financial companies in the PBOC pilot program are all controlled by non-financial companies: precisely the kind of companies previous attempts at supervision overlooked. And finally, under fierce regulatory pressure, several non-financial firms have already been moving to divest themselves of their stakes in financial services.
Macro & Finance
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