Regulators Move to Restructure Troubled Baoshang Bank

Chinese regulators have finished dealing with the troubled Baoshang Bank Co. Ltd.’s debts to large corporate and interbank clients, and will now verify the bank’s assets before restructuring, according to a Q&A published (link in Chinese) by the central bank-backed Financial News on Sunday.

By June 7, Baoshang’s large corporate and interbank clients had transferred all their claims to the deposit insurance fund management company set up by the People’s Bank of China (PBOC) on the same day the lender was taken over. The transfer marked the end of the first phase of the takeover, according to the Q&A, which was presented as an interview with an unnamed official on the government team in charge of the takeover.

The team will now focus on verifying the bank’s assets and restructuring the bank as soon as possible, the official said.

They conceded that the takeover had led to “a little bit of pain,” but said it was good for the market’s development.

According to the official, 99.98% of Baoshang’s corporate creditors have had their claims fully guaranteed. The remainder — as well as some large interbank creditors — had an average of 90% of their claims guaranteed at the preliminary stage.

The official said the high guarantee ratios came from the fact that the fund management company purchased Baoshang’s assets and liabilities to fully take over the bank — instead of simply bankrupting and liquidating it. If it had done the latter, depositors of all kinds would only be guaranteed up to 500,000 yuan ($72,193.80) each.

Not all creditors were fully guaranteed because doing so would encourage financial institutions to invest in illegal high-interest products without conducting a solid risk assessment, the official said. This was a “moral hazard” that could lead to a “systemic crisis.”

The PBOC and the China Banking and Insurance Regulatory Commission took over the Inner-Mongolia based Baoshang Bank on May 24, citing serious credit risks, and entrusted China Construction Bank Corp. to manage Baoshang’s day-to-day operations.

The authorities guaranteed the principal and interest of all individual clients’ deposits, as well as corporate deposits and interbank liabilities worth up to 50 million yuan to the full amount, and promised to guarantee large creditors with more than 50 million yuan of claims 90% of their amounts in the initial period, according to the PBOC’s announcement on June 6.

Contact Reporter Liu Jiefei (jiefeiliu@caixin.com)