Popular High-Yield Deposits Under Scrutiny in Risk Clampdown
Chinese regulators moved to tighten oversight of commercial banks’ $1.5 trillion business of structured deposits as part of a campaign to clamp down on financial risks.
Commercial banks must have derivatives trading licenses to offer structured deposits, and the sales of such products must follow rules for wealth management products, the China Banking and Insurance Regulatory Commission (CBIRC) said in a notice published Friday on its website.
Structured deposits, often known overseas as yield-enhancement products, are deposit products that are embedded with derivatives contracts linked to currencies, commodities or stock prices. They offer a mixed return in line with regular bank deposits along with yields linked to the derivatives.
The products have gained popularity in China since 2018 as regulators tightened control on banks’ sales of wealth management products, forcing banks, especially smaller lenders, to seek alternative sources of funding.
Since the beginning of this year, the market for structured deposits has grown quickly as yields outpaced borrowing costs from bank bills, attracting companies to use borrowed money to invest in such products.
As of the end of September, Chinese banks had 10.9 trillion yuan ($1.5 trillion) of structured deposits outstanding, compared with 9.62 trillion yuan at the end of 2018 and 6.96 trillion yuan at the end of 2017, according to the CBIRC.
The fast-expanding sector, which largely fell outside regulatory oversight, has caught regulators’ attention. In September, the Beijing municipal banking and insurance regulator took the lead by issuing guidelines demanding that banks tighten scrutiny of the design and sale of structured deposit products while enhancing risk disclosure to investors.
The Friday notice required banks to strengthen review of investors’ risk tolerance and clearly inform them about potential risks of structured deposit products.
Banks should fully disclose information about the products during the investment period and set up separate systems to manage sales, investment and risks of structured deposit assets, according to the new rules.
Structured deposit products should be included on banks’ balance sheets and in calculations for reserves and related provisions, according to the rules.
Banks will have a grace period of 12 months to comply with the requirements, the CBIRC said.
Additional reporting by Bloomberg
Contact reporter Han Wei (firstname.lastname@example.org)
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