Top Bank Regulators Move to Defuse Jitters After Two Bank Runs

Top Chinese bank regulators moved to defuse growing unease in the country’s $40 trillion banking system after two small lenders were hit with bank runs in less than two weeks.

In a briefing Tuesday, three senior officials of the China Banking and Insurance Regulatory Commission (CBIRC) pledged to contain liquidity risks among the country’s thousands of smaller banks. They addressed incidents involving Yingkou Coastal Bank in northeastern Liaoning province last week and Yichuan Rural Bank in Luoyang, Henan province, in late October.

The regulators attributed the runs to false online rumors and sought to restore confidence in the lenders. The world’s largest banking system has been rattled this year not only by those two incidents but also by earlier crises at three other banks.

“The banking industry is very sensitive,” Liu Rong, vice department chief of city commercial banking at the CBIRC, said at the briefing in Beijing. “We should improve the mechanism of liquidity risk management for small and medium-sized lenders and fend off systemic financial risks.”

The two bank runs underscore mounting concerns over potential liquidity risks facing China’s small banks as the world’s second-largest economy continues to cool. China has about 4,500 banks, most of which are small and medium-sized institutions.

In May, a rare government seizure of a city commercial bank in Inner Mongolia — Baoshang Bank — sparked fears about the liquidity health of small and rural lenders. Worries mounted further after the later government bailout of Jinzhou Bank and Hengfeng Bank.

The CBIRC briefing followed the run on Yingkou Coastal Bank in Liaoning. A large number of depositors lined up outside the bank Wednesday to withdraw cash after word circulated online that the city commercial bank was mired in financial woes.

The run subsided after the Yingkou city government issued a statement backing the bank, saying the lender’s operations were in good condition and depositors’ money was safe.

The CBIRC’s Liu said the Yingkou bank run was a one-off event triggered by negative rumors and the bank’s operations have returned to normal. Liu said the bank’s financials have remained sound and its liquidity performance exceeds regulatory requirements. Police arrested two individuals on suspicion of spreading rumors that triggered the incident, according to Liu.

Established in 2010, the Yingkou Coastal Bank operates 20 branches in Yingkou city with total assets of 88 billion yuan ($12.6 billion) as of the end of September. The bank’s liabilities totaled 80.3 billion yuan, according to a company financial report.

China Lianhe Credit Rating Co. found in a recent report that the bank’s risk-weighted assets rose to 82 billion yuan. HNA Group is the largest shareholder of the bank with a 14.6% stake, followed by Huajun Holdings, a private investment holding company.

A similar incident occurred at Yichuan Rural Bank in Henan in late October. Rumors about Yichuan Rural Bank’s solvency circulated after an investigation into the lender’s former chairman. More than 1,000 customers rushed to bank counters to withdraw funds.

Ji Yanmei, a deputy director of the CBIRC’s rural financial department, called for calm at the Tuesday briefing. Ji said China’s rural lenders have sufficient assets and sound liquidity due to their stable sources of deposits and an effective mechanism of cross-region liquidity support among rural institutions.

Xiao Yuanqi, the chief risk officer of the CBIRC, said at the briefing that small and medium-sized banking institutions in general have maintained stable operations with risks under control.

Some banks have accumulated risks related to the economic cycle or poor corporate governance, Xiao said. But the troubled institutions are small and their risks manageable, he said.

Regulators are closely monitoring the risks of the banking industry and have taken measures to contain risks, Xiao said. The measures are starting to take effect, he said.

Liu said regulators will first encourage troubled institutions to rescue themselves through capital replenishment and improved corporate governance. Other measures to address banking risks include restructuring, mergers and acquisitions, takeovers and bankruptcy, Liu said.

Zhou Liang, a vice chairman of the CBIRC, told Caixin Sunday that the regulator will not take one-size-fits-all measures or issue a hardline order for banks to merge in a bid to defuse risks.

Contact reporter Han Wei (weihan@caixin.com)