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  • Sep 22, 2014
  • Updated: 5:30am

Bankruptcy system on agenda for banks

PUBLISHED : Friday, 15 December, 2006, 12:00am
UPDATED : Friday, 15 December, 2006, 12:00am

China's banking regulator plans to introduce a bankruptcy system for financial institutions at the same time it prepares the new national commercial bankruptcy law which could be considered by China's rubber stamp parliament as early as March.


'We will clearly define the specific standards for exiting the market as well as the rights and responsibilities of financial institutions' clients, creditors, government departments, regulators, the central bank and other affected parties,' China Banking Regulatory Commission Communist Party disciplinary committee secretary Hu Huaibang said in a speech published yesterday.


What to do with non-viable financial firms has been one of the 'long-term issues' hanging over the banking system, according to Fitch Ratings banking analyst Charlene Chu. 'Right now there is just no mechanism to allow bad players to fail,' she said.


While state-owned enterprises have gone bust, there have not been any bank failures - the government has propped up the weak ones to prevent major losses to depositors.


'Right now there is an implicit guarantee that the banks are too big to fail and the government will bail them out, but introducing a bankruptcy system will send a message that they have had their last free dinner,' said BNP Paribas analyst Isaac Meng. 'The logical and necessary next step will be to introduce a deposit insurance system.'


The CBRC held discussions this week with the International Finance Corporation, the private sector investment arm of the World Bank, to discuss international experiences with financial failures.


Such a system would further remove bailout responsibility from the government and is being recommended by the IFC, World Bank and Asian Development Bank, the CBRC said. The government has said that state-owned banks will receive no direct state support once they have been bailed out and listed on stock markets in Shanghai and Hong Kong.


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