New rules tighten bank-risk reins

PUBLISHED : Friday, 02 November, 2007, 12:00am
UPDATED : Friday, 02 November, 2007, 12:00am

The central government is planning to tighten risk controls in the banking sector as overseas acquisitions by mainland banks begin to dissolve the strict divisions between different types of financial institutions.

The banking regulator has drafted a new set of rules designed to 'consolidate supervision' over banks and their overseas holding companies that would allow it to supervise all units controlled directly or indirectly by domestic lenders.

The China Banking Regulatory Commission said the rules, which are subject to a two-week public consultation, were in response to the 'complicated equity structures' that had accrued from banks' foreign forays.

'As holding companies buy up foreign financial institutions, they essentially become banking conglomerates. These not only do banking but also have stakes in insurance, fund, securities, mixed holding companies and even industrial firms,' the CBRC said.

South Africa's Standard Bank, in which the Industrial and Commercial Bank of China bought a 20 per cent stake recently, has both an insurance and a securities arm.

In comparison, the mainland's financial services laws divide the industry into three distinct groups - banking, insurance and securities - that prevent lenders from engaging in 'non-bank' business.

Although the draft rules are ostensibly aimed at keeping tabs on banks' increasingly diversified foreign businesses, they may offer a framework for future liberalisation of China's strict financial segregation laws.

'This consultation paper is about technical details; it is not about policy implications. It is aimed only at consolidating the balance sheets of banks with branches at home and abroad,' said one regulatory official.

Analysts said liberalisation of the laws was inevitable. 'With the development of capital markets, banks cannot stick to traditional banking. It is a natural trend that they will become more diversified with more holding companies,' said May Yan, a China banking analyst at Moody's.

The major question was whether the regulators would follow the United States' holding-company model or the European 'universal banking' model, she said.

The CBRC's move may also indicate it is stepping up its turf war with securities and insurance regulators. The draft rules had 'drawn lessons' from Britain's Financial Services Authority, set up in 2000 to regulate the financial industry, the CBRC said.