CBRC orders banks to create firewall around wealth management services

PUBLISHED : Monday, 14 July, 2014, 3:09am
UPDATED : Monday, 14 July, 2014, 3:09am

Mainland banks must create a firewall around increasingly popular wealth management services, the banking regulator said, in order to avoid any contagion from higher-risk products spreading to normal bank loans.

Banks must establish a separate department to carry out wealth management business by the end of September, the China Banking Regulatory Commission (CBRC) said on Friday.

The mainland's wealth management sector has exploded in recent years, Xinhua reported, citing the CBRC as saying that mainland banks had sold 50,918 wealth management products with an outstanding book value of 13.97 trillion yuan (HK$17.45 trillion) by the end of May, equivalent to about 27 per cent of the mainland's gross domestic product last year. Such products brought mainlanders more than 450 billion yuan in extra financial income at average weighted returns of 4.13 per cent last year, well above the benchmark interest rate of 3 per cent for one-year deposits, the CBRC said.

Beijing has been pushing to strengthen regulation of the wealth management sector as it looks to diversify funding channels. The new rules require banks to set up separate departments for risk management, accounting and statistical analysis for wealth management services, and give details for each wealth management product individually.

In a research note yesterday, JP Morgan analysts said the rules were likely to have a "negative impact on system liquidity and may increase default risks", but they were unsure whether they applied to existing wealth management products or only ones that would be issued after the announcement.

They said the rules might affect smaller mainland banks, including China Merchants Bank, Citic Bank and Minsheng Bank, more than their peers because they were carrying more exposure to wealth management products.

The three lenders' average ratio of wealth management product to assets was 13 per cent last year, higher than the industry mean of 8 per cent. China Merchants Bank's reading jumped to 17 per cent last year from 11 per cent in 2012.