Banking & Finance

China’s banking regulator lays out draft plan to tighten oversight of banks’ off-balance sheet business

CBRC introduces a draft of new rules which requires caps and provisions for an opaque areas of business among lenders

PUBLISHED : Wednesday, 23 November, 2016, 10:30pm
UPDATED : Wednesday, 23 November, 2016, 10:52pm

China’s banking regulator introduced a set of new draft rules governing commercial banks’ off-balance sheet business on Wednesday afternoon, and urged banks to set aside impairment and provisions for risky business.

The new rules, pending industry feedback, will enhance risk management operations at banks, but will also weigh on regional, and smaller sized banks. Also, it is unlikely to affect the outstanding issuance of wealth management products(WMPs), a major part of the off-balance sheet business among Chinese banks, analysts said.

“The new rules, which raised strict requirements in provision and capital setting for banks’ products promising guaranteed returns and intermediary business, will directly affect the banks’ capital adequacy ratio, and even their profit,” said Shujin Chen, research director at DBS Vickers.

Smaller banks with aggressive off-balance sheet business are most likely to be affected by the new rules, while the decline in capital adequacy ratio will restrict them from developing new business, or expanding risk assets, she added.

According to the draft of rules introduced by the China Banking Regulatory Commission (CBRC), commercial banks should set a “risk quota” to cap their off-balance sheet business. Specific measures to calculate the quota remain unknown.

Also, when dealing with intermediary business, Jack Yuan, an analyst with Fitch Ratings, said: “The new rules look to be general guidelines on strengthening WMP risk governance and controls. I do not expect that it will have a material impact on the scale of outstanding issuance.”

According to data from CBRC, the outstanding WMPs stood at 26.3 trillion yuan by the end of June, up 11.83 per cent from the beginning of 2016, or 17 per cent of deposits.

It is the equivalent to 37 per cent of GDP, up from 16 per cent three years earlier, and around 77 per cent of outstanding WMPs resided off the balance sheet, according to the data from Fitch.

That means they are, in effect, bank contingent liabilities as there is a widely held expectation that issuing banks are holding implicit guarantees for the principal and sometimes even returns of the products.

Smaller banks have higher exposure to WMPs, according to a Fitch report issued in September, among mid-tier banks, WMPs were equivalent to 43 per cent of deposits at the end of the first half, up from 41 per cent six months earlier and just 22 per cent at the end of first half in 2014, which “makes them especially vulnerable”.

In late October, media reported China’s central bank was considering enhancing the monitoring of commercial banks’ off-balance-sheet business, by incorporating them under its macro-prudential assessment (MPA) system.

The MPA system is framework adopted by the central bank at the beginning of this year to gauge risks in bank-credit exposure.

The intention was not stated in the draft rules.

“The MPA initiative is more about controlling broad-based credit growth, while the draft of rules is specifically targeting risk management enforcement of the shadow banking business,” Chen said.