China tests a US-style grading scheme to ring-fence banking system from risks as it opens financial market to more foreign participation
- The scheme is based on a descending scale of one to five, with the best-run 1A banks scoring between 95 and 100 points, while those with less than 45 points are rated five
- The new rating system applies to branches of banks from foreign countries, Hong Kong, Macau and Taiwan that have operated in China for one full financial year
China’s bank regulator is refining its management of foreign lenders, adopting a similar rating scheme as the US to ring-fence the financial system against risks, while opening the gates to allow more wholly foreign-owned financial institutions to operate in the country.
The scheme appears to be similar in nature to the ROCA system used in the United States, which assigns numbers in a descending scale of 1 to 5 to grade the risk management (40 per cent), operational controls (30 per cent), compliance (20 per cent) and asset quality (10 per cent) of foreign banks operating in the US, under the Office of the Comptroller of the Currency.
China’s banking system was hit by scams this year, when the founders of several rural banks absconded billions of yuan of deposits in Anhui and Henan provinces, robbing thousands of depositors of their life savings. The crisis prompted protests and violent crackdowns by the authorities, especially in the Henan provincial capital of Zhengzhou.
The number of foreign banks in China soared between 2006 and 2016, from 224 to 1,031, according to data compiled by Statista. So far, no foreign-owned banks have been implicated in any of China’s financial scams.
The new rating system applies to branches of banks from foreign countries, Hong Kong, Macau and Taiwan that have operated in China for one full financial year.
The rating system is based on a descending scale of 1 through 5 to determine how much supervision branches should receive. The best-run banks, scoring between 95 and 100 points, are ranked 1A, while those that score 45 points or below are rated five.
The weighting of compliance was increased to 20 per cent under the new regulation to “enhance” its importance, the CBIRC said, without disclosing the change in weighting.
The regulator also further refined the rating system. The top rating one is broken into sub-tiers A and B, while those rated two, three and four are subdivided into A through C.
Bank branches that are rated 1A or 1B are deemed to have stable operations and management, with the capability to resolve minor problems in their daily operations, and the strong ability to resist risks. Regulators can lower the number of site inspections for these branches.
Regulators also look at the level of support branches get from the head office to give a rating of one through five. A five means the support from the head office is “meaningless” for its branches in China and regulators will take immediate actions, the CBIRC said.
Scores on the four core areas and the head office’s support will determine a final rating for the branches, upon which regulators can decide what levels of supervisory concern and actions are needed.