China sets about putting house in order, steps up supervision of financial institutions seen as too big to fail

Beijing began the process of improving its supervision of Chinese financial institutions viewed as too big to fail, in latest efforts aimed at defusing risks amid a slowing economy and heightened tensions related to its trade war with the United States.

These “systemically” important banks, securities firms, insurance companies and financial holding companies are considered so large and interconnected with other institutions that their failure will threaten the stability of the Chinese – and global – financial system.

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Chinese regulators have jointly issued guidelines for the evaluation and supervision of these institutions, and will soon release a list identifying them, according to a circular posted on the website of the People’s Bank of China, China’s central bank. The list will be updated annually.

“Systemically important financial institutions must meet stricter supervision of their capital and leverage,” according to the central bank statement. Their liquidity and exposure to high-risk assets will also be monitored and regulated, it said.

These institutions will undergo regular risk evaluations and stress tests, and could face higher compliance costs, as they might have to boost their capital and meet government-set leverage limits.

But, “in the long run, the guidelines will help push systemically important financial institutions to take responsibility for their risks, prevent their blind prevention and ensure the healthy development of the financial sector and the stable operation of financial markets,” the central bank said.

Wu Qi, a senior fellow at Beijing-based think tank Pangoal Institution, said the new guidelines follow international best practice developed after the global financial crisis of 2008-09.