China calls on local governments to ‘defuse the bomb’ of troubled small banks
- Beijing lays out road map for rescuing troubled small and regional banks as risks of problematic lenders have started to emerge amid economic slowdown
- Move comes after Baoshang Bank, Jinzhou Bank and Hengfeng Bank all ran into trouble in recent months
China is in the process of drafting a road map to “defuse the bomb” of problematic small and regional banks after three crisis rocked the world’s second biggest economy in the last four months, according to an official Chinese newspaper.
If a regional bank runs into trouble, such as a liquidity shortage or technical insolvency, it is expected that the bank itself, the local government, and financial regulators in Beijing work together to rescue it, according to the Economic Information Daily, a newspaper run by the official Xinhua news agency.
In particular, the local government should shoulder the main responsibility for restructuring a lender that has run in trouble and provide “funding and taxation” support.
The People’s Bank of China, the country’s central bank, is working to distribute the guidelines, the newspaper reported. The central bank prefers mergers or restructurings of troubled banks over bankruptcies, and it will “use different policies to defuse the bomb” on a case-by-case manner, the newspaper said.
China’s small and regional banks, which in some cases serve as the financing arms of local governments, are particularly vulnerable to the current economic slowdown after excessive lending to projects favoured by local officials, with some becoming time bombs in China’s financial system.
In May, China was forced to take over Baoshang Bank in Inner Mongolia, the country’s first bank failure in more than 20 years, as its credit risks were seen as too high to ignore.