Bank regulator proposes tightest shadow lending oversight to date

The China Banking Regulatory Commission yesterday pitched one of the most aggressive measures to date aimed at reining in the shadow banking industry.

"This would be the biggest change we've seen for controlling shadow banking," said Chen Xingyu, a banking analyst at Phillip Securities in Shanghai, noting that the measure could bring an unprecedented level of transparency to off-book bank lending. "We expect more clarity on this in the coming months."

The draft of potential changes from the CBRC gave few details but said that off-balance-sheet assets such as bankers' acceptances and trade finance would be included in the calculation of leverage ratios at banks.

Clarity would also be added to the calculation method for banks' exposure to derivatives and securities financing transactions.

For two years, the CBRC has attempted to narrow the channels that banks can use for off-balance-sheet lending with limited success.

Assets under management at trust companies, a once-favoured conduit for bank shadow lending, fell in the third quarter to the lowest level since 2010. However, banks have found new, less-transparent channels such as securities brokers and, more recently, insurance companies through which they can structure products.

In the short term, more clarity on the nature of banks' off-balance loans is likely to reveal an increasing amount of bad loans that have thus far been kept off the books. "One of the direct impacts is that asset quality would go down for banks," Chen said.

Non-performing loan ratios have increased markedly at many banks this year and those rates were expected to increase next year.

The CBRC draft also proposed raising leverage ratios as the banking system comes into line with a set of international standards known as Basel III. Since last year, lenders have vigorously raised capital to reach the Basel III recommended capital adequacy ratios.

Adding some off-balance-sheet assets to the calculation was "in favour of banks as it would be easier for them to meet the regulatory requirement going forward", according to Erin Lee at Yuanta Securities in Shanghai.

State-run Shanghai Securities Journal said yesterday the move could push several trillion yuan into the formal banking system at a time when regulators had shown increasing sensitivity to the high cost of borrowing for corporations as well as a willingness to reform outdated lending restraints.

The draft for the rule change comes on the same day the People's Bank of China lowered its benchmark lending rate by 40 basis points to 5.6 per cent - the fist rate change since 2012.

The central bank reportedly injected 10 billion yuan (HK$12.6 billion) into banks this week as several companies prepare to go public next week and liquidity in the interbank market becomes tight. Trading on the interbank market was extended by 30 minutes on Thursday.

The State Council earlier this week said it would loosen lending restrictions at banks, a measure that policymakers hope will relieve pressure on banks.