Shadow Banks Out of Beijing's Control
A good follow-up to the previous post Beijing Can’t Even Control Beijing
Making banks clearly reflect that risk on their balance sheets has been a priority task for the China Banking Regulatory Commission (CBRC) for years. This most recent effort includes substantial revisions to rules published in 2011 on how banks should control the risk of their off-balance-sheet business.
The regulator released the draft policy on Wednesday and will seek public opinion until Dec. 23.
The policy greatly expands the range of operations that banks must now monitor and report for credit-risk purposes. These include when they provide guarantees for loan payments and also an array of so-called investments and intermediary services, such as lending to a specific borrower on the instruction of the company that provides the funds. This is known in China as making an “entrusted loan.”
The proposed regulations also apply to so-called entrusted investments, in which the bank invites a specialized investment firm to manage its own capital or wealth management products. Entrusted investments have received much attention this year in China’s financial circles because the funds it channeled to bond traders played a big role in fueling a rally that led to central bank intervention.
…Facing so many difficulties, “it’s hard to know how far the regulators will be able to go on supervising and controlling off-balance-sheet business,” another CBRC official said.
“But there is one thing for sure,” he said. “That’s the goal of what we’re doing with off-balance-sheet operations — they cannot continue this barbarian growth anymore.”