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UPDATED: April 16, 2014 NO. 13 MARCH 27, 2014
Private Banks in Sight
State-owned banks, which have got used to resting on interest margins, face new rivals
By Deng Yaqing

FINANCIAL REFORM: Shang Fulin, Chairman of the China Banking Regulatory Commission, answers questions from reporters at a press conference on March 11 (ZHENG LIANG)

Risk prevention

Due to the pursuit of profits, all banks have the impulse to engage in connected transactions. However, without being insured by national credit, people may be reluctant to deposit their hard-earned money in private banks for fear of a possible failure or default. Therefore, the biggest question now is how to effectively protect the interests of depositors and build up their confidence in private banks.

"Amid the ongoing financial reform, private banks will have to face an array of risks. Only when they are equipped with risk awareness and employ innovative thought will they be able to survive and thrive," said Ma Weihua, former President of China Merchants Bank.

Shang said that the five pilot banks need to make some institutional arrangements ensuring that the residual risks can be effectively kept under control, provide specific terms on the supervision of shareholders, adopt differentiated market positions and strategies, and formulate a legitimate plan on risk management and recovery.

"In other words, they are required to 'make a living will' in case of sudden bankruptcy," Shang said. "The living will" can greatly reduce the potential risks and losses that depositors and taxpayers may suffer in the eventuality that private banks collapse."

Aside from that, regulators should create a favorable environment to help private banks develop. In the 2014 government work report, Premier Li Keqiang stressed the significance of the deposit insurance system in China's financial reform.

"Risk prevention is the top priority in pushing forward the development of private banks. As most of them carry out business in towns and counties, integrated financial management architecture should be established to secure depositors' interests and shield them from risks," said Pan, who confirmed the importance of the deposit insurance system, but admitted that it would take some time for all concerned parties to make the necessary preparations.

In the process, consideration should be given to the viability of small and medium-sized banks, argued Yan Bingzhu, Chairman of Bank of Beijing. "Credit ratings should be carried out in terms of capital adequacy, asset quality, management ability and liquidity."

At the same time, the exit mechanism needs to be advanced to eliminate the inferior institutions and ensure the healthy development of the banking sector, added Yan.

Furthermore, private banks should be brought into a supervisory environment featuring fairness and transparency, in order to help them take root, sprout and thrive.

Shang said that oversight should be maintained over the behavior of private banks' shareholders, especially with regard to connected transactions between banks and shareholders. Supervisory departments need to keep an eye on the sustainability of capital injection and their risk-bearing capacity, in case of pilot banks turning into a financing tool serving shareholders' interests.

Pan suggested that private banks would be jointly supervised by central regulators including the People's Bank of China, CBRC, China Insurance Regulatory Commission and the China Securities Regulatory Commission, in addition to regional supervision forces.

"In short, private banks will expand lending to micro-business, increase people's investment channels, propel interest rate liberalization and enhance the efficiency of financial transaction," said Pan.

With the proper supervision, risk management and the necessary groundwork, the future indeed looks bright for the joint private-public banking sector.

Email us at: dengyaqing@bjreview.com

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