CBRC warns banks of off-balance-sheet activities and assets
Revised guideline to mitigate risks from wealth management products by raising capital reserve
China will tighten risk control of commercial banks' off-balance-sheet activities, which have been growing rapidly to a tremendous size in recent years.
Commercial banks should include off-balance-sheet activities in their comprehensive risk management system, according to the draft of a revised guideline on risk management of commercial banks' off-balance-sheet activities issued by the China Banking Regulatory Commission on Wednesday.
They will be required to allocate allowances for impairment losses on assets and to retain risk-based capital for their guarantee business and commitment business. This will also apply to investment, financing and intermediary services in which they essentially take credit risks.
The banking regulator will also require commercial banks to set risk limits on off-balance-sheet activities.
Zeng Gang, director of banking research at the Institute of Finance and Banking at the Chinese Academy of Social Sciences, said: "In the past, commercial banks did not allocate allowances for impairment losses on assets and did not set aside risk-based capital for their off-balance-sheet activities, so the risks arising from off-balance-sheet activities are underestimated.
"The regulator is trying to set the standards of risk management for off-balance-sheet and on-balance-sheet activities at the same level. This is associated with the rapid development of banks' off-balance-sheet activities," he said.
As of the end of the third quarter, the balance of funds for commercial banks' wealth management products was about 27.1 trillion yuan ($3.9 trillion). If the banks were liable for 30 percent of the products, due to guarantees, and if the ratio for the allocation of allowances for impairment losses was 0.5 percent, commercial banks should allocate around 40 billion yuan in total, which accounts for around 2.5 percent of their profits in 2015, said Li Shanshan, a banking analyst at BOCOM International Holdings Co Ltd, in a research note.
"We expect banks will accelerate the restructuring of their business. As long as they complete the rectification on time, there's no need for them to allocate allowances for impairment losses on these products," she said.
