Baoshang Bank woes a warning of financial risks

Source:Global Times Published: 2019/6/9 20:38:40

Illustration: Luo Xuan/GT


Chinese financial regulators announced recently that Inner Mongolia-based Baoshang Bank was taken over for one year starting from May 24 due to serious credit risks. The move is aimed at protecting the legitimate rights of depositors and other clients, according to a joint statement by the People's Bank of China (PBC) and the China Banking and Insurance Regulatory Commission (CBIRC).

Specifically, a special team was set up to take over Baoshang Bank's operations management, with its business entrusted to China Construction Bank. After the takeover, principal and interest on personal saving accounts at the bank will be fully guaranteed, and the individual wealth management business will also not be affected.

With the central government prioritizing the prevention of systemic financial risks, the sudden takeover of Baoshang Bank may only be the tip of the iceberg of risks facing China's commercial banks. The incident has caused shocks in the domestic financial market. Market participants are eager to find clues to questions like: how will the incident deteriorate? Was it an individual case or not? Will it trigger a series of financial risks? What kind of impact will the handling of Baoshang Bank have on the domestic financial market?

It is worth noting that the takeover may break the implicit guarantee for corporate business at the bank. According to the central bank, it would guarantee all principal and interest of corporate deposits and interbank liabilities below 50 million yuan ($7.24 million), but the handling of those above 50 million yuan needs to be re-negotiated with the takeover team. This means that corporate business above 50 million yuan at Baoshang Bank may not have the guarantee for full repayment.

Ironically, Baoshang Bank, which is exposed to serious credit risks, even won five national awards in 2018, including the best wealth management innovation award, the best Chinese private banking award and the most popular financial product brand.

Based on the information available, we came up with the following judgment. The takeover by the PBC and the CBIRC is just a preventive measure, which doesn't involve issues like bankruptcy and liquidation. After one year of takeover, the situation may deteriorate, but it also could get better. At present, the handling of Baoshang Bank has important implications as a benchmark, and the country's financial authorities and the China Construction Bank will try their best to ensure that it won't cause any bigger risk and to try avoid further market panic.

From the perspective of the entire commercial banking sector and financial market, whether the Baoshang Bank incident has any universality in the context of the domestic economic downturn, the deteriorating business environment, and the excessively high financial leverage ratio in recent years deserves attention. 

There are several issues that need attention. First of all, the Baoshang Bank incident may not be just an individual case. Given the current situation of domestic joint-stock banks, city commercial banks and rural commercial banks, commercial banks could pose more problems in the future.

Second, is Baoshang's problem just about business management? The performance and risk control of a local commercial lender is usually a comprehensive manifestation of the local economy, status of local companies, debt issues, and credit environment. 

In many regions, it is worrying to see that state-owned enterprises operate with government support, and private enterprises operate with collateral guarantees. Once a company goes wrong, it may cause a chain reaction.

Third, the takeover of state-owned financial institutions may become a new model. Considering the examples of Anbang Insurance and Baoshang Bank, financial regulators and other state-owned financial institutions are often left taking responsibility. Such a trend may lead to strengthened state oversight over financial resources.

Fourth, the current statistics of banks' nonperforming loans lack credibility. Commercial lenders often tend to cover up problems until they become too big to handle.

The Baoshang Bank incident may be just a risk alert. The central government is highly concerned about systemic financial risks. 

Without the takeover by financial regulators and the China Construction Bank, the Baoshang Bank incident could have become a regional financial risk. Against the backdrop of the US-China trade tensions, it is necessary for regulators and market supervisors to be vigilant that some regional financial risks may expand and turn into systemic financial risks.

The article was compiled based on a report by Beijing-based private strategic think tank Anbound. bizopinion@globaltimes.com.cn

Posted in: INSIDER'S EYE

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