Policy shift in BSB takeover breaks rigid redemption: experts

Source:Global Times Published: 2019/6/16 21:08:40

A branch of Baoshang Bank in Huaibei, East China's Anhui province File photo: IC





The breaking of the practice of rigid redemption in Baoshang Bank (BSB)'s takeover was intended to encourage full reliance on market mechanisms and promote the sound development of the nation's financial markets, experts said Sunday.

According to a report by financialnews.com.cn Sunday, during the takeover of Baoshang Bank, the rule of rigid redemption was broken in line with related laws and regulations, and risks were minimized during the process. This case is expected to become a lesson for the broad investors and correct the business models of some financial institutions. 

Rigid redemption is a situation where there are implicit guarantees that savings and investments will be safe even if the financial institutions that hold the money go bust. This principle wasn't followed in the Baosheng takeover.

Earlier this year, China's central bank and the banking regulator announced that Inner Mongolia-based Baoshang Bank would be taken over for one year starting on May 24, citing "serious credit risks," according to the Xinhua News Agency. 

The action was taken after full consideration of the issues involved, according to a representative from the takeover team of Baoshang Bank. According to the report, the market has reacted calmly and the short-term impact will result in reasonable adjustments in the market. So far, signs point to a stable market, the report said. 

Li Daxiao, chief economist at Shenzhen-based Yingda Securities, told the Global Times that breaking the rule of rigid redemption in the takeover of Baoshang Bank was the first time for such a move in a long time, but it can become the norm as it represents a fairer allocation of investment responsibility.

"Breaking the rule of rigid redemption can be educational for future investors," Li said. "It shows that both the bank and investors should take responsibility in a failed investment. No one should rely on any bank that is 'too big to fall'," Li said. 

Li also noted that although the move came as a shock, in the long run it will improve the overall financial market in China, as investors will be more cautious.

"People didn't expect it," said Li. "But based on the reaction, the financial market is capable of handling the immediate impact, and in the long run, it can bring about a healthier financial market."



Posted in: INDUSTRIES,COMPANIES

blog comments powered by Disqus