Weak risk controls heighten risk of Chinese bank WMPs
Chinese Banks urgently need to resolve weak oversight of wealth management products in order to avoid scandals such as Hua Xia Bank’s failed WMP. December 20, 2012 | Alice YangChinese investors recently gathered at the gates of Hua Xia Bank’s Jiading branch to protest the bank’s default in a wealth management product. While judicial results have yet to be released, the claim is that an employee allegedly sold the bulk of a wealth management product to the equivalent of 119 million renminbi ($19.1 million), with the bank now not being able to repay said investors. It is bemusing that an unpermitted wealth management product could be sold at a bank branch for over half a year without the bank’s knowledge. In this case, the concern is not only about an employee’s alleged irregular product selling, but also the bank’s lack of supervision and weak risk control systems. Because of the strict control of interest rates and loan-to-deposit ratios in China, wealth management products (WMPs) have become the preferred choice for banks in an attempt to expand income and avoid the 75% loan-to-deposit ratio limitation. Since the WMPs are off balance sheets and only reveal limited information such as yields, it’s convenient for banks to issue WMPs to take in capital then lend the money out without using their own capital. In the event of a sluggish stock market and real estate market, WMPs offer higher rates of return than deposit rates, and they have attracted domestic investors who generally have a very limited range of investment channels. WMP issuance has risen rapidly in recent years. According to a recent Fitch Ratings report, “Chinese Banks: the issuance of WMPs continue to increase toward the year-end”, WMP issuance hit 12 trillion renminbi ($1.9 trillion) as of end September 2012, compared to 8.5 trillion renminbi ($1.36 trillion) for the whole of 2011. Unlike previous years, WMPs were mostly issued by smaller banks this year, not by China’s traditional “Big Four”. The smaller banks’ market share of WMPs has risen to 48% from 32% in 2011. Of the new WMPs issued this year, worth some 3.5 trillion re... Please login to read the complete article. If you already have an account, you can login now or subscribe/register.
Categories: China, Regulation, Retail Banking, Risk and Regulation, Wealth ManagementChina,riskregulation,retail,Risk and Regulation,Wealth Management, China,Regulation,Retail Banking,Risk and Regulation,Wealth Management, Keywords:Hua Xia Bank, WMPs, BoC, Xiao Gang Hua Xia Bank, WMPs, BoC, Xiao Gang
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