Private Banks in Sight

By+deng+yaqing

After years of heated controversies and dashed expectations， the China Banking Regulatory Commission （CBRC） finally unveiled its pilot private bank scheme on March 11， which selects 10 privately owned companies， including Internet giant Alibaba and Tencent， to participate in the preparations for setting up five private banks.

The private banks need to comply with the provision that the equity ratio of a single share- holder should be no more than 20 percent， and be co-sponsored by at least two private capital providers， said Shang Fulin， CBRC Chairman.

“The pilot program is a breakthrough. For the first time， private capital will be empowered to dominate banks management， business development and risk management，” said Shang.

“These banks need to set up their own board of directors， board of supervisors and management structures， so that they can oper- ate independently，” said Shang. The full play of the market mechanism is what mainly differentiates these private banks from existing commercial banks， he said.

Private banks also need to make clear their prospective target markets. Experts say that if private banks engaged in similar businesses as state-owned banks， competition would be intensified and the marketization process would be hampered.

Shang suggested that the five private banks would be differentiated in operation pattern with a collective focus on small and micro-businesses， as well as residential communities.

F o r i n s t a n c e ， the team of Alibaba a n d W a n x i a n g Group， a Hangzhouheadquartered automotive components manufacturer， will specialize in absorbing small deposits and issuing small loans by setting a ceiling on the deposit and loan of every customer. Moreover， Alibaba will further exploit its edge in Internet technology and mainly target small online businesses.

The bank co-established by Tencent and its partner will be geared toward attracting large deposits and issuing small loans.

“Well push forward the establishment of private banks cautiously and prudently，” said Shang， specifying no concrete timetable for the official launch of the five banks.

Equal access

According to CBRC statistics， more than 100 small and medium-sized banks are now seeing private capital make up half of their assets， and in rural areas， the ratio even surpasses 90 percent for small and medium-sized financial institutions. Nonetheless， state-owned capital is still playing a leading role in the banking sector.endprint

State-owned banks have gotten used to the soft existence provided by fat deposit and loan interest margins. It seemed that money would voluntarily appear in their pockets without them having to rack their brains for ways of cozying up to customers， while small and medium-sized banks have always been in a disadvantageous position in competing with state-backed banks.

Competition leads to progress. Pan Gongsheng， vice governor of the central bank， said that the birth of a private banking sector bodes well for Chinas social and economic development， as private capitals entry into the financial services sector would help to spark innovation， and further facilitate the development of startups and programs concerning individual farmers， agricultural ventures and rural areas as a whole.

“Diversified competitors should be admitted into the banking sector and be treated as equals. voices calling for private banks have evolved into doubts over the governments attitude toward fair competition，” said Pan， noting that the establishment of private banks was meaningful for cementing peoples consensus and building up confidence in financial reform.

Pan argued that equal admittance criteria should be applied to private banks， making sure that all forms of ownership have equal access to factors of production， and that the private ownership economy has equal rights， enjoys equal opportunities， and competes on an equal basis with the public ownership economy.

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.endprint

“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 Chinas 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 Peoples 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 peoples 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 privatepublic banking sector.endprint