Chinas new asset securitisation pilot programme cannot
succeed without the resolution of regulatory
conflicts-of-interest and more buy-in from domestic banks,
according to market participants.
The Peoples Bank of China
(PBOC) last week announced Chinese banks were participating in
a pilot scheme to securitise credit assets, and confirmed
its intentions to gradually promote asset securitisation within
Chinas domestic banking sector.
It is understood those involved
in the scheme will initially be limited to the Bank of China,
China Construction Bank, Industrial and Commercial Bank of
China, Agricultural Bank of China and China Development Bank.
The pilot is expected to include only simple structures to
start, such as collaterised loan obligations (CLOs).
But one Beijing-based law firm partner told IFLR the
PBOCs enthusiasm for the scheme was largely driven by its
responsibility for the development of Chinas interbank
bond market and a desire to prove to Chinas State Council
that this market was both sophisticated and progressing
The China Banking Regulatory
Commission (CBRC) had been much more conservative in its
reaction to the pilot, he said, because it was more concerned
with the need to protect domestic financial institutions from
The PBOC is not really shouldering its responsibilities
on this, said the lawyer. It is leaving it up to
the CBRC to deal with the potential risks posed by the pilot to
the financial institutions under it supervision and the
possible reputation damage that could occur if anything were to
The CBRC and PBOC need to
reach some middle ground on this, he said.
But attaining the CBRCs
buy-in would be difficult. Put simply there are
fundamental problems with the asset-backed securitisation (ABS)
structure, he said.
As with previous ABS pilots, the
programme is limited to the interbank bond market which means
the majority of investors are banks.
The associated risk of
securitising credit assets thereby remains within the domestic
banking system, said the lawyer. The CBRC is
understandably uncomfortable with that.
Others also questioned
participating banks enthusiasm, and readiness, for
involvement in the scheme.
A Shanghai-based in-house counsel said there was currently
little incentive for banks to securitise creditworthy assets.
There is a danger, therefore, that this will prompt banks to
package bad assets together with those assets that meet
regulators' requirements, and thereby bypass credit
Until the PBOC introduces
a more market-orientated interest rate system in which banks
are able to freely decide lending rate and saving deposit rate
ceilings and floors, domestic banks will have little incentive
to get rid of good loans on their books, he said.
A more market-based
interest rate system would encourage banks to compete with each
other and thereby ensure there is more of a need for ABS
programmes, he said.
In more competitive conditions,
banks would be much more open to a scheme which enables them to
securitise loans and thereby acquire more regulatory capital to
make more loans, he said. But right now conditions
are not ripe for this to succeed.
Many banks were also unprepared to issue ABS, he said.
Many of my clients are still waiting for further
instruction on this as to how they should prepare task forces
internally, he said.
China launched a
securitisation programme in 2005, backed by high-quality
bank assets, such as loans to state companies and mortgage
loans. But the Chinese government slowed down the process of
financial innovation in the wake of the US subprime mortgage