Is China Gearing Up for Mainstreaming Securitisation?

It was only a short and mostly generic sounding release from the China Banking Regulatory Commission but, as is often the case with regulatory pronouncements from the Chinese authorities, what they say can often be less important than why and when they say it.

Close China market watchers are reading between the lines of the Commission’s recent release of “guiding principles” for the securitisation of commercial receivables by banks in China.  Is this a case of the domestic banks approaching a tipping point in their desires to utilize structured finance techniques to better manage their growing balance sheets or is the government attempting to reassure the outside world (global investors) that they are watching the developing securitisation market with great intent, therefore providing some comfort that the market will not spin out of control before it even takes off?

Given the events in the structured finance markets over the past several years, this looks to be a sound step for the Banking Commission to be taking.  Certainly a market with an increasingly strong and more predictable pool of consumer assets available for structured programs can only be a good sign for investors looking for new investment opportunities.  If this market does begin to heat up and the regulators can help make it a smooth launch, it can only be good for the markets throughout the region.

Here the China Banking Regulatory Commission’s release from earlier this month:

Notice of China Banking Regulatory Commission on Further Improving the Management of Credit Assets Securitisation Business

 

Since the pilot program of credit assets securitization was launched in 2005, some banks have successively commenced this business and witnessed the business scale gradually expanded. In order to safeguard the healthy development of this securitisation business and improve related risk supervision, all banking institutions are required to make following efforts.

 

I.                  Paying attention to assets quality and steadily promoting securitisation activities in line with business strategy and management capacity. Given the current market situation and investors’ risk appetite and endurance, banks are expected to have their good assets securitized. Where non-performing assets are included, banks should take effective measures to diversify credit risk and default risk associated with the business and fully disclose the information.

 

II.              Ensuring “veracious sales” and controlling credit risk. The initiating bank should sell the securitized assets in real sense so as to make these assets off balance sheet and mitigate credit risk. In addition, the initiating bank should precisely distinguish and appraise the risk shifted away by transactions and the risk still remained, of which the later one must be effectively monitored and controlled.

 

III.           Accurately judging the risk transfer and strictly abiding by capital requirement. Banks revolving in securitisation activities should, based on the veracious risk transfer, set aside provisions for risk exposures arising from securities issuance, credit enhancement, investment activity and loan service, etc. in order to ensure capital adequacy and prudential operation.

 

IV.            Strengthening risk management and internal control thus to ward off operational risk. Upon the initiation of asset-backed securities, the initiating bank should establish particular internal risk management system for the business, covering operational procedures and administration, selection process of basic assets, relevant accounting methods, etc. And this particular system should be incorporated into the bank’s overall risk management systems. When going through loan service function, the lending banks should clarify business procedures and internal policies for offering information and transferring funds, put in place a rigid internal supervision and examination mechanism with a view to improving completeness and steadiness of the whole system functions.

 

V.                Working out a proper assessment mechanism of loan service performance thus to ward off moral hazard. The lending banking should have in place sound internal policies and standards for securitized assets management with clear post description and proper assessment mechanism. Due diligence of the management should be covered by the assessment in order to guard against moral hazard. Where the borrower defaults on the payments after the loans are securitized, the bank should intensify efforts of collection and resolution so as to reduce operational risk and reputation risk.

 

VI.            Standardizing procedures of transferring creditors’ rights thus to ward off legal risk. Firstly, the initiating bank should employ professional and experienced law firms, underwriters, accounting consultants, rating agencies, etc. for the purpose of regulating activities of every business link. Secondly, the initiating bank should adequately communicate with relevant judiciary and supervisory authorities in a bid to ensure trade structure designing and practical operation are in compliance with law and regulations. Thirdly, the initiating bank should well inform debtors of the business and keep them from misunderstanding the activities, thus to facilitate the development of securitisation business and ward off legal risk.

 

VII.         Disclosing information and protecting investors’ legitimate interests. Banks involving in securitization business should fully disclose information concerning basic assets pool and urge the sub-prime securities investors to keep clients’ data in confidentiality when introducing basic assets to these investors.

 

VIII.     Reinforcing financial education on investors. Banks revolving in securitization business are expected to well educate the public, particularly the medium and small investors, on credit assets-backed products and related risks.

About markferraris
Managing Principal Orchard Street Partners LLC

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