Qiang Liao, senior director of financial institutions ratings at S&P’s, feels that shadow banking activities are more of a symptom, than cause of emerging systemic risks to the domestic banking sector.
August 15, 2013 | Qiang LiaoShadow banking has, undoubtedly, been growing at a rapid clip in China. According to Standard & Poor’s estimates, shadow banking accounted for Rmb22.9 trillion ($3.7 trillion) of credit in China at the end of 2012, after making adjustments to avoid double counting. We estimate credit in this market has increased at a compounded annual growth rate of 34% since the end of 2010. We believe that growth is likely to remain strong for at least the next few years, albeit at a slightly slower rate.
So what’s been fuelling the expansion in shadow banking since 2008? In short, growth has been driven by massive investments in infrastructure and property development, consolidation in China's export sector, and restrictive measures in the banking system. For Chinese banks’ shadow banking activities, regulatory arbitrage-or circumventing regulatory measures -is particularly pertinent, given that the government regulates interest rates, sets steep deposit reserve ratios (20.5% for major banks), and imposes conservative loan-to-deposit requirements (capped at 75%). The central bank also intervenes in loan growth by setting banks quotas for new loans. What’s more, market competition has encouraged banks to seek loopholes in regulations by offering loans and attracting deposits via wealth management products and other unconventional channels, such as loan-backed repurchase agreements with non-bank financial institutions.
An underdeveloped bank-performance culture has also boosted shadow banking activity. Banks have used wealth-management products and other off-balance-sheet credit to increase headline profitability and diversify their revenue mix. In addition, many banks have opted to extend credit to liquidity-thirsty clients through the shadow banking market, at a time when the regulator is focused on reducing non-performing loans in the regular system.
In our view, several areas of shadow banking in China could be highly risky. These include tru...
Categories:
Capital & Strategic Issues, China, Risk and RegulationKeywords:S&P's, Qiang Liao, Shadow Banking, Credit Risk, Contagion Risk, FSB, Systemic Risk
