What’s new: China’s big banks and insurers will now have to make so-called “living wills” laying out contingency plans in case they collapse, a regulator has announced (link in Chinese).
The policy aims to improve the financial institutions’ ability to handle risks and reduce government bailouts, such as those given to Baoshang Bank Co. Ltd. and Hengfeng Bank Co. Ltd., according to (link in Chinese) the China Banking and Insurance Regulatory Commission (CBIRC).
The new rules (link in Chinese) target all banks, as well as financial leasing and asset management firms operating in China with more than 300 billion yuan ($47 billion) in consolidated assets at home and abroad, and insurers with more than 200 billion yuan. The rules took effect Wednesday, after a draft was released for feedback in late February.
In making their recovery and resolution plans, the institutions are required to prioritize market-oriented strategies such as making use of their own assets or raising funds from shareholders, the CBIRC said. Government bodies will only intervene — and only at the smallest possible cost — if the institutions fail to recover and severe risks are posed to the financial system.
Creating “living wills” allows financial institutions to increase their awareness of potential crises and better anticipate problems before they happen, the CBIRC said. Such planning can also clarify local regulators’ responsibilities so they can deal with risk events in an orderly manner.
The background: Policies requiring major financial institutions to make “living wills” have their roots in the fallout of the 2008 global financial crisis, and have been adopted by multiple major economies, including the U.S. and Singapore.
Since 2011, China has asked some financial institutions to make “living wills.” These included the country’s “Big Four” state-owned banks: Industrial and Commercial Bank of China Ltd. (601398.SH), China Construction Bank Corp. (601939.SH), Agricultural Bank of China Ltd. (601288.SH), and Bank of China Ltd. (601988.SH), as well as Ping An Insurance (Group) Co. of China Ltd. (601318.SH).
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