Central bank reports macro-prudential policy framework since 2017
China will "gradually broaden the scope of macro-prudential regulation," including studying how to regulate systemically important insurance companies and securities firms.
Financial regulation is hugely important, so I have put out quite some relevant content. It’s obviously way too niche for many Pekingnology subscribers, so I promise you won’t see similar content for some days after this one :)
But for those interested in how the Chinese central bank summarizes its job publicly, last week I translated its status report on China’s interest rate liberalization.
The 宏观审慎管理局 Macro-prudential Management Department of the People’s Bank of China (PBOC) published the article 完善中国特色宏观审慎政策框架 筑牢系统性金融风险防线 Perfecting the Macro-prudential Policy Framework with Chinese Characteristics and Strengthening the Defense of Systematic Financial Risks in the latest issue (the second half of September 2022) of 中国金融 China Finance, a biweekly publication of the central bank.
The 20th National Congress of the Communist Party of China is taking place next month so it’s not unusual that this official summary of work for the past five years - since the 19th National Congress in 2017 - is out now.
Below is the full translation.
(By the way, Credit Suisse, the Global Systemically Important Bank, is in “turmoil after the bank’s attempts to reassure markets on its financial stability backfired,” with the “gauge of credit risk rose to a record high while its stock hit a fresh low,” Bloomberg reports on Sunday.)
Perfecting the Macro-prudential Policy Framework with Chinese Characteristics and Strengthening the Defense of Systematic Financial Risks
Since the Communist Party of China's (19th) National Congress, the People's Bank of China (PBC) has steadfastly carried out the directives and plans of the CPC Central Committee and the State Council, sped up the creation and development of a macro-prudential policy framework, continuously enriched and improved policy instruments, and strengthened the supervision of systemically important financial institutions and financial holding companies. The PBOC has gradually developed a macro-prudential policy practice with Chinese characteristics, which has given strong support for combating and resolving major financial risks as well as for enhancing the capacity of finance to serve the real economy.
Established and improved the macro-prudential policy framework with Chinese characteristics, and improved the capacity to prevent systemic financial risks.
The need for "scientific prevention, early identification, early warning, early detection, and early disposal" of financial risks was emphasized by General Secretary Xi Jinping. He also emphasized that "we should make the first move and take the initiative to effectively prevent and resolve various risks and challenges." The primary goal of the macroprudential policy implementation is to proactively improve the capacity to prevent systemic financial risks. The PBOC had already focused on the application of the macro-prudential concept to strengthen early warning and prevention of financial risk. Starting from the basic national conditions of China's economic transformation and structural adjustment, instead of simply following the international mainstream practice of "single target, single instrument" [Pekingnology: single target=price stability, single instrument=interest rate], China insisted on implementing financial regulation by combining price-based and quantitative instruments with macro-prudential management, and enables measures such as 窗口指导 window guidance.” [Among central banks] PBOC was among the early ones to introduce macro-prudential management tools for real estate finance such as 最低首付比 minimum down payment ratio. A global consensus developed around the need to strengthen macroprudential management following the global financial crisis of 2008. The PBOC has adhered to the problem-oriented approach and created a series of macro-prudential policy instruments with Chinese characteristics, such as 差别准备金动态调整机制 dynamic adjustments of differentiated reserve requirements, 宏观审慎评估机制 macro-prudential assessment mechanism, and 全口径跨境融资宏观审慎管理 macro-prudential management of full-scope cross-border financing.
The 19th National Congress of the CPC clearly made an important deployment to improve the two-pillar regulatory framework of monetary policy and macro-prudential policy. The People's Bank of China was given the responsibility of taking the lead in macro-prudential management at the Fifth National Financial Work Conference (in 2017). China's capacity to reduce systemic risks has increased in recent years as a result of the financial regulatory reform that has been continuously promoted and focuses on strengthening macro-prudential management.
First, the macro-prudential policy framework's top-level design has been gradually improved. We issued the 《宏观审慎政策指引（试行）》Guidelines on Macro-Prudential Policies (Trial)[ENG], which systematically elaborated the general thinking, principles, and policy framework of macro-prudential management in China, and clarified the policy objectives, tools, transmission mechanism, and governance mechanism, etc.
Second, we continuously innovated and improved macro-prudential management tools and policy practices. In order to strengthen the countercyclical adjustment and anti-contagion capabilities of macro-prudential policy instruments, efforts were made to take into account the "big ups and downs" in pro-cyclical financing as well as cross-market and cross-sectoral contagion, which are prone to form systemic risks. We improved early warning systems for risk related to financial cycles, leverage, significant financial markets, and financial transactions. A countercyclical capital buffer mechanism was put in place. Macroprudential policy instruments for real estate finance have been enriched and improved. The PBOC carried out macro-prudential management of cross-border capital flows, combining the use of 外汇风险准备金 foreign exchange risk reserve, 全口径跨境融资宏观审慎管理 macro-prudential management of full-scope cross-border financing, and other instruments, and restrained the procyclical behavior of market participants. We successfully withstood the test of multiple rounds of market fluctuations and ensured the overall stability of China's foreign exchange market and cross-border capital flows. We have consistently improved the systemically important financial institutions' and financial holding companies' macroprudential management.
Strengthened the supervision of systemically important financial institutions and enhance the robustness of the "key nodes" of the financial system
We created a fundamental institutional framework for the supervision of systemically important banks. A key role in the financial system is played by large financial institutions with complicated and scaled-up businesses. Once there is a significant risk, the entire financial system will be severely impacted. The PBOC, together with the regulatory authorities, has successively issued the 《关于完善系统重要性金融机构监管的指导意见》Guidelines on Improving Regulation of Systemically Important Financial Institutions (ENG), 《系统重要性银行评估办法》Evaluation Measures for Systemically Important Banks (ENG), and 《系统重要性银行附加监管规定（试行）》 Further Enhancing Regulation of Financial Marketing(ENG). The PBOC has publicly solicited opinions on the《系统重要性保险公司评估办法》Measures for the Evaluation of Systemically Important Insurance Companies. The regulatory rules framework for financial institutions that are systemically important has essentially been established.
Our scientific assessment identified China's systemically important financial institutions. The People's Bank of China (PBOC) and China Banking and Insurance Regulatory Commission have strictly specified identification and assessed and identified China's systemically important banks based on a total of more than ten indicators in four dimensions: scale, relevance, substitutability, and complexity. The list of systemically important banks in China was first released in October 2021 and updated in September 2022. At present, there are 19 systemically important banks in China, including 6 state-owned banks, 9 joint-stock banks, and 4 city banks. The total assets of these banks account for more than 60% of the total assets of China's banking industry, which is representative.
Additional regulation of systemically important financial institutions achieved positive results.
First, capital management in the banks is more proactive. Systemically important banks had an average core tier 1 capital adequacy ratio of 10.7% as of the end of June 2022, up 0.14 percentage points year over year and 0.6 percentage points higher than the average. These banks were able to meet the additional capital and leverage requirements.
Second, "living wills"(Resolution Plans) have generally been formulated. The disposability of risks has improved as a result of the submission of recovery plans and resolution plan proposals by systemically important banks, as well as the preparation of response plans in advance of significant risks.
Third, risk management is more prudent. Systemically important banks generally strengthened the requirements for information reporting and disclosure, risk management, corporate governance, etc., and formulated internal management regulations specifically as systemically important banks. As of the end of June 2022, the average non-performing rate for loans of 19 systemically important banks was 1.33%, lower than that in the corresponding period of last year, and the provision coverage rate was 240%, representing a year-on-year increase of 15.6 percentage points.
Filled the gap in Supervision, Regulate the Development of Financial Holding Companies in Both Symptoms and Causes
We “chose the medicine targeting the illness” to build a regulatory system for financial holding companies and improve the financial supervision layout with Chinese characteristics. The《国务院关于实施金融控股公司准入管理的决定》Decisions on Implementing the Access Management of Financial Holding Companies and the 《金融控股公司监督管理试行办法》Trial Measures on Regulation of Financial Holding Companies were formally implemented, which for the first time explicitly, in accordance with the law, include into regulation the enterprises which should set up financial holding companies and control multiple types of financial companies. The《金融控股公司董事、监事、高级管理人员任职备案管理暂行规定》 Interim Regulations on Filing-based Management of Financial Holding Companies’ Appointment of Directors, Supervisors and Senior Executives have been issued, and the draft of the《金融控股公司关联交易管理办法》Measures on Regulations of Affiliated Transaction by Financial Holding Companies has been issued for public consultation, setting higher requirements for financial holding companies in terms of the professionalism of personnel and the compliance with affiliated transactions. The initial construction of a regulatory system for financial holding companies has become an important part of the financial regulatory landscape with Chinese characteristics, which is an important step to learning from the lessons of risks, filling the regulatory gaps, and preventing 脱实向虚 the shift of focus by financing activities from the real economy to the virtual economy. The control of multiple types of financial institutions by non-financial enterprises has initially been brought into regulation at the root, and the overlapping of industrial sector risks and financial risks has been narrowing.
Prudential and orderly licensing has been implemented, and the financial holding companies have entered a new phase of regulated development. Large conglomerates are now required to consolidate their financial operations into a financial holding company that will manage equity, capital, and risk in a centralized manner. The corporate structure has also been streamlined. The regulation effectively segregates finance from industry and prevents “disorderly expansions.” In order to encourage the relevant obliged enterprises to submit applications for the creation of financial holding companies in accordance with the law, the PBOC conducted a nationwide study on the control of various types of financial institutions by non-financial enterprises. At present, five applications for the establishment of financial holding companies have been accepted, among which three financial holding companies, including 中信金控 CITIC Financial Holdings, 北京金控 Beijing Financial Holdings Group, and 招商局金控 China Merchants Financial Holdings have obtained administrative permissions. The businesses have thoroughly examined their financial holdings, shareholding structure, and corporate governance through the application for the creation of financial holding companies. They have also increased their awareness of the importance of concentrating on their primary business and bringing their operation into compliance.
To firmly guard against risks, we strengthened our regulatory expertise in a number of ways. The PBOC adhered to the positioning of 监管姓监 “the top priority of the regulator is to exercise regulation,” continuously deepened its understanding of the traits of the behavior and risk of financial holding companies, and enhanced professional expertise.
Firstly, we emphasize the consolidated financial statements-based management from a macro perspective and promote the establishment of a robust corporate governance, liquidity, and risk management framework within their respective conglomerates by the financial holding companies, focusing on conglomerate-specific risks such as conflict of interest, risk concentration, and risk contagion.
Second, in order to create a buffer against risks that affect the entire conglomerate and prevent excessive leverage and blind expansion, we conduct regulation over the capital from a counter-cyclical perspective.
Third, from the perspective of penetrating regulation, we effectively identify actual controllers and affiliated parties, to ensure that the source of investment funds is genuine and legitimate, and to prevent major shareholders from illegally controlling and hollowing out financial institutions.
Fourth, to reduce the likelihood of risk transmission between financial affiliates and industrial affiliates, we strengthen the regulation of affiliated transactions from the standpoint of preventing risk contagion and encourage the construction of "firewalls" between financial affiliates.
Our nation has developed a macro-prudential policy framework with Chinese characteristics that draws on helpful international practices after years of investigation and improvement. The framework has been crucial in many instances. The PBOC has consistently prioritized these three areas when implementing macroprudential policy.
First, it has consistently taken into account the particular national circumstances of China, adhered to the problem-oriented approach, and given full play to the unique role of macro-prudential regulation where it can directly affect the financial system, particularly in specific financial areas. It has also made sure that the policy is pragmatically and effectively implemented.
Second, In order to effectively direct and stabilize market expectations, it has always adhered to marketization and the rule of law, placed an emphasis on rules and transparency, established rules and regulations, and clarified the rules, parameters, and triggers for regulation.
Third, in order to maintain our macroeconomic stability and national financial security, it has consistently placed a strong emphasis on working in coordination and cooperation with monetary policy and micro-prudential supervision to better integrate the economic cycle and financial cycle as well as currency stability and financial stability.
In the next stage, the PBOC will adhere to the guidance of the Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, earnestly perform its leading role in macro-prudential management, and firmly hold the bottom line of no systemic financial risks.
First, in order to prevent pro-cyclical fluctuations in the financial system and cross-market and cross-sectoral contagion of risks, we will first continuously improve the macro-prudential policy framework, strengthen the monitoring, assessment, and early warning of systematic financial risks, conduct macro-prudential stress testing, further enrich and optimize the macro-prudential policy toolbox, and gradually broaden the scope of macro-prudential regulation.
Second, we will strictly implement the additional regulatory requirements, and strengthen the monitoring, analysis, and risk assessment of systemically important banks. We will push them to continuously meet the additional capital and leverage ratio requirements and improve the risk management and internal control by resolution plans. We will continue to study and promote the establishment of assessment and regulatory rules for systemically important insurance companies and systemically important securities firms, and further improve the regulatory framework.
Third, we will play the role of a strict gatekeeper [limit the number] for the market access (of financial holding companies), establish a risk early warning and regulatory rating system, strengthen regulatory cooperation, and promote the sound operation of financial holding companies. （Enditem)