Who Will Foot the Bill If More of China’s Troubled Regional Banks Fail?

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  • People’s Bank of China governor Yi Gang addressed plans for bailing out regional banks for the first time after three crisis in the last five months
  • Problems at Baoshang Bank, Jinzhou Bank and Hengfeng Bank renewed concerns about the financial health of Chinese small banks

China’s regional banks “engaged in blind expansion” in recent years to go beyond their home bases and chase “risky projects” resulting in three crisis that rocked the world’s second biggest economy in the last five months, according to central bank governor Yi Gang, who insisted China’s overall financial stability remains solid.

Yi was for the first time discussing the People’s Bank of China’s (PBOC) plans for bailing out regional banks after the takeover of a regional bank in Baotou, Inner Mongolia, in late May first renewed concerns about the

financial health of Chinese small banks.
Beijing’s process of drafting a road map to

“defuse the bomb”

of problematic small and regional banks was discussed in an article in the Economic Information Daily, a newspaper run by the official Xinhua news agency, at the end of August.

But now PBOC governor Yi Gang has confirmed Beijing placing its hopes on stakeholders, including shareholders, creditors, local authorities as well as regulators, to save troubled banks.

These [troubled] institutions must take the prime responsibility. Their shareholders must be responsible for their actions, while large creditors must also have the ability to identify risksYi Gang

Yi said Beijing will follow “market-oriented” and “rule-of-law” approaches in dealing with problematic banks, suggesting that the central bank is not willing to foot the bill to bail out regional lenders.

“These [troubled] institutions must take the prime responsibility. Their shareholders must be responsible for their actions, while large creditors must also have the ability to identify risks,” Yi said.

In addition to

Baoshang Bank,

Beijing was forced to bailout Jinzhou Bank based in China’s rust-belt province of Liaoning as well as Hengfeng Bank in Shandong province, shaking confidence in China’s local banks and even the country’s banking system as a whole.

 

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