The second manifestation of risks is credit risks. What are credit risks? For commercial banks,
loans become non-performing assets if they cannot be serviced, which constitutes banks’ credit
risk. For companies, if they default on bonds issued, the credit risk will emerge. Credit risks
should be taken into consideration when thinking about the monetary policy and financial stability.
At present, the overall non-performing loan ratio of commercial banks is 1.87%, lower than 2%. In
regards to the bond market, we should think about how many defaults there have been this year,
what the volume involved is, what the default rate is, and how much the overall credit default risk
impacts the market.
The third risk is the so-called shadow banking risk. Shadow banking refers to bank-like
businesses such as asset management business,
inter-bank business and asset securitization
operated by banks and other financial institutions including trust companies, asset management
companies and insurance companies. Shadow banking business conducts credit transformation
or maturity transformation on assets, which is similar to banking business in nature, but the
capital adequacy ratio and other indicators of shadow banks are not as strictly regulated as those
of banks, so more attention should be paid to the risks of shadow banking. For example, some
institutions circumvent macro policy and financial regulation in the name of asset securitization,
but do not actually sell the assets, nor maintain bankruptcy remoteness. This is the risk that
should be noticed. Shadowing banking sounds pretty risky, but well-regulated shadow banking
business is a necessary supplement to the financial market.
Hence shadow banking is not an
absolutely negative concept. As long as business operations are conducted in accordance with
laws and regulations, all of the business can become necessary supplements to the financial
market, be it on-balance-sheet or off-balance-sheet business, trust funds, publicly offered funds
or private equity funds.
The fourth risk is illegal financial activities. Some unlicensed institutions and individuals raise
funds illegally through the Internet in the name of innovation. And trading-floor products in
violation of relevant laws and regulations are also part of illegal fund-raising activities, and should
be cracked down on. As for illegal fund-raising in the private sector, there were over 5,000 new
illegal fund-raising cases in China involving a large volume and many investors in 2017. In
response to illegal financial activities, we must enhance consumer protection, act with greater
vigilance and strengthen legal right protection. In particular, we should protect the elderly from
being cheated.
Various factors cause financial risks, such as international factors, domestic factors, market
factors, institutional factors, moral factors and incomplete regulation. So risk management
should be constantly improved. In coping with risks, there should be a unified principle, which is
“who the child belongs to shall holds the child.” That is to say, the owner shall take the risk.
Everyone knows that there are risks in the market and investment practices, so there should be
careful considerations before any investment decision is made. This is the law of the market, and
we should all keep it in mind. 9 / 15 BIS central bankers' speeches
Ultimately, finance is set to address the issue of credit. Some people have had good credit since
a very young age, while some do not even when they are in their later years. Several measures
can be taken to address the issue of credit. One is to know about the borrower. If some people
do bad things, their reputation will be hit hard. Therefore, they can be trusted since the cost will
be too high for them to serve the devil. What does the financial market trust? It trusts money. It
trusts capital fund. Why should the owners assume the risk?
When you do not know about or
cannot distinguish the credit of a person, you can look at how many bets he has made, or how
much money chipped in. If he has put his money here or used his house as collateral, you can
trust him within the scope of his collateral or the money he has chipped in. In this way, you are
able to assume the corresponding risk against his collateral. This is the essence of finance. It is
about why I can trust you. I trust you, or your record, or your capital fund. So owners need to
assume the risks.
When you start up a business, let’s say, how do you distinguish illegal fund-raising from normal
and standardized financing? The precondition is risk-assumption by the owners. Assuming that
an enterprise comes to control a rural credit cooperative (RCC) or a rural commercial bank, and
becomes its owner. If anything goes wrong in this rural commercial bank, it should be the
owner’s capital fund that bears the brunt. Why do we focus on the CAR? The core of Basel
Accords is the CAR. The requirement for it is 8%. If a bank does many other types of business,
the CAR requirement will be higher. This is also the case if it is a systemically important financial
institution (SIFI). Why is the CAR highlighted? The logic is that the money is really yours, and
your money will be lost first if there is any loss made, so I can trust you to a certain degree. I
believe that the money that is lost first is your money, and usually you would not easily lose your
own money, so I can trust you.
This is also true in our supervision on banks. When we find any RCC or financial institution is at
risk, we should remind it of the situation. If it begins to consume its own capital, we should pay
attention to it. If its capital fund is almost used up, the money lost later will be that of the
depositors. Now we should pay close attention to it. When the loss made reaches a certain
degree, we should take it over rather than allowing it to keep operating. Why? Because its capital
has been drained, the money of clients or the society will suffer if there is further loss. Then why
is it trusted at the beginning? Because at the beginning, it is its own money that is lost, and I
believe the capital fund as collateral represents its credit as well as compensation for the risk.
This also applies to bond-related issues. So I am talking about the most fundamental financial
issue. It is about why you can trust a person or an institution. You look at either his record,
namely his history accumulated in the past; or how much capital fund, how much money he has
chipped in. This is a simple judgment of risk.
For monetary policies to forestall and defuse financial risks, it is an important task to impose
certain regulations on asset management products, e.g. unified guideline for asset management
industry, net value-based management, mark to market principle, among many others.
Meanwhile, it is also very important for us to enhance regulation on non-financial enterprises
investing in financial institutions. Generally, financial institutions operate on deposits, investors’
funds and insurance premiums. Although a non-financial enterprise in bankruptcy causes
relatively limited losses and influence, only affecting itself, a financial institution in such a situation
may involve depositors, investors and policyholders. Therefore, we shall pay special attention to
the qualification and purpose of those non-financial enterprises investing in financial institutions,
i.e. why they make such investments. Are they regarding those institutions invested as cash
machines at the service of their own enterprises? Therefore, it is necessary to strengthen
regulation on such non-financial enterprises investing in financial institutions.
Efforts should be made to enhance regulations on financial holding companies, which include not
only banks, but also securities, insurance companies, and trusts. How is the firewall built
between these business lines? How to isolate risks? How to consolidate the accounts? It
10 / 15 BIS central bankers' speeches
requires us to enhance regulations on financial holding companies. Meanwhile, we shall tighten
regulation of SIFIs, which is of utmost importance. There are totally five global SIFIs (G-SIFIs) in
China, among which ICBC, ABC, BOC and CCB are all global systemically important banks. In
other words, if problems occur in these four large banks, the influence will be global. How many
systemically important banks globally? There are only about 30, and they are mostly based in
developed countries, including the US, followed by UK, Switzerland, Germany, France and
Japan. Among developing countries, only four Chinese banks are among the list, with Ping An
Group being one of the global systemically important insurance institutions.
Efforts should also be made to strengthen regulation of domestic SIFIs. Global systemically
important financial institutions are called G-SIFIs, and their domestic counterparts are called DSIFIs. The reason that we attach particular importance to the regulation of SIFIs in the banking,
securities and insurance sectors is that problems in these institutions could bring forth systemic
risks. Meanwhile, we should also carry out coordinated regulation of financial infrastructure and
promote comprehensive financial statistics
