The latest regulation on net capital management of commercial banks’ wealth management subsidiaries encourages the subsidiaries to invest in standard and high-grade assets, operate in a prudent manner, and avoid expanding business blindly, analysts said.
The China Banking and Insurance Regulatory Commission has fixed the net capital threshold for commercial lenders’ wealth management subsidiaries at 500 million yuan ($71 million) and 40 percent of the subsidiaries’ net assets.
Net capital of the subsidiaries should also be no less than 100 percent of the risk capital, according to a regulation for trial implementation released by the CBIRC on Monday.
Coming into effect on March 1, the regulation forbids bank wealth management subsidiaries to invest their own capital in nonstandard assets and sets higher risk coefficient for the subsidiaries to invest wealth management funds in nonstandard assets, compared with standard assets.
According to the rules, the risk coefficient for investment in nonstandard debt-based assets ranges from 1.5 percent to 3 percent, whereas that for investment in cash, bank deposits, interbank placement, fixed-income securities and other standard debt-based assets is zero percent.
“The regulator’s intention to guide these wealth management subsidiaries to invest in standard assets is made explicit,” said Wang Yifeng, an analyst with Everbright Securities, in a report.
Moreover, by aligning the rules on net capital management of bank wealth management subsidiaries with those for subsidiaries of fund management companies and trust companies, the regulator aims to provide a level playing field to market players and prevent them from capitalizing on loopholes in regulatory systems to circumvent unfavorable regulations, Wang said.
Currently, banks are investing an increasingly larger portion of their portfolios in standard assets, such as strengthening bond investment. In addition, bank wealth management subsidiaries may step up their efforts to invest in equity-based assets by tracking equity indexes or using the strategy of a fund of funds, which is a pooled investment fund that invests in other types of funds, said Guosheng Securities analyst Ma Tingting in a research note.
“The overall risk-weighted coefficient of the wealth management industry of China’s banking sector is estimated to range from 0.41 percent to 0.67 percent. On this basis, we estimate the wealth management subsidiaries of most banks will meet the risk capital requirement regarding net capital management, considering that the amount of their registered capital is fairly large,” Ma said.
For China’s six largest State-owned commercial lenders, registered capital of their wealth management subsidiaries vary from no more than 8 billion yuan to 16 billion yuan. The number is no more than 5 billion yuan for the wealth management units of major national joint-stock commercial lenders, such as China Merchants Bank Co Ltd and China Everbright Bank Co Ltd.