Lenders can Seek Bankruptcy Protection as Legal Framework System is Placed

Lenders can Seek Bankruptcy Protection as Legal Framework System is PlacedChinese lenders can seek bankruptcy protection legally soon. A banking regulator official said that a legal framework for the system to be placed in the next five years. Shang Fulin the chairman of the China Banking Regulatory Commission, China will be promoting normalization and standardization of the financial market exit mechanism along with the upcoming legal system that is in line with China’s conditions.

The deputy director of the banking research at the Development Research Center of the State Council Wu Qing stated that by restructuring, acquisitions and mergers are likely to become major choices for unhealthy banks to exit from the financial market. Furthermore bankruptcy is considered an option but is not prioritized because of huge losses that will be brought by the stoppage of financial services once the liquidation procedure of a bank starts. Banking regulator is requiring small commercial lenders to at least have substantial shareholders that apply for the banking license. If the bank fails it will be restructures based on the strength of the shareholders.

Earlier, China launched a deposited insurance system that was placed in effect last May, which a cap for the system is set at 500,000 yuan per depositor per bank. Banks will be paying a fee for the insurance that is divided into two parts that are a flat fee and risk based fee that vary according o the state of operation and risk management capability. The deposit insurance system offers a market-based solution for banks that fail in an increasingly complex business environment. A report was released that banks used to benefit from the implicit State guarantee but just after the launch of the deposit insurance system wherein a governing body for the deposit insurance funds will payout the losses of deposits when the money recovered from the bank’s liquidation is not enough for reimbursement. This helps the banks in improving the efficiency of a capital allocation while optimizing credit structure.

Banking regulators along with the governing body for the deposit insurance funds leads the efforts in handling unhealthy banks. Foreign institutions will also be given the opportunity to participate in the process. Traditional banks will face increasing pressure from the accelerated interest rate liberalization, the slowdown of the Chinese economy and a boom in Internet finance.


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