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Regulators restart loan securitization program

By Qiu Chen  (Global Times)

08:25, June 05, 2012

The Chinese government has relaunched a bank loan securitization program with a quota of 50 billion yuan ($7.86 billion), the China Securities Journal reported Monday, citing a joint notice released recently by the People's Bank of China, the China Banking Regulatory Commission and the Ministry of Finance.

The latest incarnation of the program, in which banks are allowed to bundle loans and sell them to investors in the form of bonds, has enlarged the scope of assets that can be securitized to include agriculture-related loans, small and medium-sized enterprises loans and company loans for local governments' financing vehicles, according to the notice. Since the relaunch, Industrial and Commercial Bank of China has applied for a 20 billion quota, and China Development Bank has asked for 10 billion yuan, according to the report.

Lenders are striving for bank loan securitization quotas in order to take some of the pressure off meeting mandatory ratio requirements, such as the prescribed capital adequacy ratio, Lu Zhengwei, chief economist with the Shanghai-based Industrial Bank, told the Global Times.

"This is a major reason why the government has reopened the program," Lu said.

Back in April 2005, the government started the initial program for China's major commercial lenders to try securitizing credit assets, but scrapped it in late 2008 in the wake of the US subprime mortgage crisis, which was partly caused by excessive bank loan securitization.

This time around, the government is taking a cautious approach towards the program and has stepped up risk management. According to the notice, two ratings agencies, one more than in the program's previous version, are required to rate securitized bank loans and then hand their findings over to China's financial regulators. Also, issuers of securitized assets are now required to retain at least 5 percent of their lowest-graded securities with holding periods no shorter than the maturity of the product.

"Since the average bad debt ratio of bank loans is 5 percent, investors' risks will be lowered if banks keep the worst 5 percent of their loans," Lu said. "To some extent this will prevent banks from repackaging low-quality loans to cheat investors."

However, Sun Lijian, vice dean of Fudan University's College of Economics, said these two new requirements are not enough to protect investors and urged regulators to require banks to disclose details about the bank loans that are sold as securities - such as the intended use of the loan and the borrower's repayment history.

"As the bank loan securitization shifts risks to investors, it is the banks' responsibility to help investors judge the risks they might be facing," Sun said.

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