Know your bank-trust products before investment
September 04, 2010 | BY
clpstaff &clp articles &Banking regulator stops sale of bank-trust wealth management products
Investors in bank-trust products need to be alert to any risks involved and aware of all information disclosures related to the products, say counsel.
As trusts are instruments intended to evade supervision, Shanghai-based partner Charles Qin of Llinks Law Offices advised that “investors need to consider seriously the product's risk degree and the party responsible for assuming risks, especially for products with high income”.
In an effort to curb dubious lending practices, the China Banking Regulatory Commission (CBRC) recently halted the launch of bank-trust wealth management products. Banks were using these products to give out loans to local governments via shady procedures that kept the transactions off record. The banks were able to skirt the government's credit quota controls and shift the entire risk of the bank-trust product default onto the investors.
“The actual purpose of the regulator is to control the increase of such bank-trust products and the risk of bank assets being transferred off the books,” said Qin.
The sale of bank-trust products, which soared to Rmb2.8 trillion (US$412.98 billion) in the first six months of 2010, allowed banks to transfer their credit business off their balance sheet. This placed the loans beyond the control of capital supervision by the regulator. As domestic banks had to comply with loan and deposit ratios, the issuance of bank-trust products enabled the lenders to bypass the loan restrictions and expand their lending scale.
Although the issuance of wealth management products is an effective measure for a financial entity without trust qualification to segregate risks, it could result in a lack of transparency and acceptability to the public and China's financial system. “The responsibilities of the assigner of the trust assets have not been reduced, nor have the risks of the custodian or the whole system been reduced,” said Qin.
If the product fails to generate profit, or if the borrower goes bankrupt, banks are not obliged to assume the risks of the borrower's profit. This means that major risks fall on the purchasers of the wealth management product.
Qin also noted that the bank-trust products being suspended are the standalone trusts of assets. The impact on the collective trust is minimal.
This premium content is reserved for
China Law & Practice Subscribers.
A Premium Subscription Provides:
- A database of over 3,000 essential documents including key PRC legislation translated into English
- A choice of newsletters to alert you to changes affecting your business including sector specific updates
- Premium access to the mobile optimized site for timely analysis that guides you through China's ever-changing business environment
Already a subscriber? Log In Now