The CBRC issued Supervisory Rules on Pilot Securitization of Credit Assets of Financial Institutions

 

The CBRC recently issued Supervisory Rules on Pilot Securitization of Credit Assets of Financial Institutions (the Supervisory Rules), which marks the pilot securitization of credit assets finally come into practice.

 

With the blessing of the State Council, the PBC and the CBRC jointly formulated and promulgated Administrative Rules for Pilot Securitization of Credit Assets (the Administrative Rules) on April 2005, thus building up a basic regulatory framework for China’s banking sector to develop the securitization of credit assets. In the context of the framework, the Supervisory Rules is promulgated by the banking regulator to facilitate the implementation of the Administrative Rules through making clear requirements of related market entry, risk management, capital regulation, etc. in a bid to well regulate associated trade parties, promote sound transaction structure as well as efficient risk management.

 

The CBRC pointed out that securitization of credit assets is conducive to diversifying and displacing credit risks, improving balance sheets, enhancing liquidity of bank assets as well as funds allocation. Nevertheless, the business is rather complicated with respect to the transaction structure and potential risks. For instance, the business involves a wide range of parties, including originators, special purpose trustee, loan servicer, credit enhancement institutions, investors of asset-backed securities, etc. Moreover, in most cases, one party may undertake multiple roles concurrently. With a view to encouraging financial institutions to prudently conduct securitization of credit assets, effectively manage and ward off related risks, thereby ensuring legal interest of investors and parties concerned, the CBRC has committed itself to drafting the Supervisory Rules ever since the year beginning when the State Council approved the applications of State Development Bank and China Construction Bank for the pilot securitization of credit assets. A task force was therefore organized to study the business in an all-round manner and draft the Supervisory Rules. In order to meet the needs of current pilot job and to be in consistency of future business development, the task force promulgated the Supervisory Rules by setting benchmarks to internationally prevailing supervisory practices of asset-backed securitization while bearing in mind the features of Chinese localities.

 

The Supervisory Rules comprises 88 articles in seven chapters, covering the application management, risk management, capital regulation, etc. To be specific, Chapter I is general provisions, stating whom the Supervisory Rules is applied to and what general principles and requirements are adopted to well conduct securitization activities as well as related supervision. Chapter II is application management of securitization business, specifying procedures and qualification of applicant originators and trustees. Chapter III is risk management, describing requirements of operations and risk management for each financial institution according to its function in the securitization activities. Chapter IV is capital regulation, setting capital requirements for each party institution from the perspective of securitization exposure. Chapter V is supervision and regulation, stating the CBRC’s supervisory process and procedures, the information disclosure requirements for each financial institution involving in the business as well as the enforcement actions towards those which proceed with the business in violation of prudent principles. Chapter VI is legal liability, prescribing specific penalties and punishments to be imposed on the violations or rule-breaking activities in line with relevant laws and regulations. Chapter VII is supplementary provisions, explaining related jargons and some other issues.

 

The worldwide practices show that many overseas banking regulators regard capital regulation as a key tool to supervise asset-backed securitization business. Accordingly, based on the international practices and in line with supervisory prudential principles, the Supervisory Rules makes reference to the New Capital Accord plus with many other supervisory regulations on securitization and stipulates proper regulatory capital requirements to address the current situation of capital adequacy at Chinese banks. It is believed that appropriate and sound capital regulation will contribute to the build-up of an efficient incentive mechanism. Moreover, the capital regulation can help prevent banks from taking it for granted that securitization will naturally lead to low capital requirement, thus keeping them away from reckless competition for securitization. Meanwhile, it will also avoid unnecessary costs which improper capital requirements would bring about, thereby assisting in promotion of financial innovation in the banking sector.

 

The CBRC added that in a follow-up to the issuance of the Supervisory Rules, it will closely monitor the implementation of pilot securitization of credit assets and make further improvement in relevant process and procedures so as to draw upon experience for future expansion of the business in nationwide market.

 

The Supervisory Rules shall come into effective as of December 1, 2005.

 

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