The CBRC issued guidelines to regulate banks’ guarantee activities

 

Recently, the CBRC issued Guidelines on Effectively Warding Off Risks Inherent From Guarantees of Enterprises’ Debts (hereinafter referred to as the “Guidelines”) with a view to regulating banks’ activities when they provide guarantees to enterprises for their bond issuing or other financing actions.

 

The Guidelines figure that enterprise bond market is a kind of direct financing market and essentially different from indirect financing market which has banks as its intermediate. In nature, the direct financing market develops on the basis of enterprise credit and protects the interests of investors while the indirect financing market grows against bank credit and mainly protects the interests of depositors. Therefore, when an enterprise issues bonds, it demonstrates its own creditworthiness and capability of repayment rather than banks’ credit. If a bank gives a guarantee to an enterprise for its bond issuing, it will indicate a replacement or a complement of enterprise credit with bank credit, thus probably leading to moral hazard of both issuers and investors, which goes against the original intention of state policy to develop bond market and boost direct financing. On the other hand, the guarantee charge in such a doing is far below loan interest rate while the credit risk inherent from the activities is the same or even higher than that of making loans. Consequently, although banks protect the interests of investors by providing guarantees, yet they concurrently transfer various risks from bond market to banking system, which may thereby harm the interests of bank shareholders and safety of deposits.

 

The Guidelines require all banks to be fully aware of risks in the guarantees of enterprises’ debts, further improve relevant credit authorization and delegation mechanism, stop offering guarantees to enterprises’ project debts, and no longer guarantee in principle financing projects such as corporate bond, trust plan, insurance company’s income plan, etc.. For those that have been guaranteed, banks should try every effort to retreat and take necessary assets protection measures. If any bank engages in guarantee businesses in violation of the Guidelines or runs into risks owing to lack of due diligence, the bank or the responsible person will be investigated for liability by the CBRC.

 

 

 

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