* CBRC forms leadership small group on banking reform
* Regulator highlights risks from shadow banking
* Banks should segregate wealth management funds from
* Money markets shouldn't be used to finance corporate loans
By Hongmei Zhao and Gabriel Wildau
HONG KONG/SHANGHAI, Jan 17 China's banking
regulator is pressuring banks to curb reliance on short-term
borrowing and control risks from off-balance-sheet lending,
according to a document obtained by Reuters, following two
severe cash crunches in the last six months.
While China is pushing to reduce systemic risks posed by the
rise of shadow banking, analysts say its focus is on curbing the
riskiest off-balance-sheet lending practices rather than ending
the practise altogether.
The China Banking Regulatory Commission (CBRC) has set up a
leadership group on banking industry reform headed by its
chairman Shang Fulin, according to a source close to the
"The CBRC is requiring banks ... to push forward reform in
the two areas of wealth management and interbank business," the
source told Reuters, requesting anonymity because he was not
authorised to speak publicly.
"The commission will come up with a reform plan in the first
quarter and preliminary results on these two focal points of
reform should be evident by the end of June."
The document is the text of a speech delivered by CBRC Vice
Chairman Zhou Mubing at the agency's annual work meeting on Jan.
7. The 15-page speech was officially distributed as a circular
to banks the following day.
Ratings agency Fitch issued a statement on Friday commenting
on the regulator's approach to what many analysts see as
potential time bomb ticking under the mountain of domestic debt.
"Recent developments highlight China's efforts at reforming
and regulating - but not rolling back - the growth of shadow
banking," Fitch said.
In the speech, Zhou warned banks against relying on
interbank borrowing as a funding source for corporate loans.
"The key focus of interbank business reform is to restore
its essential character as a temporary, short-term tool for
banks for cash management, and to control the scale of interbank
business and its share (of a bank's overall balance sheet),"
The interest rate that banks charge each other for
short-term loans spiked to double-digit levels in June and again
last month, raising concerns about excessive reliance on
short-term funding, especially among smaller banks, which have
limited access to customer deposits.
The regulator also called on banks to clearly separate their
traditional deposit business from wealth management products
(WMPs), which banks often market to customers as a
higher-yielding substitute for deposits.
Dangers arise from customers typically assuming that WMPs
are risk-free, just like deposits, even though WMP funds are
used to make riskier loans and typically don't carry a bank's
Zhou told banks that banks should strictly segregate these
two funding streams.
The risks from short-term funding is related to WMPs because
banks often borrow in the interbank market to finance cash
payouts on maturing WMPs.
Such borrowing is necessary because of the maturity mismatch
between WMPs -- which typically mature in under a year -- and
the loans, bonds, and money market assets that often underlie
such products. When payouts are due on WMPs, the underlying
assets cannot be easily sold, forcing banks to raise cash from
the money markets.
Zhou called for banks to centralise authority over interbank
borrowing and lending within their head offices in order to
prevent branches from conducting interbank business
The regulator called for banks to establish a separate
division for wealth management business to segregate it from the
main deposit-taking business. As with interbank borrowing, Zhou
said that banks should prevent branch banks from creating and
selling WMPs independently from their headquarters.
"Recently the CBRC has raised the idea that wealth
management business should be conducted with the a main
operations office designing products, while other department and
branch banks only handle sales," said a commercial bank
executive with direct knowledge of the regulatory initiative.
(Editing by Simon Cameron-Moore)