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| Under the rug |
| John Foley / Oct 22, 2009, 00:18 IST |
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China bank regulation: China’s Olympian lending spree will leave banks with bad debts that could take years to work through. Or will it? A Chinese bank regulator has suggested the fallout from this year’s $1.3 trillion of loans might not be so bad. Lenders just need to make use of two primitive types of financial engineering: rolling over bad loans and parcelling them up for sale to other investors.
The first idea, known as “evergreening”, is just plain bad. A new loan that replaces the old one only pushes the non-payday into the distant future. It’s much better to restructure loans — give borrowers breathing space to get their houses in order, at the cost of higher interest rates. Evergreening is already thought to be common among banks, but since it’s not disclosed, only they know how common.
Securitisation of loans isn’t necessarily bad if the loans are of a high quality. The process of splitting up and selling loans gives investors outside of banks direct access to debt, and gives bank room to lend more.
But securitising bad loans looks like a recipe for disaster. The Chinese bank regulator stopped non-performing loan securitisations in February, after allowing $8.7 billion of them.
That’s wise. Chinese banks can’t claim they need space on their balance sheets, since their loans are just 69 per cent of their deposits. What’s more, an immature restructuring regime makes recoveries on these loans hard to predict.
In building a developed financial market, China’s banks should try out various financial techniques, including loan restructuring and securitisation. But they should avoid using them as brooms to sweep bad lending decisions under the carpet.
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