China said to order banks to reclaim trust loans

China’s banking regulator ordered banks to transfer off-balance sheet loans onto their books and make provisions for those that may default, sources with knowledge of the situation said.

The assets linked to wealth management products provided by trust companies must be shifted onto banks’ balance sheets by the end of 2011, the sources said, declining to be identified as the matter isn’t public. Lenders should prepare provisions equal to 150 per cent of potential losses, they said.

The move may increase pressure for capital-raising at Chinese banks, which Fitch Ratings last month said had more than 2.3 trillion yuan ($339 billion) of off-balance sheet assets. It also underscores concerns about the health of the banking industry after a person with knowledge of the matter said regulators last month ordered lenders to conduct stress tests to gauge the impact of home prices falling as much as 60 per cent.

The regulator’s order “will plug the loophole that more and more banks now employ to get around government lending curbs,” said Liao Qiang, a Beijing-based analyst at Standard & Poor’s. Bringing loans back on to the balance sheet will restrict banks’ ability to expand lending while “their capital requirement will increase,” Liao said.

Larger banks will be required to maintain the mandated capital adequacy ratio of 11.5 per cent after taking the off-balance-sheet loans back onto their books, the people with knowledge of the matter said. Smaller Chinese lenders are required to meet a 10 per cent ratio.

Global push
A China Banking Regulatory Commission press official, who declined to be identified because of the agency’s rules, confirmed the regulator sent a notice on cooperation between banks and trust companies. The regulator will make a public statement soon, she said, without giving a specific time period.

Globally, regulators are pushing banks to increase capital and improve the quality of their balance sheets in the wake of the credit crisis, which forced dozens of US and European banks to accept state bailouts. A report by bankruptcy examiner Anton Valukas into the collapse of Lehman Brothers Holdings found the investment bank used off-balance sheet transactions to downplay its leverage in 2007 and 2008.