A “Convoy System” for China’s Banks?

China’s banking system is facing new levels of stress following the takeover of Baoshang Bank and the restructurings of the Bank of Jinzhou and Hengfeng Bank. These three banks were all highly dependent upon wholesale funding, and have been restructured in different ways, with no clear model for future bank bailouts. The banking regulators have reportedly responded to growing risks within the banking system with new regulations limiting some city commercial banks’ reliance upon interbank liabilities as a proportion of bank capital, as interbank funding has contracted throughout the banking system in the first half of the year.

The bank restructurings seen so far in China share several characteristics of the “convoy system” utilized by Japanese regulators in the 1980s and 1990s, in which the stability of smaller financial institutions was effectively guaranteed by larger banks and regulatory intervention. As China faces additional bank restructurings and bailouts, this note explores some of the potential lessons of Japan’s crisis management experience, as well as the potential sustainability of a “convoy”-type approach to managing banking system stress in China.

Posted September 4, 2019
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