From Macro Polo, November 18:
Bank rescues in China may no longer be isolated events. Since May, one bank has been taken into receivership by the government, two have been bailed out by central authorities, and depositors have lined up outside of two others demanding their money back. Even the chairman of China’s sovereign wealth fund recently noted that as the economy slows, the failure of financial institutions will become “a fact of life.”....MORE
The authorities seem to be handling such failures in an ad hoc fashion, having “…taken different approaches to Baoshang (taken over by the banking regulator), Jinzhou, and Hengfeng banks (both were bailed out) based on the authorities’ assessment of the institution’s specific circumstances,” as noted by a recent International Monetary Fund report. But a closer look reveals that the size of the bank appears to be a main determinant in the method by which Beijing chooses to deal with them. Let’s look briefly at what to expect as the central government tackles some of these shakier banks.
Small Banks Get the M&A Treatment
It seems that small distressed banks will get consolidated together or merged into larger, healthier banks. Although authorities have denied it, Beijing was reportedly considering a plan that would do just that for small banks with less than 100 billion yuan worth of assets. The reason for the official denial isn’t clear, but China has a long precedent of such consolidations.
Between 2005 and 2014, at least 48 local banks were merged into nine regional banks. For example, Hong Kong-listed Huishang Bank is the outcome of six Anhui banks (and seven credit cooperatives) merging in 2005; Shanghai-listed Bank of Jiangsu is the result of the merger of 10 banks in 2007; and Hong Kong-listed Zhongyuan Bank is the product of 13 Henan banks merging in 2014.
These examples highlight a main advantage of mergers: banks post-consolidation have an easier time listing publicly and borrowing from the interbank market. Another advantage of larger banks is that they are easier for regulators to monitor, and asset management companies (AMCs) are more willing to deal with them, making it easier for larger banks to dispose of nonperforming loans.
Given China has significant experience in bank consolidation—and the simple fact that larger banks are more stable than small banks on their own—it seems likely that more mergers are on the horizon.
Large Banks Get Bailouts
Beijing has few qualms about mobilizing state resources to capitalize large banks. It intervenes sooner than governments in market economies and is willing to bail out smaller banks that aren’t systemically important. And crucially, it has the potential to intervene more widely by drawing upon a range of resources typically not available to democratic governments.
When countries like the United States and United Kingdom bail out a bank—as they did with Citigroup and the Royal Bank of Scotland, respectively—they typically use tax revenues, which can invite public backlash. In contrast, when Beijing intervenes, it avoids using either the Ministry of Finance’s tax revenue or the People’s Bank of China’s printing press. Rather, intervention typically involves mobilizing state resources that don’t appear on the government’s ledger....
