China State Commercial Banks' Non-Performing Loans: Workout and Prevention
Abstract
The purpose of this thesis is to examine the very significant problem of State bank nonperforming
loan (NPL) in China. NPLs undermine the stability of China's banking system
and the efficient operation of its markets. This thesis will make recommendations for
developing better workout procedures to deal with existing NPLs and explore the role of
banking regulation and supervision in NPL prevention, as well as in avoiding impacts of
NPLs on the stability of banking system, drawing on experiences at national, regional and
international levels.
The accumulation of NPLs in China has been caused by the dominant role of State
banks in China's financial markets, policy loans to state owned enterprises (SOEs),
unnecessary administrative controls on banks' lending activities, weak internal controls
within State banks and inappropriate banking regulation and supervision. All these have
seriously ruined the conditions of market discipline in China and resulted not only in large
amount of NPL stock, but also the constant creation of new NPLs on State banks' balance
sheets.
The NPL problem in China is not limited to individual banks. It is a systemic problem
closely connected to the SOE problem. The existing bank NPLs cannot be worked out
without debt and enterprise restructuring. The balance sheets of banks and firms must be
cleaned up by, first, recapitalizing banks to write off and make provision for existing NPLs,
and, second, setting up independent asset management companies to purchase and manage
bank NPLs.
To prevent the increasing accumulation of new NPLs, unnecessary administrative
controls on banks must be removed; prudential banking regulation and supervision much be
enhanced; appropriate internal control systems must be promoted within banks, especially
with regard to the proper risk evaluation systems and internal decision-taking structures. To
avoid the damaging impacts of NPL problem on the stability of the banking system, ' an
explicit limited deposit insurance system should be introduced; the central bank's lender of
last resort facilities must be properly defined; bank insolvency resolution mechanisms must
be put in place. In a word, the proper functioning of market discipline must be restored in
China.
Authors
Lou, JianboCollections
- Theses [4490]