Reform of small banks will defuse financial risks

Editor's Note: The Financial Stability and Development Committee under the State Council, China's Cabinet, recently held its ninth meeting, focusing on how to deepen the reform of small and medium-sized banks and prevent and defuse financial risks among other issues. 21st Century Business Herald comment:

Deepening the reform of small and medium-sized banks is a key part of China's efforts to enhance its financial sector's governance capability, and also constitutes part of its efforts to promote the modernization of the national governance system and enhance its governance capabilities. In fact, since the fifth national financial work conference in 2017, the top authorities have further strengthened the policy expectation of these banks to serve the real economy, rural revitalization and small and micro businesses.

At a meeting in February, President Xi Jinping reiterated the need to focus on improving financial services and prevent financial risks, while pursuing high-quality development, and particularly stressed that small and medium-sized banks should build a multi-level, wide-covering and differentiated banking system, and actively develop differentiated and customized financial products to serve small businesses and agriculture. At its eighth meeting on Sept 27, the Financial Stability and Development Committee emphasized the need to support small and medium-sized banks to replenish capital, combining their capital replenishment with improving their corporate governance and internal management to guide them to serve local areas in support of private medium, small, medium-and micro-sized enterprises. This meeting further clarified the deepening of the reform of small and medium-sized banks and the strengthening of their governance capability.

In deepening the top-level design for small and medium-sized banks in the past two years, the capital replenishment system and mechanism has remained a key task. To promote the establishment of a multi-channel capital replenishment mechanism, the country should roll out key measures, such as how to make use of foreign financial resources, how to set up a marketized replenishment channel for the financial market, how to optimize the resource allocation for the strategic reorganization of small- and medium-sized banks, and how to make local governments appropriately play their role.

To this end, top-level policy design should be combined with grassroots exploration, in which local governments should help combine the reform of small and medium-sized banks with local financial resources to offer these banks a ballast to boost their capability of defusing financial risks.