Banking industry plan may weaken small players

China's push for bank resolution and deposit insurance is credit-negative for small banks, said Moody's Investors Service in a report released on Monday.

"For small Chinese banks, these new elements are credit-negative because they weaken the government's incentive to provide support to them," said Katie Chen, associate analyst at Moody's and writer of the report.

China's State Council recently announced that it had approved a plan that outlines the country's financial industry development during the 12th Five-Year Plan (2011-15), which serves as a guide for future legislation and policy.

Insisting on market-oriented principles, the plan called for the establishment of a deposit insurance system and bankruptcy mechanism as part of a framework to facilitate the orderly winding down of failing financial institutions.

While these measures would protect the stability of the banking system, they would weaken the government's incentive to provide support, especially to small banks, putting them at risk of net interest margin compression, Chen said.