China's recently issued draft measures on the net capital of banks' wealth management subsidiaries are credit positive for the banks as they will strengthen the wealth management units' ability to mitigate risks, Moody's said.
The rating agency said Sept. 26 that, over time, the draft rules will discourage banks' wealth-management subsidiaries from excessive allocation of customer assets under management to riskier shadow banking products, such as private debt and private equity, by charging risk capital for such investments.
The initial effect of any capital shortfall on parent banks will be limited as Chinese banks only began to set up wealth management subsidiaries in June, Moody's added.
Earlier in September, the China Banking and Insurance Regulatory Commission proposed that the wealth management units of Chinese banks should have net capital of no less than 500 million yuan and 40% of its net assets, as well as no less than 100% of its risk capital.
The measures also require the net capital of a lender's wealth management unit to cover its risk capital calculated as the sum of assets under management and own funds weighted by risk parameters. Moreover, banks' wealth management business will be required to disclose their net capital annually.
As of Sept. 25, US$1 was equivalent to 7.13 Chinese yuan.
