China regulators focus on shadow banking, which involves mostly wealth-management products (WMPs) sold as a higher-yielding alternative to traditional bank deposits

December 2, 2013 Leave a comment

Updated: Monday December 2, 2013 MYT 6:46:26 AM

Regulators focus on shadow banking

BY YAP LENG KUEN

REGULATORS are placing more emphasis on shadow banking, which involves mostly wealth-management products (WMPs) sold as a higher-yielding alternative to traditional bank deposits. Beginning next year, China’s bank regulator will require banks to report detailed information on their WMP holdings, says Reuters, quoting sources.Many WMP transactions are recorded off-balance sheet and carry a higher level of financial risk.

The new rules will require banks to disclose their holdings of WMPs and related transactions through a new nationwide registration system, adds Reuters, quoting sources.

In detailing the Federal Reserve’s (Fed) planned rule for banks that rely on short-term funding, Fed governor Daniel Tarullo has also urged international regulators to consider a surcharge on banks’ exposure to a prominent part of shadow banking – the repurchasing or repo markets.

Referring to the US$6bil (RM19.33bil) loss incurred from derivative bets by a trader dubbed the London Whale, Tarullo said it was a reality check on banks using their own money to bet on financial markets.

“One of the key mandates to the staff from all the five agencies working on the final rule has been to ensure that London Whale in substantive and procedural terms couldn’t happen again,” Tarullo said.

With increased international spotlight on shadow banking, more steps can be expected to monitor its growth.

Shadow banking was largely responsible for the downfall of Lehman Brothers, and action to capture transaction data and risks should be expedited.

In the area of mergers and acquisitions, Singapore’s DBS Group Holdings Ltd is not looking backwards at its failure to buy a controlling stake in Indonesia’s PT Bank Danamon.

DBS is one of the five bidders that have submitted final-round bids for Societe Generale’s (SocGen) Asian private bank, which is being valued at around US$400mil, reports Reuters, quoting people familiar with the matter.

DBS will have to compete with ABN Amro and Credit Suisse in this final round, for which five bidders have been shortlisted. It is not clear if all five have submitted their bids.

SocGen’s Asian private bank unit manages about US$13bil and DBS is seen as a leading contender for the stake sale.

If successful, it will probably lead to an extension of DBS’ wealth-management business.

This could pave the way for the rise of Asian banks, as they take over units of Western banks.

Already, Malaysia’s second-largest bank is in partnership with the Royal Bank of Scotland in Australia.

China has gone to London for yuan-deposit investments and its largest bank,Industrial and Commercial Bank of China Ltd, is opening its first overseas branch in New Zealand.

Doing business overseas has its risks. Several financial services firms are under investigation relating to their hiring practices in China.

The US Justice Department is probing Morgan Stanley, JP Morgan Chase & Co,Goldman Sachs Group Inc and Citigroup Inc for their hiring practices in China as part of an industry-wide investigation by the government into whether their employment of politically connected Chinese had breached US bribery laws, saysReuters, quoting people familiar with the matter.

US authorities’ interest in the hiring practices of banks operating in China first came to light in August.

That was when media reports disclosed that the US Securities and Exchange Commission was looking at whether JP Morgan’s Hong Kong office had hired the children of powerful heads of state-owned companies in China with the express purpose of winning underwriting business and other contracts, writes Reuters.

Conflict of interest and ethical questions need to be looked into, but one must be careful not to go overboard in this sort of “witch-hunt”.

We should be aware too that some of these young men and women genuinely want to carve a career in investment banking.

By coming down too hard on this issue, we may snuff out their ambition and block their path to future growth.

Columnist Yap Leng Kuen advocates a cool frame of mind in any “witch-hunt”.

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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