China gives pointers in West's war on bank culture

NVC International Holdings

20/11/2014 03:13

(The author is a Reuters Breakingviews columnist. The opinions 
expressed are his own.) 
    By John Foley 
    BEIJING, Nov 20 (Reuters Breakingviews) - Rotten bank 
cultures are causing problems from Beijing to 
Bishopsgate. Though the misdemeanours may be different, 
the roots are the same: sprawling institutions, weak regulators, 
and powerful local loyalties. 
    Traders in London and New York colluded via internet 
chatrooms to rig rates in the foreign exchange market. Their 
Chinese counterparts aren't yet that influential. But the 
People's Republic also has a problem with bankers behaving badly 
away from head office oversight. On Nov. 17 manufacturer NVC 
Lighting  2222.HK  accused local employees of four lenders, 
including the world's biggest, Industrial and Commercial Bank of 
China  601398.SS , of helping its former chief executive spirit 
away $102 million. The banks have not commented on the case. 
    Managing huge companies is a problem everywhere. For China's 
bank bosses the task is even more daunting. Agricultural Bank of 
China's  601288.SS  balance sheet is of similar size to HSBC 
 HSBA.L , one of the institutions implicated in this month's 
foreign exchange settlement. Yet ABC's 478,000 employees vastly 
outnumber the UK lender's 256,000 staff. 
    Distance encourages indiscipline. In chat rooms, forex 
traders in London declared themselves loyal to each other before 
"nyk", or New York. In China, ties between powerful 
local businesses and politicians make it hard for bankers to say 
"no". So while Western fiefdoms facilitate market-rigging, 
China's encourage both graft and bad capital allocation. The 
country's credit stimulus in 2009 went to industries that were 
not supposed to benefit, like coal mining. Lenders have 
skirted official loan limits by nurturing a shadow banking 
sector which is worth $4.9 trillion, by Standard and Poor's 
estimates. 
    As in the West, regulators in China are getting wise, but 
it's a tough job. Their only option is to tie up banks in masses 
of red tape and stipulate which sectors and companies 
are deserving of credit. Tolerance for financial innovation 
seems to be shrinking. 
    China's politicians and regulators do have one thing going 
for them that is lacking in the West: a willingness to 
meddle. They see the financial system as a tool for managing the 
economy, which gives them few qualms about restricting lucrative 
activities and generous incentives. This approach hasn't stamped 
out mischief. But Western banks with behavioural issues could do 
worse than try some Chinese-style micromanagement. 
     
    https://twitter.com/johnsfoley 
 
     
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    CONTEXT NEWS 
    - Bank of England Governor Mark Carney said on Nov. 17 that 
new rules to control the fixed pay of bankers may be needed to 
ensure individuals can be held responsible for excessive 
risk-taking and misconduct. 
    - Speaking just five days after a combined $4.3 billion 
settlement between four regulators and six banks over rigging of 
the foreign exchange market, Carney suggested that the problem 
was not "a few bad apples" but "the barrel in which they are 
stored". 
    - On the same day, NVC Lighting said employees of four 
leading Chinese banks were under police investigation for 
allegedly helping the Hong Kong-listed Chinese manufacturer's 
chief executive divert funds and obtain loan guarantees 
amounting to around 623 million yuan ($102 million) without the 
company's knowledge. 
    - The banks include Industrial and Commercial Bank of China, 
the world's largest bank by assets, as well as Bank of China, 
China Construction Bank and Minsheng.  
    - BOC declined to comment immediately. Spokesmen for 
Minsheng Bank and ICBC told Reuters they had not heard of the 
case, while CCB could not be immediately reached for comment. 
    - Reuters: China's NVC Lighting ex-CEO, bankers investigated 
for suspected $100 mln fraud  ID:nL3N0T71J1  
 
     
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    - For previous columns by the author, Reuters customers can 
click on  FOLEY/  
 
    
 
 (Editing by Peter Thal Larsen and Katrina Hamlin) 
 ((john.foley@thomsonreuters.com)(Reuters messaging: 
john.foley.thomsonreuters.com@reuters.net)) 
 
Keywords: CHINA BANKS/BREAKINGVIEWS