Brief Comment on US Fed’s approval on ICBC’s acquisition application

Q1: How do you think of Chinese banks’ expansion in U.S. market?

A: TheUShas a huge and highly developed financial market, offering enormous opportunities. It is no wonder that Chinese bankers would like to have a fair presence here in the States. Chinese banks used to offer traditional set of financial products, more focused on Asian ethnicity. So far the story is quite mixed. They have proved their ability to survive, but that is not sufficient. Their market share is still negligent. They should be more competitive, provide more products, and accommodate better to local demands. I am glad that more Chinese banks will be coming, and certainly wish them greater success.

Q2: Are there any barriers for Chinese banks’ entering and expansion in U.S. market? What advantage do Chinese banks have in doing this?

 A: According to some media report, all the three applications had been pending for as long as nearly two years. For Chinese bankers, it is a frustrating experience. However I don’t see major barriers here for Chinese entry intoUSmarket. Perhaps there could have been some misunderstandings. People become very cautious and even suspicious when dealing strangers. This is also the case for Chinese banks.  Ten years ago or even five years ago, Chinese banks were technically broken. With Chinese government’s huge capital injection and support, Chinese banks return to make money almost overnight. When Chinese banks come to the States, they should familiarize themselves with local environment, including regulation and supervision. They also need time to prove their tracking record. One the other hand, US regulators need time to know and build confidence in Chinese banks, including their business models, risk management, corporate governance and internal controls, etc.

US Federal Reserve Board has very clear and transparent guidance of whether or not to grant its approval on applications. For example, the foreign applicant should be subject to comprehensive, consolidated supervision (CCS), largely based on extent of home regulator’s adherence to Basel Core Principles.China’s banking system has made significant improvements in risk measurement and management. The CBRC has adopted “activist, forward-looking” supervision process, supported by requirements for high-quality capital and liquidity. All these progress has been positive factors for Fed’s final decision. Admittedly, the Fed Reserve is also walking under the tight rope under the current economic situation, to be sure.

The Fed’s order could create the opportunity for other leading Chinese banks to acquire US banks. Even though the Fed make it very clear that the CCS determination is specific to ICBC in this application, in practice a CCS determination for one bank in a country is typically precedential for all similarly situated banks in that country. So it is likely that more applications from Chinese side will follow suit in the near future. From the perspective of theUS, regulations are still strict and currently theUScould only allow Chinese banks to take small banks. The aim for Chinese banks entering into the states is mainly to help Chinese multinationals with financing in order to develop the trade and economic ties betweenChinaand US. I believe that more entry of Chinese banks will without doubt facilitate those efforts.

Q3: How do Chinese banks improve their operations in global stage?

A: The Chinese people are very smart, and they learn things very fast. In order to be global players, Chinese banks should learn mistakes committed by others. I offer two suggestions here. One is to build up business capacity. Even though largely Chinese banks escaped from the global financial crisis, which does not necessarily mean Chinese banks are superior to other banks. To sustain the successful story, Chinese bankers should continually consolidate their risk management, fine tune their business strategy and monitor their risk profile, amongst others. The other thing is to proceed with a proper expansion plan. Chinese banks should avoid head-on competition with global giants at least for now. It is better for Chinese banks to focus China-related business first, and then gradually expand to other business line. Be wary of big acquisitions.

Q4How will U.S. and China strengthen their financial cooperation?

A: American banks used to be strategic investors for Chinese banks during their restructuring and listing process. Because of recent financial turmoil, American banks pulled their investment out of Chinese market. Now it might be going the other direction. The American banks are subject to tremendous regulatory uncertainties and in the process of deleveraging, it might be the proper time for Chinese banks to buy some assets at pretty prices.

Other potential fields of cooperation could be risk management, risk IT and professional training. Many entities on both sides, including the IIF, have been working to promote those efforts. The IIF, as the global association of financial institutions, has been aiming at strengthening understanding and cooperation betweenUSAandChina. Every year, the Institute will host its annual and spring membership meetings, which provide opportunity for bankers globally to exchange ideas and views. Also, the Institute holds regional fora and PDF program, which offer good chances to foster sound industry practice and risk management.

About wilbertouyang

I am a Chinese, just moved from China to the States. I am now working for the banking compliance field, especially keen on new basel accord, liquidity risk, corporate governance, etc.
This entry was posted in Acquisition, Banks, China, market access, Regulations, Supervision and tagged , , , , , . Bookmark the permalink.

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