UPDATE 1-China bank regulator encourages innovation while warning on risks
(Adds details, background)
* CBRC encourages innovation but urges caution
* Banks must segregate on- and off-balance sheet businesses
* Wealth management products must be separate from lending
* New comprehensive system to monitor risk
BEIJING/SHANGHAI, Sept 16 (Reuters) - China's banking watchdog has encouraged banks to develop new products but urged them to minimise risks in the sector, setting the latest official tone on financial innovation and reform.
The regulator's warning on risk comes at a time Chinese banks are zealously developing new financial products. The industry has seen explosive growth of off-balance-sheet loans, which are often packaged into wealth management products.
Shang Fulin, the chairman of China Banking Regulatory Commission, said on Monday that CBRC will encourage financial innovation, while ensuring that banks don't remain on the hook for risks they have supposedly transferred off-balance-sheet.
"Some off-balance-sheet innovative business lines have gotten inter-tangled with (on- balance-sheet) deposit and lending business," he said.
"We need to segregate lending, wealth management, brokerage, and securities investment businesses, implementing protective barriers around each, while encouraging innovation within each segment," the chairman said.
"Some related-party transactions hide potential risks and contagion. There is even the phenomenon of 'many ants together killing the elephant'," he added.
Shang said that banks should earn fee income on wealth management products but should not also earn investment income or assume credit risk from off-balance-sheet assets.
In recent years, banks have used cooperation with non-bank institutions such as trust companies and securities brokerages to transfer some loans off balance sheet, even as they remain exposed to the underlying risk.
In May, regulators issued new rules preventing banks from trading between separate on- and off-balance sheet accounts.
A severe cash crunch in late June was due in part to banks who needed to raise funds to pay off maturing wealth management products. They borrowed cash from other banks to bring off-balance-sheet assets back on their books temporarily.
LESSON FROM GLOBAL CRISIS
The chief regulator also asked banks to tighten risk control by setting up a broader risk-detection measure to cover both on- and off- their balance sheet businesses, as well as overseas operations.
"A lesson from the global financial crisis tells us the overlapping of different businesses may intensify the accumulation and contagion of risks," Shang said in a speech at a banking sector meeting, according to a statement posted on the CBRC's website.
Shang also pledged to push forward a pilot programme for credit asset securitisation and urged banks to quicken the "market-oriented" disposal of non-performing loans.
"We should ensure the risks of bad assets are transferred veritably and set aside relevant assets provision for retained risks," Shang added.
Chinese policymakers have recently signalled their intention to push banks to work through bad debts on their own in order to make government bailouts unnecessary.
China's cabinet had earlier said it would expand the pilot programme for securitising credit assets, in the latest effort to expedite long-awaited financial reform. Progress has been slow on the programme, which was interrupted by the 2008-2009 financial crisis.
(Reporting by Aileen Wang, Xiaoyi Shao and Gabriel Wildau; Editing by Richard Borsuk)