Chinese lenders improve risk management
They are not bankers; they are technical experts, and are equally discerning as to how to detect problems with Chinese banks.
Geoff Hart and Kenny Mok, two software experts working to help banks install computer systems to control risks, said Chinese banks are improving risk awareness and management, although they still have a long way to go.
They observe domestic banks not by assessing their financial figures, but how they tackle risks.
"They (Chinese banks) have some 'book knowledge' of risk, which is good, but they lack the practical experience to really apply risk management within the banks," said Hart, head of risk solutions at Misys (Asia-Pacific), a leading global application software and service provider, with banks as their major clients.
Ten years ago, however, such book knowledge was lacking.
Now nearly all major domestic banks, including the Big Four, are the company's clients.
But Hart said when he first set foot in China, few banks were aware of what they needed to do address risk management.
Chinese banks were considered de facto government-controlled agencies during the planned economy period. The government had a big say in their lending decision-making and loans were extended to support State enterprises, which means fund safety or returns were not the No 1 consideration.
In such circumstances, it is hard to establish a sound risk control system, analysts said.
Lack of risk management was not only China's problem, but one shared by the Asian region 10 years ago.
"Back in 1997-98 when I first came to Asia and started working for banks, it was an empty arena, where banks created risk departments, but people there were not risk managers but just various people put in the department," Hart said.
The domestic banks used to strive to "do things right", said Mok, principal consultant and head of business development at Misys. But now they are making strategic decisions on what they should do to reduce risks and improve corporate performance.
"Now they try to do the right things," Mok said.
"I'm glad there's been such a change."
Singapore, Japan, Australia and Hong Kong have led the wider Asian region to establish a sound risk management regime, according to Mok.
Second-tier economies such as the mainland, South Korea and Taiwan are on the way to catching up, he said.
For the mainland, the lack of data for its over 200 banking institutions is a big problem for risk managers to assess risks, Hart said. "You can have the best models in the world, the best-looking graphics, the best philosophy, but if you don't have data, you risk being failed."
It's like buying a Porsche and not buying gas for it, he said.
"You have a beautiful car that doesn't run."
Another problem is that some Chinese banks shun risk instead of braving it, Mok said.
Most domestic banks continue to depend on the deposit-saving interest rate differentials as their major source of profit, he said.
"Some would buy bonds to get safe returns," he said.
If they keep operating in such a way and refuse to take initiatives to expand, risk management would mean little for them, he said.
As China becomes more open, more foreign banks will be attracted. Risk management would help domestic banks to better analyze market risks and help them stand out in a more complicated market environment, he said.
"The risk system will give them a competitive advantage because it allows you to maximize risk returns."
If banks are confined to their limited business scope, they may become losers, Mok warned.
"If you just buy bonds and do limited business, you give business away. It's a way of being acquired," he said.
Putting a system in place to help risk management will give those banks the ability to go out and become more dynamic to maintain their existence as a bank, he added.
Liu Xiaola, assistant general manager of China Merchants Bank, a Misys client, said: "With continued growth in the markets, accurately managing risk, both in terms of modeling and risk limit management, is essential."
Many of China's banks have undergone shareholding reforms before listing on the stock market.
Their non-performing loans have decreased continually. By the end of the third quarter, the bad loan ratio of commercial banks was 6.2 percent, down from 8.6 percent at the end of 2005.
But many small and financially weak institutions, including grassroots cooperative banks, have faced growing challenges as competition intensifies.
One of their paramount tasks is to establish a sound risk management regime, as previous bad loan losses and embezzlement cases have exposed their weak internal control mechanisms, analysts said.
They need to foster an entrenched risk culture, Mok said.
In such a culture, everyone, no matter what department they are from, should properly understand risk control.
"It's not to stop traders from doing business, but ensure that it's done in a safe manner," Mok said.
"But it's going to take time to move this culture into the banks."
(China Daily 12/18/2007 page15)
