China's banking regulator drafting bankruptcy rules

China's top banking regulator is drafting rules on bankruptcy risk handling for commercial banks, aiming to provide sufficient guarantees for rapidly and thoroughly dealing with banks in crisis.

In reply to a proposal by the fifth session of the 12th National People's Congress, the top legislative body of China, the China Banking Regulatory Commission said it will strengthen communications with legislators to push forward with legal protection for close-out netting, the primary means of mitigating credit risks associated with over-the-counter derivatives. The CBRC will also communicate with the International Swaps and Derivatives Association on establishing a close-out netting arrangement for Chinese commercial banks.

"The upcoming regulation on bankruptcy risk handling for commercial banks will set a sound legal foundation for a bank to withdraw from the financial market at a low costs, low risks and high efficiency," said Zeng Gang, director of banking research at the Institute of Finance and Banking under the Chinese Academy of Social Sciences. "The launching of the withdrawal mechanism, which is in accordance with China's interest rate liberalization and financial marketization, will help prevent spillover risk among banking institutions. It doesn't mean a large number of Chinese banks will collapse."