In October 2023, the ** Financial Work Conference proposed to comprehensively strengthen financial supervision, effectively prevent and resolve financial risks, and deal with the risks of small and medium-sized financial institutions in a timely manner. In December of the same year, the ** Economic Work Conference emphasized that it was necessary to coordinate and resolve the risks of real estate, local debt, and small and medium-sized financial institutions. In order to implement the decision-making and deployment of the first country, the financial regulatory authorities proposed to adhere to the goal-oriented, problem-oriented, resolutely fight a tough and protracted battle, focusing on accelerating the reform of small and medium-sized financial institutions. This paper puts forward some thoughts on resolving the risks of small and medium-sized financial institutions.
Analysis of the risk causes of small and medium-sized financial institutions.
The risk of small and medium-sized financial institutions is the result of the joint action of the internal laws of the financial system and changes in the external environment, and has its objectivity and inevitability. For credit institutions such as small and medium-sized financial institutions, almost completely homogeneous products and services, the focus of competition between each other is the cost of capital and the credibility of the subject. Therefore, theoretically speaking, the competition between institutions of different sizes in the financial sector is more fierce and differentiated. However, unlike the free market development model of western developed economies, China's financial system, especially the banking system, which has transitioned from a planned economy, is naturally closed and exclusive, and the spatial distribution of urban commercial banks and rural commercial banks is the most typical, and there is usually only one corporate banking institution in a certain administrative region. In the past stage of rapid economic development, local small and medium-sized banks and other small and medium-sized financial institutions have more or less enjoyed the special "dividends" brought by financial licenses and scarce status, resulting in small and medium-sized financial institutions neglecting the cultivation and improvement of their own competitiveness and risk management and control capabilities.
There is a lack of internal governance and risk management and control of small and medium-sized financial institutions. The bankruptcy of financial institutions, especially private capital holding institutions, in the past few years has exposed the lack of internal governance and risk control mechanisms of small and medium-sized financial institutions. Due to historical reasons, the shareholding structure of local urban commercial banks and rural commercial banks, which were born out of credit cooperative institutions, is characterized by a large number of shareholders and a high degree of dispersion, and the information of "zombie" shareholders is lost, and the identity of shareholders is false and unclear. The property rights of the "three monks" make it difficult for shareholders to effectively exercise their power and regulate and constrain management. The lack of governance system for small and medium-sized financial institutions with a high proportion of private capital has become a pretext for some institutions to carry out "capital operation", and even be controlled by minority shareholders or insiders. Some local small and medium-sized financial institutions have become high-incidence areas of financial corruption, and some localities have failed to earnestly perform their duties as the ultimate "guardians" based on their political achievements or local interests, and even shielded and connived at the illegal activities of small and medium-sized financial institutions. There are also some small and medium-sized financial institutions, and the first risk assets are paid for local illegal debt borrowing.
The internal differentiation of small and medium-sized financial institutions is becoming increasingly prominent. Regional small and medium-sized financial institutions are closely related to the level of social and economic development in the region, and have entered a new stage of development, and the trend of regional economic differentiation directly reflects the differentiation of local financial institutions. The asset quality and operating conditions of high-quality financial institutions, represented by the top listed city commercial banks, are far ahead of national financial institutions, including large state-owned banks and joint-stock banks. However, most of the financial institutions located in economically underdeveloped areas are greatly affected by the fluctuations of the economy and industry in the region. The asset distribution of local small and medium-sized financial institutions has the characteristics of "high proportion in the private economy", "high proportion of small, medium and micro enterprises and self-employed persons", "high proportion of local financing platforms and real estate", as well as the three characteristics of "excessive concentration in regions", "excessive concentration in industries" and "excessive concentration of large customers" in credit investment. Small and medium-sized banks are constrained by the business area and the high cost of capital on their own liabilities, so they prefer high-risk and high-yield assets.
Small and medium-sized financial institutions have not been able to keep up with technological advances. From the perspective of the evolution of the competitive landscape brought about by technological progress, small and medium-sized financial institutions are in an increasingly disadvantageous position and cannot reverse the competitive disadvantage in a short period of time. In the past decade, the tide of Internet finance, led by mobile Internet giants, has had a huge impact on traditional financial institutions, among which rural financial institutions and local banks in remote areas that were originally in areas where financial services are scarce have been hit the hardest. In rural and remote areas where financial resources were originally scarce, the popularity of mobile Internet applications has led to more convenient asset allocation for local residents, which in turn has led to capital outflow, making local finance even worse.
The digital transformation of small and medium-sized financial institutions is relatively lagging behind. The digital transformation of small and medium-sized financial institutions, especially banking institutions for the majority of end-users, has become a key factor in market competition, and local small and medium-sized banks lag far behind large banks in this field. As we all know, the investment in information technology of financial institutions has significant economies of scale and increasing marginal returns, and many small and medium-sized financial institutions lack application scenarios and are difficult to bear the cost of trial and error.
Local financial institutions outside the first- and second-tier central cities are unable to recruit high-end IT talents, and are in a dilemma in the process of digital transformation, forming a digital divide with large institutions in the industry.
Small and medium-sized financial institutions do not have smooth channels for replenishing capital. Local small and medium-sized banks and other small and medium-sized financial institutions are generally weaker than large financial institutions in terms of capital adequacy ratios and other regulatory indicators that reflect the health of assets, but they are in a very disadvantageous situation in terms of capital replenishment channels. At present, the capital replenishment tools of domestic commercial banks mainly include the issuance of supplementary Tier 1 capital such as **, convertible bonds, preferred shares and perpetual bonds in domestic and foreign capital markets, as well as the issuance of Tier 2 capital bonds to supplement Tier 2 capital. However, the reality is the opposite, there are currently less than 70 domestic and foreign listed banks**, less than 50 of which belong to small and medium-sized banks and are highly concentrated in the head institutions of central cities, which is just a drop in the bucket to alleviate the capital hunger of the majority of small and medium-sized financial institutions.
Suggestions for mitigating the risks of small and medium-sized financial institutions.
First, it is necessary to properly dispose of the non-performing assets of small and medium-sized financial institutions. For small and medium-sized financial institutions in trouble, they should be cured, and those that cannot be rescued should be resolutely shut down and transferred, and strive to eliminate the credit risk events of small and medium-sized financial institutions in the shortest possible time, so as to minimize the possible economic and social impact, especially the negative effect of risk transmission within the financial system. To rescue small and medium-sized financial institutions, it is necessary to treat both the symptoms and the root causes, and establish a long-term mechanism for risk management and control. Regulators should vigorously promote the application of advanced financial technology methods, build a dynamic monitoring system for business asset risks of small and medium-sized financial institutions, dynamically control the risk formation process in real time, and effectively avoid the recurrence of similar risks. For small and medium-sized financial institutions in operational difficulties, the competent authorities should create conditions to broaden their financing channels and effectively meet their financing needs. Establish a fully functional non-performing asset transfer and trading market, give full play to the role of special asset investment institutions such as AMCs, and guide them to participate in the risk disposal actions of small and medium-sized financial institutions, especially credit institutions. Improve the market-oriented risk mitigation and handling mechanism for small and medium-sized financial institutions, so that the state-owned funds and social capital participating in the bailout can be smoothly withdrawn.
The second is to steadily promote the restructuring and integration of small and medium-sized financial institutions. The competent financial authorities, especially the relevant local departments, should carefully study the characteristics of small and scattered local financial institutions, steadily promote the restructuring and integration of small and medium-sized financial institutions when conditions permit, optimize the layout, and enhance the industry's ability to resist financial risks. As far as the economic environment is poor and the economic strength is weak, it is necessary to actively explore ways to change the business concept of small and medium-sized financial institutions, merge county-level and prefectural and municipal institutions with relatively small scale to form a number of provincial-scale financial institutions, and strive to build "aircraft carriers" or "joint fleets" of local financial institutions. It is necessary to regulate the cross-regional operation and disorderly expansion of local small and medium-sized financial institutions, and encourage cross-regional cooperation between industries to achieve mutual benefit and win-win results. To promote restructuring and integration, it is necessary to take into account the interests of all parties, prevent "pulling and matching", and avoid normal institutions being dragged down by difficult institutions to form new risk events.
The third is to standardize and improve the internal governance of small and medium-sized financial institutions. In regulating the chaotic operation of small and medium-sized financial institutions, it is necessary to give prominence to promoting the internal management of financial institutions and improving supervision and supervision. In the process of improving the internal governance of local financial institutions, it is necessary to strengthen the leadership of the Party and strengthen the leading role of the Party building of regulatory departments and financial institutions. In the fight against corruption and clean government in the financial sector, it is necessary to persist in punishing the former and treating the disease and saving people, comprehensively carry out warning education activities, and build a management team with firm political awareness, risk responsibility in place, and excellent professional ability. In the process of bailing out small and medium-sized financial institutions, it is necessary to realize the three synchronizations of "capital injection, system injection, and intelligence injection"; while injecting fresh blood, it is necessary to thoroughly straighten out the chaotic situation in the equity structure of local banks that has existed for a long time, and optimize the capital structure of small and medium-sized financial institutions. It is necessary to improve the internal governance mechanism of small and medium-sized financial institutions, effectively implement supervision and restraint on shareholders and management, and ensure that they operate in accordance with the law.
Fourth, we should explore the characteristic operation path of small and medium-sized financial institutions. Small and medium-sized financial institutions should make use of their strengths and avoid weaknesses, transform the disadvantages of brand capital into advantages in organizational personnel and network channels, open up new areas of financial services on the basis of deepening and detailing existing businesses, and avoid unnecessary vicious competition with large financial institutions. Small and medium-sized financial institutions can make full use of their institutional outlets and territorial advantages, carry out various forms of cooperation with national financial institutions, and give full play to the role of financial service distribution channels and customer service networks. Local financial institutions should be based on serving the local real industry, continue to play the role of serving local small, medium and micro enterprises, ordinary residents and "three rural" operators, and build a solid "moat" for business customers. Regulators should actively coordinate external resources to help small and medium-sized financial institutions strengthen informatization and digitalization, make up for shortcomings in the field of financial technology, and continue to improve operational efficiency and risk management and control capabilities.
Editor-in-Chief of The Banker Magazine: