China mulls granting broker license to banks

Chinese securities regulator's recent comments that it was looking into allowing commercial banks to apply for securities brokerage licenses indicate the further slackening of barriers for financial services.

Spokesperson with China Securities Regulatory Commission (CSRC) Zhang Xiaojun said during a routine press briefing on Friday that the commission is working to allow banks to apply to do broker business, though no timetable has been set.[Special coverage]

Rumors that the country's securities regulator is moving to loosen restrictions over brokerage business have been circulating since last month. The Industrial Bank is reportedly waiting for approval from the State Council to acquire Huafu Securities, whereas the Bank of Communications is said to be eyeing a 33.3 percent stake in Huaying Securities, from Royal Bank of Scotland.

These developments saw banking stocks listed on mainland bourses surge nearly five percent on Monday and weighed on shares of listed brokers.

Broker licenses would be more appealing to small banks, analysts say, as the potential profits stemming from broker service would mean a sizable markup from banking alone.

But large, state-owned banks would be less incentivized as the profit generated by a leading brokerages in the country accounts for less than one tenth of their earnings.

The Securities Law mandates that securities, banking, trust and insurance should be operated and regulated separately. The Commercial Banking Law also prohibits commercial banks from undertaking trust and broker business.

However, the lines between the these disparate businesses have becoming increasingly blurred in recent years.

Though banks are banned from wading into securities territory, some financial conglomerates have managed to run multiple services by establishing separate entities.

Financial conglomerates such as CITIC Group Corp., Ping An Insurance (Group) and China Everbright Group already have subsidiaries that hold licenses for banking, securities brokerage and insurance. Other financial institutions have also sought to extend their business offerings through buying stakes in, or acquisition of, firms with different licenses.

Yet analysts say these conglomerates, though boasting multiple licenses, seldom excel on all fronts. Ping An has a strong presence in insurance, but its bank is only one tenth of the country's largest lender Industrial and Commercial Bank of China, in terms of total assets.

Sun Lijian, a senior finance researcher with Fudan University, said letting banks run a whole gamut of services would help companies that currently deal with numerous financial firms for its various financial needs.

The move could also break license monopolies, reduce intermediary costs for clients and create more competition, Sun added.

But others raised concern over regulators' ability to monitor risky behavior once banking and brokerage are managed under the same roof.

"What if banks use deposits for proprietary trading of securities without depositors' consent?" said Xi Junyang, a professor with the Shanghai University of Finance and Economics. "Such practice, if not properly regulated, will breed risks such as liquidity mismatch and hurt their clients."

Still, some see hope that the integration of financial services will force regulators to further clarify their roles in regulating the financial sector.

According to Liu Shengjun, deputy director of the Shanghai-based Lujiazui International Finance Research Center, there are still a lot of uncertainties over the commissions' role in regulating the wealth management product market, which many banks have used as a disguise for lending beyond their assigned quota or to blacklisted industries.

Granting broker license to banks, Liu says, would put their off-balance sheet lending under regulator's scrutiny.

That said, allowing banks to do broker business could create as many challenges for regulatory competence as potential profits for banks.

"If this is the trend going forward, then regulators should adapt to changing circumstances" said Xi.

"Even when different businesses are brought together, there should still be boundaries," Xi added.