By Wang Yanhang    Source: Global Times    Published: 2016-4-18

China`s banking regulator has recently unveiled new guidelines designed to enhance risk management concerning domestic banking institutions` overseas operations. This marks a strategically pivotal step forward in addressing risks posed by the rapid expansion of domestic lenders in overseas markets.

Admittedly, some of the country`s banking institutions are faced by the recurring problem of lax management in their operations in overseas markets. Risk management has a huge impact on the credibility, funds and profitability of Chinese financial institutions operating overseas. With the new rules in place, they are now under pressure to improve in this regard.  

Banking institutions should make improvements in their analysis and evaluation of the risk factors associated with their overseas operations, delving deeper in their research into the local political and economic situation, financial market trends and the financial oversight regime of the countries or regions in which they are operating, according to the new guidelines released by the China Banking Regulatory Commission.

It is especially worth noting that the guidelines say that debt investments made by domestic lenders cannot be purely based upon credit ratings offered by external professionals and the debt investments should be integrated into the lenders` proprietary risk management system. Additionally, equity investments that come under the purview of consolidated supervision should be reviewed by the banks` board of directors and the impact on the banking group of potential losses incurred by failed investments must go through an all-round evaluation.

Tougher risk control over domestic banking institutions` overseas operations, as outlined by the new guidelines, would require efforts by these banking institutions to attune their strategies, organizations, manpower and system of accountability to the local markets in order to effectively put operational risks under control.

That said, domestic lenders that have in recent years continued expansion in overseas markets will need to take a more prudent and cautious approach to pursue market penetration outside their home turf.

The author is a senior fellow with the Chongyang Institute for Financial Studies at Renmin University of China.