Hong Kong Regulators Warn Banks Over Complex Lending Risks

(Bloomberg) -- Hong Kong’s financial regulators warned banks against complex lending transactions, highlighting a case at an unnamed Chinese bank as authorities in the city increase their scrutiny of risky financial practices.

The Securities and Futures Commission and Hong Kong Monetary Authority said in a joint statement Wednesday that they had recently conducted coordinated inspections at a Chinese bank and found it had entered into transactions that illustrated ways in which other Chinese financial institutions in Hong Kong “embedded financial risks and make it difficult to conduct rigorous risk assessment.”

Highlighting so-called complex lending arrangements comes amid a clampdown by the securities regulator on licensed money managers disguising margin loans as investments. Such tactics are illegal and increase balance sheet risks at firms involved, the SFC has previously said.

“Banks should ensure that credit facilities granted to their subsidiaries and affiliated companies or those of their holding company are granted on an arm’s length basis,” the regulators said in the statement.

The HKMA will review the effectiveness of banks’ controls as part of its supervisory work, the regulators said. They encouraged the industry to “critically assess the risk implications” of borrowers engaging in activities such as taking margin loans to finance high-risk investments.

In an example provided in the statement, a subsidiary of an unnamed Chinese bank obtained a credit facility from the bank, the regulators said, and then made a large investment in a private fund. That fund’s only purpose was to provide a loan to a special purpose vehicle owned by a substantial shareholder of a public company. Firms that have similar arrangements should “review them urgently,” the regulators said.

Regulators also found that the bank subsidiary had provided lending to other public companies in exchange for company stock that was illiquid and “of doubtful quality.” The practice, known as share pledging, has previously led to SFC warnings. SFC has warned against concentrated lending before, and the agency recently issued new rules following a series of sudden price plunges that were caused in part by lenders dumping loan collateral.

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