A Study On Some Legal Issues Of The Financial Asset Management Corporations

The subprime crisis at the beginning of the century has caused great disaster to the world financial industry. Many countries struggle in the system reconstruction. The main reasons are the accumulation of the non-performing assets and their derivations as well as the regulatory lag. The non-performing assets are associated with the development of the financial industry, especially the development of the banking industry. It is due to the high-risk nature of the financial industry, and comes with its own nature of potential default. Non-performing assets is a common "problem children" of the world’s financial institutions in a word. On one hand, the development of the financial industry will unavoidably lead to the accumulation of non-performing assets, diluting the quality of assets and non-performing assets, increasing the financial risk. On the other hand, the methods used to resolve non-performing assets often cause more risk. Securitization of subprime loans, as the chief culprit in causing the crisis, is one of the deviations from the methods in deal with the non-performing assets. The harm will continue to far-reaching. Therefore, the disposal of non-performing assets will always be a core issue of the international financial sector’s development and risk prevention. Our group stands in the forefront of the disposal of non-performing assets, focusing on our own forms of organization-Financial Asset Management Companies, to study the disposal of non-performing assets and the subsequent development of financial assets management companies.Financial Asset Management Companies are wild spread in the world. Since1980s, many countries and areas suffered from financial crises due to complicated factors such as financial globalization, the acceleration of international capital flow, deepening financial innovation, and the transformation of economic development models, etc. During these crises, the financial industries (especially the banking industry) of countries are exposed to many risks, leaving huge amount of non-performing loans. The existence of non-performing loans did not only bring the financial institutions with great burdens concerning bad loans, but also casted a shadow on the development of the national economies. To solve this difficult issue, the suffering countries basically adopted a similar idea, namely setting up some special institutions with the function of acquiring and managing the non-performing loans from banks and other financial institutions. These special intuitions, which bore the responsibilities of improving the financial situation of distressed financial institutions and safeguarding the stability of national economies, are called Financial Asset Management Corporations (FAMCs)Financial Asset Management Company is still new in China. During the1990s,as the Chinese economy continued to develop, the Chinese banking industry was continually threatened by the high non-performing loan ratio when enjoyed the fast expand of the asset scale. To assure the financial stability and safety of China, Chinese government decided to establish4FAMCs (namely China Huarong Asset Management Corporation, China Cinda Asset Management Corporation, China Orient Asset Management Corporation, and China Great Wall Asset Management Corporation) to acquire, manage and dispose the part of non-performing loans which were transferred from4commercial banks (namely Industrial and Commercial Bank of China, China Construction Bank, Bank of China, Agricultural Bank of China).The establishment and operation of FAMCs of which is drawn from international practice is an important measure taken in the reformation of our country’s financial system. It aims to dispose the non-performing loans from state-owned commercial banks, also to wipe out domestic financial risk and resist international financial disturbance.Now, although the policy-oriented non-performing assets disposal has basically been completed, China’s banking system is still relatively large-scale non-performing assets. So the FAMCs also have a long way to go. However, the FAMCs cannot run smoothly without legal standard. Therefore, we must search for a valid path to solute the legal problems. While in this paper, five aspects of problems involved in the FAMCs are discussed from a legal point of view.In addition to the preamble and the conclusion, the paper contains six chapters:Chapter1is the overview of the banks’non-performing assets and FAMCs. It not only introduces causes and harms of non-performing assets, but also analyses the concept, character and risk of the financial asset management corporations. Besides, the running process and the commercial transformation plan of FAMCs are also mentioned.Chapter2puts forward the suggestions to FAMC’s management structure based on traditional corporation management theories and experience of overseas FAMCs.Chapter3focuses on the obstacles during the procedure of the financing of FAMCs and the purchasing of the non-performing assets and tries to analyze the obstacles in different ways to overcome them.Chapter4summarizes the main disposal measures of FAMCs (namely debt restructuring, transfer of assets, conversion of debt into equity and asset securitizationin China, using the method of the fundamental research combining with the case research. At the same time, related legal issues of these methods of disposal are analyzed.Chapter5analyzes the FAMCs’challenges to the existing supervision system, elaborates legal vulnerabilities in the supervision of FAMCs, and gives suggestions to perfect the supervision through analyzing the experience of overseas FAMCs.Chapter6introduces the legislative experience of overseas FAMCs and elaborates the related legal issues aroused during the process of FAMC’s operation, including legal environment and status. Finally, in order to perfect the law system, the basic concept of the legal framework about China’s FAMCs is proposed.