Analysis And Expectation Of Financing-Related Products Of Off-Balance-Sheet Activities In Commercial Banks

This paper focuses on off-balance-sheet activities (OBSAs) which are attached to bank-issued financial products by carrying out a study on the current economic situation, financial regulations and the financing environment of enterprises, conducting a research on the major OBSAs (including the transaction structures thereof) and presenting the findings. Since2001, the domestic financial environment has undergone significant changes. The competition brought by foreign-invested banks, the updating and application of the Basel Accords, and the recent acceleration of interest rate liberalization have all had a profound impact on the operational form of domestic banks. A new item, so called "bank-issued financial products", made its debut upon China’s entry into the WTO and has been growing along with changes in the financial environment. Since then, these products have spread over every corner of our daily life, and silently changed the financial ecosystems via the underlying OBSAs. It is only through media reports and frequent legislative and regulatory updates in this area over recent years that the veil over OBSAs has been lifted. However, ordinary individual investors and even some finance professionals still do not have sufficient knowledge on what OBSAs are, or how they are connected with bank-issued financial products. In the wave of financing the deposit caused by financial products, it is obviously unreasonable that ordinary individual investors (which constitute the major group of consumers of bank-issued financial products) have little knowledge on what they have purchased, which is also unhealthy from a financial market perspective. Hence it is vital to increase introduction and disclosure on OBSAs for investors. OBSAs are mostly non-regulated at the initial stage, and are created by commercial banks which have an increasing need for profits and are bearing the pressure of economic recession and credit crunch. By merging the characters of main financial market participants and the banking accounting principles, OBSAs between banks and trust companies have become important for they are widely applied in the shadow banking sector. Because profits are quite often made by taking advantage of regulatory vacuums, and the system can maximize monetary supply without being subject to regulatory limits, the supervision organizations are paying a great deal of attention on these OBSAs’ activities, and new rules and policies are promulgated on a frequent basis to cover the identified regulatory vacuums in a "catch me if you can" manner. In this chasing game, regulators have changed their attitudes recently. Specifically, they are no longer banning OBSAs without exception; rather, they are turning their methodology from "blocking" to "regulating". Therefore, in line with such regulatory trend, it is envisaged that OBSAs would become more complex and more transparent, and more adjustments will be made for regulatory compliance purposes as opposed to escaping from the regulators’ radar. It is also envisaged that more and more participants want to have a slice of the OBSAs cake.