Regulation of securitisation in China: Learning from the US experience

• The restarting of securitisation in China in 2012 has potential benefits to the Chinese economy but some risks remain and further reforms needed.
• We evaluate the regulation of securitisation in China as more effective and strident that of the US.
• Reforms such as adopting a bifurcated approach for MMR requirement, adoption of stricter regulation if MBS will be allowed and effective regulation of Shadow banking will be helpful.

With the issuance of the latest adjustment on the Chinese securitisation regulatory framework, the originating institution only needs to hold 5% capital for each class of the securitised assets. Previously, the originating institution needed to hold a certain percentage of the lowest class of the securitised assets in one single securitisation deal, and the percentage in principal, should not be less than 5% of the entire term of the securitisation deal. This adjustment of the reduction of the minimum risk retention (MRR) requirement has to large extent, addressed the limitation of financing in participating in securitisation for Chinese banks. However, it has increased the risk of securitisation failure or even a crisis in the Chinese banking sector compared with the previous regulatory framework.In the light of the potential risks of this latest adjustment, the study critically examined the effectiveness of the regulatory framework of the current Chinese securitisation market drawing from the US experience during the global financial crisis (GFC). Overall, we evaluated the regulations on the current Chinese securitisation market as relatively effective, whilst we also raised concerns on the future of the regulations and thereby provided suggestions for improvements.