On Sept. 16, the first working day after Lehman Brothers filed for bankruptcy, CBRC urgently asked Chinese-funded banks to report on asset-related situations with Lehman Brothers and Merrill Lynch, risk conditions, and protective measures that can be taken.
CBRC officials stressed that China's economy is running smoothly and that the turmoil in US financial markets won’t have a major impact on the fundamentals of China's banking sector.
The Shanghai and Shenzhen stock exchanges also called for analysis of the impact of the subprime lending crisis and Lehman Brothers�bankruptcy on listed banks. The exchanges require risk assessments of listed banks and have called on banks with securities investments, and especially banks with direct losses from proprietary trading, to disclose information.
On September 18, the Industrial and Commercial Bank of China issued a notice that it and its share-holding institutions hold bonds worth about $151.8 million with Lehman Brothers, and that domestic and foreign subsidiaries of ICBC directly hold bonds worth about $139 million, all of which are senior bonds. Macao Seng Heng Bank, a subsidiary holding company of ICBC, holds credit linked bonds with Lehman Brothers with a face value of HK$100 million (about 12.81 million U.S. dollars).
The investment accounts for a small part of ICBC’s total assets and profits. As of June 30, 2008, the bonds it holds accounted for only about 0.01% of total assets, 0.03% of the total bond investment, and 1.6% of the after-tax profit of $9.5 billion for the first half of 2008.
The Bank of Communications revealed that it holds bonds worth $70.02 million related to Lehman Brothers and its subsidiaries, amounting to 0.02% of the total assets as of June 30, 2008, and 0.35% of the net assets.
China Merchants Bank said that its exposure to bonds issued by Lehman Brothers totals $70 million, including $60 million of senior debt and $10 million in subordinate bonds. The Bank of China Group Investment, Ltd., holds $75.62 million in bonds issued by Lehman Brothers and its subsidiaries. The loan balance of the Bank of China’s New York branch to Lehman Brothers totals $50 million, $3.2 million to its subsidiaries. The Industry Bank disclosed that its exposure in investment and transaction to Lehman has reached $33.6 million.
The China Construction Bank of will disclose related information in the next few days. It is estimated that its exposure may exceed that of the Bank of China.
The information disclosed above covers only proprietary trading and is much smaller than the actual total assets related to Lehman the banks hold.
According to Caijing Magazine, Chinese-funded banks hold assets worth dozens of billions of dollars related to Lehman, far more than the $500 million of investment disclosed so far by the five listed companies. These assets include direct-held bonds, loans to Lehman, and bond-related derivatives with Lehman, as well as financial products of QDII (qualified domestic institutional investors).
The banks said that they are not currently disclosing some information because Lehman Brothers is still in bankruptcy protection. If Barclays purchases the assets of Lehman Brothers, senior bonds held by investors may have a recovery rate of 50%. Any loss, therefore, depends on the bankruptcy process.
Insiders say that Chinese banks holds billions of dollars of bonds of Lehman, not very high compared with the total assets. The provisioning coverage rate of the listed banks is normally high at present, so direct losses won’t have great impact on the banks�profits.
"Given the asset sizes and profitability of domestic banks, the bankruptcy of Lehman Brothers will not affect their normal operation." Guo Tianyong points out. Guo is the director of the research center of Central University of Finance and Economics.
However, there are worries that if any other large financial institutions in the United States go bankrupt and Chinese-funded banks hold their bonds, the damage could be much greater.
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