April 13, 2017 / 3:52 AM / 3 months ago

China tells banks to come clean on misdemeanors: sources

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Guo Shuqing, China's newly appointed banking regulator, attends a news conference ahead of China's parliament in Beijing, March 2, 2017.Shu Zhang

SHANGHAI (Reuters) - China's banking regulator has told lenders to conduct checks on improper trading, incentives, innovation and charges, according to a document seen by Reuters.

The move is the latest in a flurry of orders from the regulator after Guo Shuqing took the helm of the China Banking Regulatory Commission (CBRC) in February.

Chinese regulators are trying to contain risks in the banking system as more borrowers struggle to avoid defaults and levels of non-performing loans (NPLs) rise.

Through self-inspections and spot checks, the CBRC wants to make sure there is no untoward behavior in interbank investment and financing and the investment of wealth management product funds, two sources with direct knowledge said.

Analysts say those two areas are among the riskiest potential flashpoints in China's banking system.

The CBRC could not be immediately reached for comment.

"We've have already conducted on-site regulatory inspections," said one of the sources who works at a regulator.

The move is to ensure that there are adequate risk safeguards behind innovative business and new products, he added.

Checks on improper innovation cover whether there are adequate stress tests in place for innovative products and whether management conduct regular risk assessments, according to the document dated April 6.

Inspections of improper trading involve probing interbank business to see if bank health is being masked by multiple trades and the impact of sell and buy-back deals on balance sheets, the document added.

Checks on incentives include whether actions are taken purely to manipulate market standings among other things, while inspections of improper charges will cover unreasonable loan charges.

The news was first reported by Caijing magazine.

The CBRC told lenders to conduct "self-inspections" in areas such as using loopholes to circumvent rules at the end of March, according to documents seen by Reuters while on Monday, the CBRC issued guidelines on risk-control.

Reporting by Ma Rong in Beijing and Engen Tham in Shanghai; Additional reporting by Li Zheng in Shanghai; Editing by Kim Coghill

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