Huaxia Bank has been held liable for the sale of unauthorised wealth management products issued by a third-party investment company, as analysts warn of such dangers facing the sector.
An employee at the bank’s Jiading branch in Shanghai sold the instruments issued by Zhongding Wealth Investment Center without permission of the bank, Reuters reported.
"Currently, investors think Huaxia Bank must take the responsibility and no matter what we argue, they won’t listen to us. So we must let the police and judiciary decide the different responsibilities of all parties involved in this case," a spokesman said. "But it cannot be understood that the bank will pay for the default."
Police investigation is underway and reports have claimed the banks have stopped making payments.
The incident, underscores the reputational risk incurred in selling wealth management products to investors, said a recent Fitch report.
The report highlighted the issuance of wealth management products by Chinese banks presents growing risks for the sector as larger amounts of funding are sourced through this channel.
"Managing wealth management products issuance and payouts is becoming a growing logistical challenge," Charlene Chu, head of Chinese banks’ ratings at Fitch, said. "Add to this poor disclosure plus the fact that many of the assets and liabilities spend much of their life off-balance sheet and there is clearly cause for concern."
While wealth management products are similar to time deposits, banks can freely set interest rates of the former, the report explained. As a result, many of the assets and liabilities stay off the balance sheets.
Furthermore, unlike previous years, recent issuance has been driven mainly by non-state banks, with a majority of investment taking place among joint-stock and city and rural commercial banks. The lack of liquid assets and a small deposit bases make them more susceptible for repayment issues.