China Tightens Regulations to Better Bank Transparency

The China Banking Regulatory Commission is cracking down its regulation of loopholes in the country’s financial sector, while giving authorities more leverage control in the process. According to a Jan. 18 Fitch Ratings report, the endeavor is believed to improve transparency in Chinese banks.

Notices from the commission were put in place to help banks better understand their total credit exposure as well as any potential risks that could impact Chinese banks’ viability ratings. Efforts to combat risky lending began in early 2017, Fitch said, which found evidence that interbank activity and entrusted investment exposure are contracting.

Although loan exposure to a single name will remain capped at 10% of Tier 1 capital, the latest proposals state the cap will extend to include non-loan credit, with single-name total credit exposure capped at 15% of Tier 1 capital. Fitch said single-group exposure will be capped at 20% of Tier 1 capital, with both single-name and single-group including counterparties that are controlled or economically dependent on the same group.

“There will also be a 15% cap on exposure to unidentified counterparties in structured products, which will force banks to adopt a look-through approach and identify the underlying assets and counterparties embedded in these products,” Fitch said. “Single-group limits will also apply to interbank exposures for the first time.”

Per Basel requirements, single-group limits will be capped at 100% of Tier 1 capital from June 2019, while a phased, three-year reduction will bring the cap to 25% by 2021. This grace period would give mid-tier banks the time necessary to fall in line with the interbank exposure rules. Global systemically important banks (G-SIBs) will then have their credit exposure to other G-SIBs capped at 15% of Tier 1 capital.

Another notice released by the commission focuses on entrusted loans and ensures that the proceeds are not used to purchase financial assets or extend loans in restricted sectors. Fitch said that outstanding entrusted loans increased by 6% last year, accounting for 8% of total social financing (TSF).

“Official TSF growth has not slowed notably and at 12% in 2017 is still running faster than nominal GDP growth, which means that the overall system deleveraging is still not happening,” Fitch reported. “Genuine deleveraging would hurt near-term economic growth and banks’ asset quality, but there are so far no signs of the effects.”

—Andrew Michaels, editorial associate

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