PBoC PLANS TIGHTER BANK CAPITAL RULES

Intermediary category in evaluation to be removed, say sources

CHINA’S central bank plans to apply a stricter method for assessing banks’ capital as part of efforts to contain risks of financial sector, said people with knowledge of the matter.

Under the proposed change to the so-called Macro Prudential Assessment (MPA) framework, the People’s Bank of China (PBoC) would remove an intermediary category in its evaluation of banks’ capital adequacy, said the people. That means banks would either get a full score if they met capital requirements or a zero score if they fall short, according to the people.

Banks in danger of falling into the bottom category would be encouraged to take steps to contain risks, such as raising capital or slowing asset growth, said the people. The PBoC penalises banks with low scores on its MPA scale, for example, by paying lower interest rates on reserves they hold with the central bank. A higher score leads to higher rates for reserves.

China has put a new priority on containing risks of financial sector, including steps to control its rapidly expanding shadow banking sector. Regulators are drawing up measures to curb the nation’s US$8.7 trillion (RM38.8 trillion) of asset-management products, which include investments in bonds and risky off-balance-sheet lending by banks.

Earlier this year, the central bank ordered the lenders to strictly control loans during the first quarter, especially their mortgage lending, said the people.

The latest central bank move was likely to put pressure on China’s smaller banks to strengthen their capital ratios, including with new preference share issues, said Wei Hou, a Hong Kongbased analyst at Sanford C. Bernstein.

Many smaller banks “have been boosting their balance sheet by increasing investments and lending over the past few years, and at the same time they are not as strong as those major banks in terms of capital adequacy”, he added.

Rising bad loans, falling profitability and tighter Basel III financial regulations are straining capital ratios at Chinese banks. Outstanding credit swelled to 264 per cent of gross domestic product last year, Bloomberg Intelligence estimates.

Moody’s Investors Service and S&P Global Ratings said higher leverage was amplifying credit risk, while Fitch Ratings Ltd said poorer loan quality and shadow banking curbs would increase fundraising pressures.