In­ter­me­di­ary cat­e­gory in eval­u­a­tion to be re­moved, say sources

New Straits Times - - Business -

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.

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