China To Require Stress Tests After Bad Loan Concerns

The China Banking Regulatory Commission (CBRC) has said it will conduct regional and national stress tests after banks saw a spike in bad loans last year, the Shanghai Securities News reported on Friday, reflecting growing concerns over credit risk.

“All (CBRC) offices, supervisory departments, must organize stress tests of banking institutions in a timely manner so as to analyze the impact of unfavorable situations in individual banks and the banking system and urge banking financial institutions to make emergency plans,” the regulator was quoted as saying in guidelines sent to banks in March.

Chinese banks’ non-performing loan (NPL) ratio rose to 1.0 percent at the end of December, its highest level in two years, the CBRC reported in February.

It was unclear, however, to what extent the latest guidelines are a departure from previous practice.

“Commercial banks all have to submit stress test results to the local CBRC branch every quarter. The Big Five banks reporting a rise in their NPL ratios probably caused CBRC to put more stress on this issue,” said an executive at a mid-sized bank in Shanghai who is involved in preparing reports for regulators.

“Until now I haven’t received a notice from CBRC asking for anything special,” he said.

Unlike the stress tests that the U.S. and European central banks conducted in the aftermath of the financial crisis, which were intended to restore investor confidence in western banks, industry observers say the Chinese regulators are unlikely to publicly release results of their tests.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza