Moody’s Raises Alert on China’s Banks Reliance on Wholesale Funding

Moody’s Investors Service is raising the red flag on the Chinese banking sector as small and mid-size banks increasingly rely on wholesale funding to aid rapid asset growth.

Between January 2015 and June 2016, small and mid-size banks drew nearly half of their new funds from wholesale funds, said Moody’s using data from the People’s Bank of China. At end-June 2016, wholesale funds accounted for 34 percent of mid- and small-sized Chinese banks’ total source of funds, up from 29 percent at end-January 2015.

“This increasing use of wholesale funds constitutes a systemic risk as it raises interconnectedness in the system and makes transmission of unexpected shocks more pronounced,” said Christine Kuo, a senior vice president at Moody’s in a report released Tuesday.

“With an increasingly larger number of banks now more actively engaged in the interbank financial product business, the banks are becoming more sensitive to the risk of potential counterparty failure, which could magnify any collective reaction to negative news and trigger a sharp tightening in system liquidity,” added Kuo.

via CNBC

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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