Credit, Liquidity and Property Top CBRC Risk Concerns for 2017

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China’s banking regulator has released a set of guidance opinions outlining key risk areas for the economy in 2017.

The release of the opinions arrives little over a week after CBRC launched stern measures against Chinese lenders, with the issuance of penalties to 17 banking sector organisations on 29 March alone.

According to the guidance opinions just issued by the China Banking Regulatory Commission (CBRC) the ten major risk areas for this year include:

  1. Credit risk,
  2. Liquidity risk,
  3. Real estate sector risk,
  4. Municipal bond default risk,
  5. Traditional sector risk,
  6. Bond fluctuations,
  7. Cross-market financial products,
  8. The wealth management sector,
  9. Internet finance,
  10. External shock risk, as well as major contingencies or mass event risk.

Credit Risk

The regulator has placed control of credit risk at the top of its priority, calling and will focus on those financial institutions whose ratio of loans outstanding for more than 90 days and non-performing loans exceeds 100%; have a high percentages or rapid growth in special-mention loans, or whose off balance sheet assets post excessively rapid growth.

A key area of concern will be the erroneous categorisation of asset risk, and the use of various methods to conceal or transfer non-performing loans.

The opinions also require that banks raise their risk mitigation capability via increases in retained profits and full provisions for asset impairment, as well as provide guidance for bank’s to raise their loss absorption capability via equity expansions or the issuance of new capital instruments.

Liquidity Risk

With respect to liquidity risk the opinions mandate improvements to liquidity risk management systems and risk response contingency plans; strengthening of administration and control of key institutions, regular stress tests, the proper performance of response preparations, strengthening of report communications with China’s central bank, and the use of instruments such as temporary liquidity facilities to satisfy liquidity demand.

CBRC’s opinions also require that banks include interbank operations, investment operations, wealth management operations and trust management operations within the scope of liquidity risk monitoring, formulate liquidity restriction and management plans, and adopt measures to effective measures to reduce reliance upon interbank deposits and other forms of interbank financing.

Bonds are another key focus for liquidity risk management, with the opinions calling for improved management of bond investment operations, placing bond investment under unified credit management, as well as including direct bond investment via special purpose vehicles and off-balance sheet financial management products within the scope of monitoring.

Property Risk

The opinions note that real estate comprises a high percentage of financing, and there has been a large increase in financial institutions with fluctuation loan quality as well as real estate trust operations.

In order to prevent property risk the Opinions call for proper categorisation of residential property, pragmatic expression of property bubbles in key cities, as well as requires that banks perform monitoring all forms of real estate financing including real estate enterprise loans, personal mortgages, loans that use property as collateral, and real estate enterprise bond.

The Opinions also advocate regular property stress tests, strict prohibitions in illegal use of funds to invest in the property sector.

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