PBOC Debuts Risk Ratings of Chinese Financial Institutions

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The Chinese central bank has publicly released its risk ratings of Chinese financial institution for the first time ever.

On 2 November the People’s Bank of China (PBOC) issued the “China Financial Stability Report (2018)” (中国金融稳定报告(2018)), after completing assessments of 4327 financial institutions in the first quarter of 2018.

The report grades financial institutions from one to 10, with a higher rating corresponding to greater risk levels.

According to the report the vast majority of the 3969 banking institutions included in the assessment posted ratings of between three to seven. 3473 banking institutions saw ratings within this bracket, accounting for 87.5% of the total.

Only 76 banking institutions had ratings of one to two, accounting for a mere 1.91% share, while 420 banks had high risk ratings of eight to 10, accounting for 10.58% of the total.

These 420 banking institutions included 235 rural credit societies, 109 village or county banks, and 67 rural village commercial banks.

PBOC officially commenced its ratings of financial institutions in December 2017, after efforts to establish a macro-prudential assessment framework in the wake of the 20018 Great Financial Crisis.

The focal points for the macro-prudential assessments included capital management, asset quality, cross-border operations and stability.

Zhou Xuedong (周学东), head of PBOC financial stability department, said that the ratings of financial institutions were one of the central bank’s key tools for macro-prudential management, and would serve as the basis of “hard constraints.”

Higher fee rates would be applied to those financial institutions with poor ratings, while other measures could include capital supplementation, controls on asset growth and major credit transactions, as well as reductions in leverage ratios.

Those financial institution with ratings of eight or higher will be subject to strict constraints when it comes to financial policy support, business approvals, and re-loan credit.

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