And Here Come The Stress Tests For Chinese Banks

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Photo: By remkotanis on Flickr

China has just passed new measures to ensure that its banks can handle short-term shocks, reports Shanghai Daily. They are set to go into effect on January 1st, 2013.Basically, these measures are coming in the form of stress tests, and here’s what they entail:

  • Banks will have to prove that easily liquidated “premium” assets could cover net outflows for a 30-day period. This measures how well they can absorb short-term shocks.
  • By the end of 2016, banks will need to prove that “a minimum 100 per cent net stable funding ratio”– in other words, that they can take one full year of instability.

Banks will be able to give feedback on these new rules until November 12th. Once implemented, they will have to send in reports on their progress quarterly.

That said, the real question is what does all this mean? Stress tests are generally publicity stunts to ensure investors and policymakers that everything at a bank is in good stead.

And given China’s current problems with underground banks (or black banks), is the government really targeting the most immediate problem?

These new regulations could actually make the underground banking system worse, as it stems from the fact that Chinese banks consider it too risky to lend to small and medium-sized businesses.

One analyst said, via Bloomberg:

“Chinese banks’ credit quality will improve as they no longer need to lend as aggressively as they did during the credit boom,” Wilson Li, a Shenzhen-based analyst at Guotai Junan Securities Co., said by telephone today. “These rules requiring banks to have adequate short-term liquidity won’t trigger a new round of equity raising as banks can get the funding from the interbank market.”

Maybe legitimate banks won’t need to raise money to serve the clients they already have. But what about the people who are already going to black banks for loans?

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