* Regulator urges banks to act to curb bad loans
* Move comes after banks' bad-loan ratios reach 2-year high
* Urges caution on lending to local govt, troubled
* Details of stress test requirement still unclear
(Adds banker comment)
By Gabriel Wildau
SHANGHAI, April 4 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 organise
stress tests of banking institutions in a timely manner so as to
analyse the impact of unfavourable 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
"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.
A corporate bond default last month and the near-collapse of
two high-profile shadow-banking investment products earlier this
year were further evidence of growing financial strains
afflicting the economy.
"Banks should study the risk situation in key regions, focus
on certain industries and on important clients," the paper
quoted from the CBRC document.
Chinese banks are now dealing with the aftermath of the huge
lending binge that policymakers unleashed to soften the impact
of the global financial crisis in 2008.
The regulator's 2014 guidelines also urged banks to curb
lending to local government financial vehicles and industries
facing overcapacity, including property and steel-trading firms.
"In particular, it is necessary to tighten supervision and
control of spillover of risk between businesses in and off
balance sheets and between the banking and other systems," the
guidelines were quoted saying.
The guidelines also warn banks against disguising the true
scale of their bad loans by offering distressed borrowers new
loans to repay maturing ones.
The report did not provide details on how the tests will be
conducted, or even whether the CBRC will conduct tests of
individual lenders or only of the industry as a whole at the
regional and national levels.
The CBRC likely lacks the resources to conduct stress tests
itself, said May Yan, China banks analyst at Barclays Capital in
Hong Kong. Yan expects the agency will continue to rely on banks
to conduct their own tests.
"It depends on the details and what exactly they test.
They've been testing on the property market for years, and the
banks all come back and say even if property prices drop by 30
percent, it would have a very small impact on asset quality and
earnings," she said.
"But that's not necessarily true because there are
An index of Hong Kong-listed mainland financial shares
closed up 0.3 percent on Friday, in line with a 0.2
percent rise in a broader index of all Hong Kong-listed mainland
(Additional reporting by Fayen Wong and Lu Jianxin; Editing by
Chris Gallagher and Tomasz Janowski)