SHANGHAI 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 organize stress tests of banking institutions in a timely manner so as to analyze the impact of unfavorable 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 regulators.
"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 second-order effects."
An index of Hong Kong-listed mainland financial shares .HSFI 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 firms .HSCE.
(Additional reporting by Fayen Wong and Lu Jianxin; Editing by Chris Gallagher and Tomasz Janowski)