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Fitch: China Tightens Bank Liquidity Rules, but Risks Remain
February 27, 2014 / 1:06 AM / 4 years ago

Fitch: China Tightens Bank Liquidity Rules, but Risks Remain

(The following statement was released by the rating agency) HONG KONG/SINGAPORE, February 26 (Fitch) The China Banking Regulatory Commission's (CBRC) recent measures signal a strengthening of liquidity management in line with Basel III norms, but the credit benefits will take time, says Fitch Ratings. It is unclear if the regulations will sufficiently address liquidity issues arising from the banks' growing off-balance sheet activities, or will deal with current concerns about the impact of rising bad debt exposure. Moreover, the targets are progressive (in line with Basel), and full compliance is not expected before 2018. For the first time, the authorities issued guidelines around banks' liquidity cover ratio (LCR) - the amount of liquid assets to cover for cash outflows in a stressed situation. Chinese banks do not currently disclose LCR, but the CBRC regulations will require this to be shored up to 100% of cash outflows by 2018. The new regulations also require commercial banks' liquidity ratio - which is the proportion of liquid assets (to total assets) - not to fall below 25%, while they are already obliged not to exceed a loan/deposit ratio of 75%. However, we think it is too early to conclude whether strengthened liquidity regulations will address the ongoing mismatches evident among off-balance sheet exposures and obligations (explicit and contingent). The regulations do not specifically target off-balance sheet items per se, and it is unclear how the new rules in themselves will significantly reduce such activity. The loan/deposit cap has already encouraged risk-taking in areas that are often out of the regulatory purview. Additional administrative measures - or regulatory controls - may therefore be necessary. Moreover, the CBRC's latest measures remain unaccompanied by steps to quicken the pace of NPL recognition, and which are one of the sources of strain on domestic liquidity. As previously highlighted in our research, the ever-greening of older, unpaid loans has weighed on banks' ability to extend new credit; and this has become a growing contributor to the periods of liquidity tightness that certain banks may experience. Meanwhile, reclassification of exposures (such as interbank) can make it difficult to assess the true extent of liquidity risk. Any further pressure on profitability will also drive liquidity strains, although this is a less pressing credit concern. The introduction of tougher liquidity regulations could still prove to be credit supportive in so far as it ultimately instills greater discipline in credit exposure decisions, enhances their liquidity profile and boosts system-wide stability. Moreover, better asset/liability management will eventually address liquidity stresses. Nonetheless, to be successful, regulations also need to target the key credit issues (such as the banks' wealth management product activities) but which also remain challenging - given the scope of reliance by the banks on such activity, and the limited transparency. As a backstop, the central bank holds a large pile of bank reserve deposits. Aside from open market operations to limit excessive strains, any reduction in the required reserve ratios could also have the potential to inject considerable liquidity into the system. Contacts: Jonathan Cornish Managing Director, Financial Institutions Tel: +852 2263 9901 Aninda Mitra Senior Director, Fitch Wire Tel: +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: 2014 Outlook: Asia-Pacific Banks here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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