China plans stricter bank capital rules to contain risks

Bloomberg

China’s central bank plans to apply a stricter method for assessing banks’ capital as part of efforts to contain financial-sector risks, people with knowledge of the matter said.
Under the proposed change to the so-called Macro Prudential Assessment (MPA) framework, the People’s Bank of China will remove an intermediary category in its evaluation of banks’ capital adequacy, the people said, asking not to be identified because the matter is private. That means banks would either get a full score if they meet capital requirements, or a zero score if they fall short, according to the people.
Banks in danger of falling into the bottom category will be encouraged to take steps to contain risks, such as raising capital or slowing asset growth, the people said. The PBOC penalizes banks with low scores on its MPA scale, for example by paying lower interest rates on reserves they hold with the central bank. A higher score leads to higher rates for reserves.
China has put a new priority on containing financial-sector risks, including steps to control its rapidly expanding shadow banking sector. Regulators are drawing up measures to curb the nation’s $8.7 trillion of asset-management products, which include investments in bonds and risky off-balance-sheet lending by banks. Earlier this year, the central bank ordered the nation’s lenders to strictly control loans during the first quarter, especially their mortgage lending, people familiar with the matter said.
The central bank move is likely to put pressure on China’s smaller banks to strengthen their capital ratios, including with new preference share issues, said Wei Hou, a Hong Kong-based analyst at Sanford C. Bernstein. Many smaller banks “have been boosting their balance sheet by increasing investments and lending over the past few years, and at the same time they are not as strong as those major banks in terms of capital adequacy,” he added.
Rising bad loans, falling profitability and tighter Basel III financial regulations are straining capital ratios at Chinese banks. Outstanding credit swelled to 264 percent of gross domestic product in 2016, Bloomberg Intelligence estimates. Moody’s Investors Service and S&P Global Ratings said higher leverage is amplifying credit risk, while Fitch Ratings Ltd. said poorer loan quality and shadow banking curbs will increase fundraising pressures.
Capital adequacy is one of several risk measures used by the PBOC in its MPA. Banks need to get at least 90 points in each of the seven categories to get the highest “A” rating, which entitles them to the higher rates on reserves and other privileges.
A zero score for capital adequacy would make it impossible for a bank to be rated “A” overall.
Banks can score a maximum 80 points for capital adequacy. The category also includes a measure of banks’ leverage, for which they can get a maximum of 20 points.