Report warns contagion risk grows among Chinese banks as capital levels weaken
Everbright says interrelated assets within the banking system are growing, and that 2.3 trillion yuan of additional funding is needed to cement capital bases
Connectivity within the Chinese banking system is growing, a new report has warned, increasing financial contagion risk across the sector as a whole, if any companies were to suffer serious distress.
The study, by top Chinese securities company Everbright Securities, released on Wednesday, highlighted national joint-stock commercial banks, as well as some city commercial banks, as accounting for 40 per cent of such “interrelated assets”, which grew at a compound annualised pace of 23 per cent through 2014-16 to reach a value of 40 trillion yuan (US$5.88 trillion).
At the same time, many of these banks are operating from a weak capital base and have high leverage, the report said.
Industry observers have long been concerned about the true level of capital buffers at many of China’s smaller banks.
Everbright now suggests that including interbank and off-balance-sheet lending, the tier 1 capital adequacy ratio dropped to 9.33 per cent, by the end of 2016, down from the official 11.25 per cent and that banks now need about 2.3 trillion yuan of additional funding to cement their capital bases.