Chinese banking regulator ordered some of the nation’s smaller lenders to set aside more funds to avoid a cash shortfall, apprehensive that defaults may climb.
China Banking Regulatory Commission branches asked some city commercial banks and rural lenders to strengthen liquidity management this year. Different requirements are being instituted by province, such as quarterly stress tests, after CBRC studies last year showed increasing risks at those lenders. Smaller banks are the weakest link of China’s financial system because their lack of a stable deposit base would force them to seek more expensive funding and offer more risky loans. They will be hardest hit when borrowing costs are elevated and the economy slows.
The requirements add to steps taken to protect against soured loans weighing on the Chinese economy which included bad-loan write offs and limiting local government debt sales. Some of the troubled banks were asked by their local CBRC branches to set aside reserves to ensure cash supply for 30- to 45-day periods.