China this weekend tightened risk management requirements for banks, requiring them to risk classify financial assets in a timely and prudent manner, in an attempt to better assess lenders’ credit risks.
Starting July 1, banks will be required to classify assets beyond currently required borrowing (including bond investment, interbank lending, and off-balance sheet assets), into five categories ranging from “normal” to “loss ”, according to the rules published by the central bank and the banking and insurance regulator.
The rules will help “commercial banks to more accurately assess credit risks and reflect the true quality of their financial assets,” the People’s Bank of China and the China Banking and Insurance Regulatory Commission (CBIRC) said. English).
“The current rules are inadequate because in recent years, the asset structure of China’s commercial banks has changed a lot and the risk classification is faced with many new situations and problems,” the CBIRC said. According to the regulator, the new rules will help prevent credit risks more effectively.
The rules will apply to new activities by banks and they have until the end of 2025 to reclassify existing financial assets.
Authorities had already urged banks to step up lending and bond buying to support the recovery of the world’s second-largest economy, following a spike in Covid-19 infections and woes in the vast real estate sector. New bank loans increased more than expected in January, reaching a record 4.9 trillion yuan ($720 billion).
The new rules also require banks to examine the underlying assets when classifying risks for asset management or securitization products. Lenders will also be required to comply.