October 23, 2009 / 5:14 AM / in 10 years

China tells banks to conduct quarterly stress tests

BEIJING (Reuters) - China’s banking watchdog has instructed lenders to carry out quarterly stress tests as part of a drive to strengthen credit controls and liquidity management, state media reported on Friday.

A shop assistant checks hundred yuan bank notes at a shop in Xiangfan, central China's Hubei province, August 19, 2006. REUTERS/Stringer

A recent circular from the China Banking Regulatory Commission orders banks to measure their capacity to withstand liquidity risks and work out a corresponding strategy to handle those risks, the China Securities Journal quoted an unnamed source as saying.

“The directive is expected to be implemented by the end of this year. Commercial banks should conduct a regular stress test every quarter,” the newspaper quoted the source as saying.

Banks made a total of 8.67 trillion yuan ($1.270 trillion) in new loans in the first nine months, 75 percent more than in all of 2008, triggering concern about how the money will be repaid.

CBRC Chairman Liu Mingkang sounded a fresh warning on Wednesday about the risks posed by such strong credit growth and told banks to lend at a more “reasonable” pace for the rest of the year.

In a separate report, the 21st Century Business Herald said the CBRC had modified a proposed ban on banks counting subordinated debt sold to other banks as part of their capital.

The final version of the regulations says only subordinated debt issued after July 1, 2009, would be subject to cross-holding restrictions, the paper said.

And, in contrast to the draft regulations issued in August, the final rules make no mention of hybrid debt instruments.

The paper cited an unnamed commercial banker who has received a copy of the rules. It described them as a compromise between the views of the regulator and lenders, which protested that the draft regulations were too tough.

The CBRC has also ruled that subordinated bonds — which rank as supplementary capital — may not exceed 25 percent of a major bank’s core capital, the paper said.

($1=6.828 Yuan)

Reporting by Aileen Wang and Alan Wheatley; Editing by Ken Wills

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