China’s central bank is acknowledging a badly kept secret, that it is applying different capital reserve requirements to different banks. Xinhua reports that 40 regional banks with low capital adequacy ratios, rapid lending growth and a high risk loan book have been the subject of individually differentiated reserve requirements.
Capital reserve requirements are one of the main tools used by the central bank to mop up the inflation-driving excess liquidity in the economy. Last week, there was a further 0.5 percentage points rise in the benchmark ratio, the eighth increase since the beginning of last year. Large banks are now required to maintain capital ratios of 19.5%. Small and mid-sized banks will have to set aside upwards of 16% of their deposits as reserves, Xinhua says. Some banks are already said to have had a 20% ratio imposed.
Meanwhile, Bloomberg reports that regulators have told banks to recalculate their capital levels using higher risk weightings for their loans to local governments via captive investment vehicles used to get round restrictions on raising capital from banks directly. We have noted the risks inherent in these before. Banks had lent at least $1.2 trillion this way to local governments as of June 30th, with 23% not backed by cash flows. It is these latter loans that particularly concern regulators and to which the highest new risk weightings, 300%, will be applied.
No official word on any of this that we’ve seen, but Bloomberg says the deadline for recalculation is March 31st, and it could reduce the capital ratios of the country’s five biggest lenders to near the regulatory minimum. Last year, authorities cracked down on such lending after a surge fueled concern that it could lead to a wave of defaults that could rock the banking system.