Tag Archives: stress tests

More Signs Of Concern Over Bad Bank Loans

China’s banks face a new round of stress tests to see how their loan books would withstand the measures to cool the property market actually succeeding. State media report that the China Banking Regulatory Commission ordered the tests on Tuesday and instructed banks to strengthen their risk management over loans to property developers and to the off-balance sheet investment companies local governments use to circumvent restrictions on raising capital.

The banks faced a similar round of testing last year, which reportedly showed that they could stomach a 30% decline in property prices. The new round suggests growing nervousness among banking regulators about the health of the banks’ loan books and the potential for more lending to turn sour as a result of the property bubble going pop or a crisis in local government financing.

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Are China’s Regulators Pricing In A Real Estate Bubble Burst?

China’s latest stress tests for its banks include a simulation in which property prices fall by almost two-thirds in the most overblown markets, according to a Bloomberg report. Previous stress tests had no more than a one-third drop in property prices as a worst case.

The latest tests, apparently ordered last month, suggest regulators are increasingly concerned about the property bubble bursting, leaving banks with huge bad loans on their books in the wake of last year’s record $1.4 trillion of new loans. Authorities have been reining in new property lending since April. This has halted the growth in property prices but in the 70 cities monitored prices were still up 11.4% in June over the same month of 2009.

The fear is that a 60% stress test implies the banking regulators expect that sort of fall in some cities. That would not be an unreasonable assumption given that prices in cities like Beijing and Shanghai have doubled in this bubble. (Our abacus reminds us that a 60% fall in a price means it had to rise 150% in the first place to end up where it started). In which case, a second bail-out of the big banks’ balance sheets can’t be far behind, though heaven knows what can be done about the shadow banking system. Not much that is too big to fail there, though in the aggregate it will be a mess.

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