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China tightens requirements on classifying banks’ asset risks

BusinessCompaniesChina tightens requirements on classifying banks' asset risks

China is taking a stricter approach to managing financial risks in its banking sector. Effective July 1, banks must classify all assets, including bonds, interbank lending, and off-balance-sheet assets, into five different risk categories, from “normal” to “loss.” This is according to new rules published by the central bank and the banking and insurance regulator. The objective of these new regulations is to help commercial banks better evaluate credit risks and reflect the true quality of their financial assets.

The current risk classification rules are deemed inadequate due to changes in the asset structure of China’s commercial banks in recent years. The regulator believes that the new rules will help prevent credit risks more effectively. The rules will apply to all new bank business, while existing assets have until 2025 to be reclassified.

The Chinese authorities had already called on banks to increase lending and bond purchases to support the country’s economy, which saw a record-breaking 4.9 trillion yuan ($720 billion) in new loans in January. The new rules urge banks to scrutinize the underlying assets when they classify risks for asset management or securitization products. This is a crucial step to ensure that financial assets are properly categorized and managed.

Lenders will also be required to strictly follow the rules when evaluating credit risks in debt restructuring, an issue that has become increasingly relevant as an increasing number of property developers struggle to meet repayment obligations. The rules require commercial banks to perform a risk classification of all financial assets at least once a quarter, with a focus on monitoring, analyzing, and early warning of potential risks. Banks must take preventive measures in a timely manner to mitigate the risks.

The COVID-19 pandemic has created new challenges for the banking sector, and the Chinese government is taking a proactive approach to ensure the stability of the financial system. The new rules will help banks to identify and manage financial risks more effectively, and provide a more accurate assessment of credit risks.

Banks are an essential part of the financial system, and it’s crucial that they operate in a safe and sound manner. The new rules will help to ensure that the banking sector is resilient and can withstand any potential financial shocks. This is especially important in the current economic environment, where uncertainty remains high due to the ongoing pandemic.

In conclusion, the new regulations on risk management in the banking sector will help to ensure the stability and safety of the financial system in China. The rules will help banks to evaluate credit risks more accurately and manage financial assets in a responsible and prudent manner. The Chinese government is taking a proactive approach to protect the economy and the financial system, and these new regulations are a step in the right direction.

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