The Communist Party’s central bank plans to conduct stress tests on all 4,024 banking institutions in 2021 to test banks’ resilience to systemic risks and other aspects. This shows the CCP’s concern about the banking system’s ability to withstand stress in the face of financial risks.
An article published on April 14 in the WeChat public number of China Finance magazine (cn-finance), a subsidiary of the Communist Party’s central bank, said that stress tests will be conducted on all 4,024 banking institutions in 2021 to further leverage the role of stress tests in effectively identifying high-risk institutions, high-risk areas and systemic risks.
The article revealed that the central bank will work with other financial regulators to conduct stress tests in a timely manner to prevent and control risks and guard the bottom line of no systemic risks.
The Communist Party’s central bank had conducted a risk test on 1,550 banks on the mainland in 2020, which together accounted for 78% of banking financial institutions in terms of asset size.
The test was conducted under the assumption that the banks’ performance under the heavy shock of a 400% rise in NPL ratio (overall NPL ratio rose from 1.7% to 8.5%), the overall capital adequacy ratio of the participating banks fell from 14.73% to 9.86%, below the regulatory requirement of 10.5%, if NPL disposal and capital replenishment from internal and external sources were not taken into account.
Among them, 30 large and medium-sized commercial banks with assets of more than RMB 800 billion had good risk mitigation and loss absorption capabilities. By type, large banks were more risk-resilient than small and medium-sized banks, while rural credit cooperatives, rural cooperative banks, village banks and rural commercial banks performed the worst after an adverse shock to their overall credit. Some small and medium-sized banks failed solvency and liquidity risk stress tests.
In the first half of 2019, 1,171 mainland banks participated in the test, accounting for 70% of the mainland financial sector, with 30 banks with more than $800 billion in capital.
Under light stress, 90 banks failed. Under heavy stress (GDP growth fell to 4.1%), 195 failed; 10 of the 30 large banks failed. It shows that these banks are undercapitalized and have liquidity risks.
Some commentators said that the CCP authorities conducted bank stress tests again this year and also extended them to all banks, showing that the CCP authorities, hit by the plague, are worried about the financial system generating financial risks under the economic downturn and thus endangering the macro economy.
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