China to broaden stress tests in 2021 to include all 4,024 banks

BEIJING: China is widening the scope of stress tests on its lenders by including all of its 4,024 banks this year, a central bank publication said on Wednesday, amid concerns over mounting debt levels of companies and financial strains in some sectors.

Annual stress tests have been conducted on the country's major commercial banks since 2012 by the People's Bank of China (PBOC), and their scope has been broadened in recent years with tests on 1,550 lenders conducted in 2020, according to a report by China Finance, the central bank's bimonthly magazine.

China has some of the world's biggest banks, including Industrial and Commercial Bank of China (ICBC) and China Construction Bank (CCB).

Though its economy has recovered quickly from the coronavirus pandemic, debt levels have risen and some companies, particularly smaller ones, continue to face financial stress.

In a November 2020 report, the PBOC indicated a third of 30 mid-sized and large banks in a sample would fail its stress test even under a mild impact stress scenario.

China Finance reported that the 2020 tests showed that rural banks would be the most vulnerable under stress conditions, while some banks in less economically developed regions such as the northeast or southwest of China would see bigger drops in capital adequacy ratios if bad loans rise significantly.

PBOC has been pushing for speedy formulation of rules in the banking sector to fend off systemic financial risks, a key agenda for the government on the economic front.

In April, it issued draft rules imposing additional capital adequacy, leverage ratio, and liquidity management requirements on major banks deemed important to the financial system.

Separately, PBOC will also closely monitor financial risks related to climate change, and conduct stress tests at an appropriate time, according to the China Finance report.

It will also work with other financial regulators on exploring a prudential management framework on climate change-related financial risks, it added.