China tightens requirements on classifying banks’ asset risks

China on Saturday tightened risk management requirements on banks, requiring them to classify financial-asset risks in a timely and prudent manner, in a bid to better assess lenders’ credit risks.

From July 1, banks must classify assets beyond the currently required loans – including bond investment, interbank lending and off-balance-sheet assets – into five categories ranging from “normal” to “loss”, according to rules published by the central bank and the banking and insurance regulator.

The rules will help “commercial banks evaluate credit risks more accurately and reflect the true quality of their financial assets,” said the People’s Bank of China and the China Banking and Insurance Regulatory Commission (CBIRC).

Current rules are inadequate because “in recent years, the asset structure of China’s commercial banks has changed quite a lot, and risk classification faces many new situations and problems,” the CBIRC said. The new rules, it said, will help prevent credit risks more effectively, the regulator said.

The rules will apply to banks’ new business. They have until the end of 2025 to reclassify existing financial assets.

The authorities had already urged banks to step up lending and bond purchases to support recovery in the world’s second-biggest economy, after a surge in Covid-19 infections and problems in the vast property sector. New bank loans jumped more than expected in January to a record 4.9 trillion yuan ($720 billion).

Saturday’s rules urge banks to scrutinize the underlying assets when they classify risks for asset management or securitization products.

Lenders will also be required to strictly abide by the rules when assessing credit risks in debt restructurings. An increasing number of property developers face restructuring as they struggle to meet repayment obligations.

Commercial banks should perform risk classification of all financial assets at least once a quarter, and they must “strengthen the monitoring, analysis and early warning” of the risks, and take preventive measures in a timely manner, the rules say.