Connectivity within the Chinese banking system is growing, increasing financial contagion risk across the sector as a whole, if any companies were to suffer serious distress, according to a study by Everbright Securities. Joint-stock commercial banks, as well as some city commercial banks, account for 40% of such “interrelated assets”, which grew at a compound annualized growth rate of 23% through 2014-16 to reach a value of CNY40 trillion. At the same time, many of these banks are operating from a weak capital base and have high leverage, the report said. Industry observers have long been concerned about the true level of capital buffers at many of China’s smaller banks. Everbright now suggests that including interbank and off-balance-sheet lending, the tier 1 capital adequacy ratio dropped to 9.33% by the end of 2016, down from the official 11.25% and that banks now need about CNY2.3 trillion of additional funding to cement their capital bases. It names banks such as Industrial Bank, China Minsheng Bank, SPDB, Citic Bank, and city commercial banks such as Shanghai Bank, Nanjing Bank, Hangzhou Bank, Ningbo Bank and Beijing Bank. The tier 1 capital ratio at some of these banks has now hit the type of levels “reached by western institutions, in the run-up to the global financial crisis”, the report says. “The ratio rose before 2014 due to implementation of the Basel III accord. But since then it declined to 5.31% by the end of 2016, the South China Morning Post reports.