Risks of loans to local governments to be assessed
February 28, 2011 Category Finance, Weekly
Banks were ordered to recalculate capital levels by March 31 to account for higher risk weightings on loans to local governments. Assigning risk weightings that are as much as triple existing ones may cut capital ratios at the five largest lenders to near the regulatory minimum. The move may increase pressure on banks that fall below required capital ratios to raise money or reduce lending. Lenders, including Industrial and Commercial Bank of China (ICBC), had at least CNY7.7 trillion of loans to local government financing vehicles as of June 30, with 23% of the debt not backed by cash flows. Chinese banks raised about USD72 billion from sales of stock and convertible bonds last year. The country boasts four of the world’s 10 largest banks by market value. Beijing cracked down on lending to the funding arms of local governments last year after a surge in such loans added to concerns that a wave of defaults could hurt financial stability. Local governments use financing vehicles to get around regulations that bar them from borrowing directly from banks. Restrictions on local-government lending are part of a wider campaign to slow credit expansion, the South China Morning Post reports. Under guidelines introduced in December, banks must assign 100% risk weightings to local government loans fully covered by cash flows from projects they fund. Credits less than 30% backed by cash flows were assigned the highest risk weighting, at 300%, implying banks will have to triple the amount of capital backing each loan. The new risk weightings will reduce capital adequacy ratios at eight Hong Kong-traded Chinese lenders by 0.42 to 1.23 percentage points and their Tier 1 core capital ratios by 0.33 to 0.95 percentage point, Nomura International Hong Kong analysts estimated. Agricultural Bank of China (ABC) will be hurt the most and China Merchants Bank (CMB) the least, they said.
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