Chinese banks have several problems. Make that many problems, and they're big. Yet, for all the negative headlines, the country's financial system isn't anywhere near imploding and in many respects is more robust than some developed nations.
Lenders in Asia's largest economy harbor vast amounts of debt, which doesn't do wonders for their capital buffers. Considering how fast nonperforming loans are rising, banks' capital positions probably aren't adequate.
That doesn't mean a string of failures is around the corner, though. High capital buffers can be a poor indicator of health. Washington Mutual, for instance, which was acquired by JPMorgan in a fire sale in September 2008, reported a risk-based capital ratio of 12.3 percent at the end of 2007. From that perspective, it was a solid bank. Yet it ended up being seized by authorities because it faced a liquidity crunch, the same thing that pushed Lehman Brothers into bankruptcy.
And when it comes to liquidity, Chinese banks are just fine. At 67.3 percent, the median loan-to-deposit ratio is the lowest among major economies. The smaller that figure, the less risk a firm runs of not having enough money to meet its obligations.
Lehman Brothers relied heavily on funds raised through markets, be it via commercial paper or securitization, and that hastened its demise. Chinese banks for the most part depend upon good, old-fashioned customer deposits in their coffers.
China's banks are also the most profitable in the world, thanks to regulated interest rates.
That means that if they stop lending and cease paying dividends, they can quickly build up their capital buffers.
The overriding problem, however, is debt. Hidden lending on banks' balance sheets, which forms part of short-term investments, and off-balance sheets as shadow-banking advances, add up to 34.4 trillion yuan ($5.2 trillion), more than five times the amount of subprime loans outstanding in the U.S. at the time of the 2008 financial crisis.
Rather than facing a meltdown similar to the U.S. and Europe, however, banks in China are more likely to issue additional equity and cut down on lending, both of which they've started doing.
That's bound to be painful and some lenders will probably be acquired or rescued by Beijing. But there's no banking blowup on the horizon.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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