China's PBOC Plans New Financial Risk Assessment Framework

  • Central bank planning a 'Macro Prudential Assessment' system
  • Framework includes stock and bond investments, not just loans

China’s central bank said it will start gauging risk next year using what it calls a Macro Prudential Assessment system built on examining banks’ capital adequacy ratios.

The People’s Bank of China will closely watch financial institutions’ interest-rate pricing using the system, which should help cut financing costs, according to a statement Tuesday from the central bank. The assessment framework will include investments in bonds and equity, a change from focusing on loans only in the past, according to the statement.

The assessment “will change its focus from loans, which are narrowly defined, to a focus on credit in a broader sense,” the PBOC said in the statement. It will include bond investments, equity investments and buybacks of the financial assets sold, PBOC said. Buybacks of financial assets sold usually refers to banks’ off-balance-sheet assets.

While the central bank has the overall responsibility for managing loan growth, liquidity levels, and systemic risk, taking variables more associated with shadow banking into account for the purpose of calculating bank capital ratios is more in line with the responsibility of the China Banking Regulatory Commission. The CBRC sets the minimum capital ratios for banks.

“It indicates a repositioning of PBOC,” said Zhao Yang, chief China economist at Nomura Holdings Inc. in Hong Kong. “Some of the work mentioned, like the capital adequacy ratio and rate pricing, is currently overseen by the banking authority. By including these duties under the PBOC’s daily work, PBOC may play a larger role.”

The PBOC also said in the statement Tuesday it will create an appropriate monetary and financial environment for structural reform.

— With assistance by Heng Xie, Zheng Wu, and Emma Dong

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