Chinese banks face their greatest risks when dealing with clients deemed too big to fail, according to S&P Global Ratings, citing a stress test by the central bank.
The People’s Bank of China (PBOC) modeled a scenario in which the top five borrowers of each participating lender defaulted, covering 3,235 banks and 86% of total system loans. Under this scenario, capital adequacy ratios were found to decline by 3.8 percentage points.
S&P replicated the exercise using a sample of 450 banks, representing 78% of system loans, and assumed such a scenario would trigger a broader economic shock to China’s growth.
“Our overall assessment shows that banks in less-developed regions of China are more vulnerable to concentration risk, while financially constrained local governments in these areas would struggle to provide support,” said Ming Tan, credit analyst at S&P Global Ratings.
The agency noted that customer concentration risk in China remains lower compared to South and Southeast Asia.
However, banks that breach regulatory thresholds are generally too small to pose a systemic threat nationwide.
“These cases are mostly concentrated in lower-income regions, with around two-thirds located in areas where GDP per capita falls below the national average,” S&P added.
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