Moody’s warning about China banking system at risk

According to Moody’s Investors Service report, China banking system is at risk as the percentage of wholesale capital in the source of small and mid-size banks’ funding is increasing. Could China banking system trigger something bigger?

August 30, AtoZForex – Moody’s warns against the banking sector in China since small and mid-size banks more and more depend on the funds coming from wholesale banking to support asset growth.

During a period between January 2015 and June 2016, almost half of small and mid-size banks’ funds were attracted from wholesale funds. In the end of January 2015, the percentage of wholesale banking in the sources of funding of small and mid-size banks constituted the amount of 29%. Whilst, at the end of June 2016 the number raised to 34%. Christine Kuo, a senior vice president at Moody’s, commented that:

“This increasing use of wholesale funds constitutes a systemic risk as it raises interconnectedness in the system and makes transmission of unexpected shocks more pronounced”.

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China banking system at risk

Based on the Moody’s report, thirteen percent of small and mid-bank funds’ sources are generated from interbank liabilities and repurchase agreements. Whereas, eleven percent of the sources are used in interbank lending and reverse repo. Considering the interconnectedness of banks and the fact that big banks are the net fund suppliers in the interbank market of China, big banks may be vulnerable to risks as well.

“With more banks now more actively engaged in the interbank financial product business, they have become more sensitive to the risk of potential counterparty failure. This feature – plus the lack of public disclosure for the majority of financial institutions in China – could magnify any collective reaction to the negative news and trigger a sharp tightening in system liquidity“.

Most worryingly, Chinese banking system is not the only one at risk. The Italian banking sector continues to face problems, and this can be the reason for ‘Italeave’. European bank shares have fell significantly, 7 to 30 percent, following Brexit and Italian banking sector collapse could trigger financial crisis in the EU.

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