Some of China's top banks have sharpened scrutiny of smaller peers' asset quality and have tightened standards for interbank lending, three sources said, in an effort to curb credit risk as a deepening property debt crisis ripples through the economy.
Report informs via Reuters that two of China's biggest state-owned banks and a leading joint-stock bank have stepped up reviews of smaller lenders over the past couple of months to identify those with poor asset quality and have a high risk of default, the sources said.
The two state-owned banks have decided to reduce interbank lending limits and set shorter maturity periods for smaller peers deemed high risk, said two of the sources.
The move comes amid growing worries about the health of the smaller banks in the world's second-largest economy, as a deepening property sector crisis and ballooning local government debt make them the weak link in the financial system.
The cautious approach taken by some big banks in dealing with smaller peers could exacerbate capital woes for the latter as they have fewer other fundraising options, which could force Beijing to step in with more supportive measures.
While the larger Chinese banks mainly use customer deposits - a stable and long-term funding source - to make loans, in recent years smaller lenders have been aggressively borrowing from local rivals to raise funds.
China's mid-sized and smaller banks account for roughly half of the trading volume in the interbank lending market, data from the China Foreign Exchange Trade System (CFETS), which is overseen by the central bank, showed.
As China grappled with the impact of the slowing economy on the financial system, the local authorities have been taking measures to support the banking system, especially the smaller ones to maintain financial stability.
As part of those measures to prevent financial risks, some of China's local governments sold record amounts of so-called special bonds last year to inject capital into troubled small regional lenders.
Although roughly 4,000 small banks are not by themselves seen as a systemic risk, the concern is that enough of them have largely funded themselves via short-term money market borrowing, posing a collective danger in the event a few of them fail.
Greater use of interbank lending for funding purposes makes banks more sensitive to counterparty risk.
While the country's Big Five banks, including the likes of Industrial and Commercial Bank of China (601398.SS) and Bank of China (601988.SS), dominate the sector, smaller banks still account for a quarter of assets, according to regulatory data.
In a sign of growing stress, 10 small and medium-sized banks have defaulted on commercial paper at least three times over six months last year, according to a statement released on Nov. 30 on the Shanghai Commercial Paper Exchange website.