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    IMF Concludes Financial Sector Stability Assessment with China

    IMF published reports on the Financial System Stability Assessment (FSSA) and the detailed assessment of the observance (DAO) of standards and codes in China. The FSSA report highlights that the authorities have undertaken major reforms since the 2011 FSAP, notably in introducing Basel III standards, a risk‑oriented solvency standard for insurers, and improving oversight of securities market products. The authorities are encouraged to implement the recommendations of the FSSA to further strengthen systemic risk analysis and oversight, data quality and collection, and information sharing.

    The FSSA report reveals that results of stress tests show widespread undercapitalization of banks, other than the Big Four banks, under a severely adverse scenario. The impact of the shocks is highly uneven across banks. Capital at the Big four banks remains adequate, but large, medium, and city-commercial banks appear vulnerable. Overall, 27 out of 33 banks included in the tests are undercapitalized relative to at least one of the minimum requirements (which include the capital conservation buffer). The number of banks that fall below the 7% common equity tier 1 capital threshold (also including the capital conservation buffer) is 23. Improving financial stability in the country is a key underlying theme in the FSSA. Clear prioritization of financial stability over development objectives will be crucial to ensure that risks outside the regulatory perimeter are monitored. Recommendation is to strengthen systemic risk oversight, further improve regulation, and move toward functional supervision. Strengthening the financial safety net and the legal framework for bank resolution would improve incentives and reduce the potential risks to public resources that could arise from the failure of financial institutions. Additional key recommendations in the FSSA report include the following:

    • Increase bank capital gradually and in a targeted manner. This would create a buffer to absorb potential losses that can be expected during the economic transition as credit is tightened and implicit guarantees are removed, as well as to better reflect the potential underestimation of risks from complex and opaque transactions.
    • Implement liquidity coverage ratio, or LCR, reforms to reflect rising liquidity risks. Although CBRC is compliant with Basel in its implementation of the LCR, it is a minimum standard.
    • Enhance regulatory reporting requirements to collect more granular supervisory data on banks’ investment holdings and provisioning.
    • Strengthen resilience of financial market infrastructures, or FMIs, through full implementation of the CPSS-IOSCO Principles and strengthening of the legal framework
    • Expand provision of central bank services to all systemically important central counterparties
    • Strengthen systemic risk monitoring mechanisms to ensure a holistic view of securities markets and their financial sector interconnectedness.
    • Develop plans for risk-based supervision, bringing together all issues and actions of each insurer, including market conduct.
    • Further develop the oversight framework for digital finance, balancing innovation with safety and soundness. Directors made this recommendations while noting the significant expansion of fintech in the Chinese market, along with its benefits for financial inclusion.

    The report on the detailed assessment of the observance of standards and codes in China covers the current state of the implementation of the Basel Core Principles for Effective Banking Supervision (BCP), the insurance core principles (ICP), and the IOSCO Principles. The report also makes certain recommendations for improvements in each area. The key conclusions of the assessment are as follows:

    • The assessment concludes that the banking supervision in China is broadly aligned with the BCP. Since the previous assessment, CBRC has improved prudential framework, undertaken internal supervisory structural reform, enriched supervisory tools, and enhanced supervisory effectiveness by benchmarking against international standards.
    • The assessment recognizes China as an emerging insurance market at the time of assessment. It also recognizes that CIRC has focused its work on improving corporate governance, enforcing sound market conduct, and reshaping the solvency standards into a modern, risk-based approach; that CIRC’s regulatory framework includes extensive requirements on these three pillars of regulation; and that all these requirements are applied appropriately.
    • The assessment report objectively depicts the current stage of development of China’s securities and futures markets, acknowledges that the regulatory framework is largely compliant with the IOSCO Principles, and recognizes the authorities’ efforts to mitigate risks, deepen reforms, and promote development in the context of China’s capital markets. Some innovative approaches taken by CSRC could serve as a reference for other jurisdictions. 

     

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    Keywords: Asia Pacific, China, Banking, Insurance, Securities, Basel III, CROSS, IOSCO Principles, BCP, ICP, FSSA, DAO, IMF

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