CBIRC and PBC Issue Tighter Asset Risk Classification Rules for Banks
The China Banking and Insurance Regulatory Commission (CBIRC) and the People's Bank of China (PBC) jointly issued, along with related questions and answers (Q&As), measures for the risk classification of financial assets of commercial banks. These stricter measures shall come into force on July 01, 2023.
The measures for risk classification of financial assets are intended to promote commercial banks to accurately assess credit risks and truly reflect the quality of financial assets. The measures aim to further promote commercial banks to accurately identify risk levels and implement asset risk classification, which will help the banking industry to effectively prevent and resolve credit risks and improve the level of serving the real economy. These measures require commercial banks to follow the principles of authenticity, timeliness, prudence, and independence and require these banks to carry out risk classification of all financial assets, on and off the balance sheet, "that bear credit risks." The risk classification refers to the behavior of commercial banks to classify financial assets into different grades according to the degree of risk. Financial assets are divided into five categories according to the degree of risk: normal, concern, subordinate, suspicious category, and loss, with the latter three categories being collectively referred to as non-performing assets. The credit impairment of financial assets referred to here relate to the credit impairment of financial assets in accordance with Accounting Standard for Business Enterprises No. 22—Recognition and Measurement of Financial Instruments.
The measures focus on four key areas related to requirements for the risk classification of financial assets, risk classification requirements for restructured assets, strengthening of bank risk classification management, and clarification of the supervision and management requirements for risk classification. These measures apply to commercial banks legally established in the territory of the People's Republic of China. The new rules apply to financial assets beyond bank loans and will apply to any new exposures originated from July 01, 2023. Banks will have until December 31, 2025 to reclassify the existing financial assets. Commercial banks shall submit to the CBIRC and its "dispatched agencies," within 30 working days at the beginning of each year, a report on the management of financial asset risk classification in the previous year. Where a commercial bank violates the requirements for risk classification supervision, CBIRC and its "dispatched agencies" may:
- Conduct prudential meetings with the board of directors and senior management of commercial banks
- Issue regulatory opinions, including problems existing in the categorical management of financial assets of commercial banks, opinions on rectification within a time limit, and corrective measures to be taken
- Require commercial banks to strengthen the categorical management of financial asset risks, formulate feasible rectification plans, and report them to the CBIRC and its "dispatched agencies" for the record
- Increase its provisions and regulatory capital requirements according to the degree of violation
- Order commercial banks to take effective measures to mitigate financial asset risks
Related Links (in Chinese)
Keywords: Asia Pacific, China, Banking, Credit Risk, Basel, Lending, Risk Classification, NPLS, IFRS 9, CBIRC, PBC
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