Flawed bank stress tests mask looming danger
《银行业恐难承受房价下跌40%》译文
Global Times | October 27, 2011 00:34
By Yang Guoying  

Chinese banks would be able to take as much as a 40 percent decline in property prices, and the general risk of property loans made by banks to developers and home buyers is controllable, Liu Mingkang, the president of the China Banking Regulatory Commission (CBRC), said last Wednesday.

However, I would argue that the regulator has overestimated the ability that commercial lenders have to weather a slump of home prices, due to flaws in their method of calculating banking stress resistance.

I would also claim that a slump of 40 percent in house prices would reduce the banks' capital adequacy ratio – a general measure of the health of the banking sector – to below 6 percent, compared to its current 12 percent. Authorities see a figure of around 11 percent as being unhealthy.

According to the current method for stress testing the banking sector, results are calculated by the commercial lenders themselves, without a standard calculation model. Due to the pressure they face from lending restrictions, banks will be more likely to overstate their stress resistance, making their claims unreliable.

In addition, CBRC's figures for property-related loans, which they use to decide whether property loan risk is controllable in China, only includes bank loans for land, loans for property development and individual home mortgages, but doesn't take account of off-balance-sheet exposures related to property, such as property trust financing and housing pledged as collateral on loans.

But this latter set of items will also hurt banks if property prices slump. Adding them in, the calculated property-related loans reach up to 20 trillion yuan ($3.15 trillion), accounting for 40 percent of overall bank loans, compared to the 10.4 trillion yuan figure given by the CBRC, which is equal to 19.8 percent of overall bank loans.

Based on the US subprime mortgage crisis, when house price declines of 30 percent generated default rates of 15 percent in property-related loans, a 40 percent decline in house prices in China would generate a default rate of 20 percent, pushing the bad debts up to 4 trillion yuan.

A decline of 40 percent in house prices would also have a knock-on effect on other loans, such as local government loans, which currently amount to nearly 11 trillion yuan; and other non-property-related bank loans, currently around 12 trillion yuan. In my estimate, we could see 1 trillion yuan and 600 billion yuan of bad loans generated in these respective areas.

So, under a 40 percent decline in house prices, we could see bad debts of around 6 trillion yuan generated, accounting for 6 percent of banking capital. As such, the banking capital adequacy ratio would drop from the current 12 percent to 6 percent.

What's more, respect for contracts in China is lower than in the US, meaning we could see a high rate of loan contracts between developers and banks broken in the event of a huge slump in house prices. This also pushes up the risk of bad debt in the banking sector.

The author is an economics commentator

原文发于《华夏时报》，《环球时报》英文版译后转载  王斐尔译

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