Leverage ratio of China’s banking sector: current conditions and potential risks

LIU Yao 1 ZHANG Ming2

(1.Graduate School of Chinese Academy of Social Sciences)
(2.Institute of World Economics and Politics, Chinese Academy of Social Sciences)

【Abstract】It requires the stable banking system and prevention of internal risks to contain systemic financial risks. In recent years, the positive book micro-leverage ratio of Chinese banking sector is in sharp contrast to the “worrisome” macro-leverage ratio. Apparently, the leverage ratio of China’s banking sector has been stable and is improving moderately. The liabilities to assets (L/A) ratio has decreased moderately, the quality of capital has increased significantly, the proportion of equity capital has improved, the capital adequacy ratio and the leverage ratio have all met the standards and the four major domestic banks have performed better than the global systematically important banks in terms of indicators of the leverage ratio. In reality, the real leverage level of China’s commercial banks may have been significantly underestimated. The explosion of off-balance sheet wealth management products, declining credit quality and the leverage linkage of financial institutions have become major risks facing the commercial banks. It is difficult for the banking sector to keep the leverage ratio stable and the structural changes in balance sheet significantly increase regulatory difficulties. That is to say, the current indicators disclosed by banks cannot fully reflect their risks and current regulatory rules have failed to ensure the multiple-layer and penetrating regulation. The “deleveraging” of commercial banks should not equal the repeated reduction of the debt ratio, but a more comprehensive re-assessment of banking risks. In the future, the coordination of micro- and macro- prudential policies and calibration of the leverage ratio will become the new direction of regulation of the banking industry. Regulators should pay attention to both short-term liquidity risks and mid-term and long-term credit risks of commercial banks and prevent a new round of concentrated systemic financial risks caused by excessive deleveraging.

【Keywords】 banking sector; leverage ratio; capital adequacy ratio; systemic financial risk;

【DOI】

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(Translated by LI Mengling)

    Footnote

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This Article

ISSN:1007-0974

CN: 11-3799/F

Vol , No. 03, Pages 133-150+8

May 2019

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Article Outline

Abstract

  • 1 Definition and measurement of leverage in the Chinese banking sector
  • 2 Leverage ratio of Chinese banking sector: current conditions
  • 3 Leverage ratio of Chinese banking sector: potential risks and worries
  • 4 Conclusions and coping strategies
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