The International Monetary Fund (IMF) has urged Chinese banks to boost their capital buffers beyond what is recommended by the Basel III to withstand sudden economic downturn.
The Washington-based lender said the capital buffer will help the Chinese lenders to ring fence themselves against the risk of an economic shock which might emerge from the rapidly mounting credit risks in the country.
IMF, which recently issued a broad review of China’s financial system, said that the Chinese banking system meets the Basel requirement but raising capital would reassure markets.
Out of the 33 banks which participated in the latest stress test, only the ‘Big Four’ state-owned lenders were found to be fully capitalised, while remaining 27 banks were under-capitalised. These 33 banks hold 74% of assets in Chinese banking system.
While praising Chinese authorities for implementing the Basel III standards on bank capital, IMF urged authorities to ensure that banks hold additional buffers than required by the rules.