Off-balance-sheet financing is still a key risk for Chinese banks despite moves to improve monitoring, regulation and risk disclosure, says Fitch Ratings in a report released today. Efforts to shift credit back on balance sheet may not lead to a meaningful fall in off-balance-sheet financing, and banks are likely to stay heavily involved in facilitating off-balance-sheet products.
Chinese banks may not bear much legal liability over off-balance-sheet financing activities, but due to their heavy involvement in facilitating these products it remains unclear which party ultimately assumes the risk in the event of default. Capital pressures for Chinese banks remain pronounced despite capital raisings in 2014.
Mid-tier lenders are the most exposed to off-balance-sheet financing; it accounts for a much larger proportion of assets for them than the larger state banks. This is already reflected in these banks' Viability Ratings, which are in the 'b' category, whereas those of the state-owned banks are in the 'bb' category.
