Banks ordered to raise liquidity coverage ratios

"Banks should rely less on the PBOC in times of risk," said Li. "The LCR requirement can help banks to forecast turbulent situations and conduct business with higher risk awareness. On the other hand, banks can also make their risk prevention systems more suitable to their own conditions."

The liquidity coverage ratio gauges banks' overall risk management of all activities, including wealth management products and interbank business, Li added.

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Liqudity: a thorny issue

The ratio is calculated by dividing a bank's net cash outflow in the coming 30 days by quality liquidity assets.

Quality liquidity assets are those that can be liquidated with little or no loss under the stress conditions specified by the CBRC. They should have high stability and low risk and be in strong demand.

Those assets can include cash, reserves at the PBOC and securities issued by sovereign entities or multilateral financial institutions such as the International Monetary Fund.

Stress conditions can include systemic risks that influence the whole market, such as significant losses in retail deposits, credit rating downgrades by one to three notches and reductions in mortgage value caused by market turbulence.

"The LCR is borrowed from global rules and is quite new in China. It is a better measure of banks' resiliency than the loan-to-deposit and liquidity ratios, which the Chinese banking system has been using for risk assessment," said Zeng Gang, a financial professor in Chinese Academy of Social Sciences.

"The introduction of LCR requirements will cause banks to evaluate risk more carefully. Therefore, banks may take measures to reduce risk prevention costs, making the whole system more secure."

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