Moody’s Investors Service is raising the red flag on the Chinese banking sector as small and mid-size banks increasingly rely on wholesale funding to aid rapid asset growth.
Between January 2015 and June 2016, small and mid-size banks drew nearly half of their new funds from wholesale funds, said Moody’s using data from the People’s Bank of China. At end-June 2016, wholesale funds accounted for 34 percent of mid- and small-sized Chinese banks’ total source of funds, up from 29 percent at end-January 2015.
“This increasing use of wholesale funds constitutes a systemic risk as it raises interconnectedness in the system and makes transmission of unexpected shocks more pronounced,” said Christine Kuo, a senior vice president at Moody’s in a report released Tuesday.
“With an increasingly larger number of banks now more actively engaged in the interbank financial product business, the banks are becoming more sensitive to the risk of potential counterparty failure, which could magnify any collective reaction to negative news and trigger a sharp tightening in system liquidity,” added Kuo.
