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IMF Says Current Circumstances In China Warrant Additional Bank Capital

The International Monetary Fund said the current circumstances warrant a targeted increase in capital even though the China's banking system meets the Basel requirement.

In a report, released Wednesday, the Washington-based lender said buffer capital would help to absorb potential losses. More capital is justified for the largest banks because of their systemic importance and interconnectedness, the IMF said.

Increasing capital would enhance the resilience and credibility of the financial system, as well as reassure markets.

According to the stress test conducted among 33 banks, 27 banks were under-capitalized. These 33 banks account for 74 percent of banking system assets.

Banks participated in the test were classified into five, namely the big-four banks, large banks, medium, city commercial banks and rural banks.

Stress test results revealed widespread under-capitalization of banks other than the Big Four banks under a severely adverse scenario.

The IMF said the impact of the shocks is highly uneven across banks. Large, medium and city-commercial banks appeared vulnerable.

Further, IMF said the credit to GDP ratio is very high by international comparison, and above levels consistent with a high probability of financial distress.

The lender noted that despite low loan-to-value ratios, the rapid growth in household debt presents concerns.

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