The banks are increasingly exposed to spillover and contagion risks.
The rapid growth of China's city commercial banks over the past decade is increasing their systemic importance and contributing to higher systemic risks, says Fitch Ratings.
Here's more from Fitch Ratings:
City commercial banks' asset structures have been shifting towards non-loan financial products to enhance yield, which coupled with their thinning liquidity and weak capital buffers, render city commercial banks more vulnerable to financial system disruption compared with larger banks. The banks are increasingly exposed to spillover and contagion risks, while access to timely liquidity support is also less certain. Their rising systemic importance implies any excessive risk building-up in this sector could lead to higher overall systemic risk.
Direct and indirect local government ownership of city commercial banks and high geographic and sector concentration expose these banks to strong implicit and explicit influence. Supporting local economy funding needs may run counter to sound corporate governance and prudent risk management, and weigh on the banks' standalone credit profiles.
Fitch believes local governments have a strong propensity to support city commercial banks, but their ability to do so varies and may be restricted by limited intrinsic financial capacity and China's fiscal system. In the absence of a systemic crisis, Fitch believes the central government would be willing to provide timely and sufficient ordinary support to an individual bank to limit contagion risk.
However, the agency's assessment of support addresses the likelihood of extraordinary support during times of systemic stress; under such a scenario, the home city's relative importance to the state and the bank's importance to the local economy will be key factors in determining sovereign support propensity.
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