Brokers to undergo stress test
Source: Agencies |
July 14, 2011, Thursday
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Print Edition
Print Edition
CHINA is preparing to conduct its first-ever stress test on the brokerage industry this year to ward off potential risks arising from a possible deterioration in the economic or market environment, three sources with direct knowledge of the plan have told Reuters.
China's securities watchdog has already urged select brokerages, including China International Capital Corp, to conduct a pilot test, and the program may be launched industry-wide in the second half, said the sources, who declined to be named because the information is not public.
The planned stress tests by the China Securities Regulatory Commission come at a time when the country is walking a tightrope in taming inflation without hitting the brakes on growth too hard, but some analysts said the move had little to do with current economic difficulties or market sluggishness. Instead, it was part of broader efforts to improve risk management in the financial sector, following similar moves by the banking regulator in the past few years, they said.
A CSRC spokesman was not immediately available for comment yesterday.
"The importance of stress tests is rising as Chinese brokerages are conducting more and more innovative businesses such as index futures," said Liang Jing, analyst at Guotai Junan Securities Co, adding that he was not aware of the scheme.
"Still, China's brokerage industry won't face systemic risks, and even in the event of a prolonged bear market, brokerages' losses won't have far-reaching social impact."
During China's 2001-2005 bear market, for example, an industry-wide loss among brokerages did not trigger a series of bankruptcies or social turmoil, partly because they have limited ability to leverage or access the country's under-developed derivatives markets, analysts said.
Under the planned stress tests, brokerages will be asked to gauge, among other things, the impact of a steep fall in stocks, or a sudden shortage of liquidity in the financial system.
They will also be asked to test business, operational and credit risks under extreme circumstances.
Brokerages for which the stress tests uncover serious risks will be urged to restructure certain business lines, adjust their development plans, or replenish their capital, one of the sources said.
China's securities watchdog has already urged select brokerages, including China International Capital Corp, to conduct a pilot test, and the program may be launched industry-wide in the second half, said the sources, who declined to be named because the information is not public.
The planned stress tests by the China Securities Regulatory Commission come at a time when the country is walking a tightrope in taming inflation without hitting the brakes on growth too hard, but some analysts said the move had little to do with current economic difficulties or market sluggishness. Instead, it was part of broader efforts to improve risk management in the financial sector, following similar moves by the banking regulator in the past few years, they said.
A CSRC spokesman was not immediately available for comment yesterday.
"The importance of stress tests is rising as Chinese brokerages are conducting more and more innovative businesses such as index futures," said Liang Jing, analyst at Guotai Junan Securities Co, adding that he was not aware of the scheme.
"Still, China's brokerage industry won't face systemic risks, and even in the event of a prolonged bear market, brokerages' losses won't have far-reaching social impact."
During China's 2001-2005 bear market, for example, an industry-wide loss among brokerages did not trigger a series of bankruptcies or social turmoil, partly because they have limited ability to leverage or access the country's under-developed derivatives markets, analysts said.
Under the planned stress tests, brokerages will be asked to gauge, among other things, the impact of a steep fall in stocks, or a sudden shortage of liquidity in the financial system.
They will also be asked to test business, operational and credit risks under extreme circumstances.
Brokerages for which the stress tests uncover serious risks will be urged to restructure certain business lines, adjust their development plans, or replenish their capital, one of the sources said.
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