Chinese banks risk sharper lending yield swings: S&P

Commercial lenders may need tighter internal models to contain interest rate exposure.

Chinese banks could face greater volatility in lending yields as they increasingly price loans using interbank rates, requiring stronger asset and liability management to manage interest rate risks.

Banks with stronger asset-liability management capabilities are likely to adapt more effectively to the shift and could strengthen their competitive position, according to a report by S&P Global Ratings.

Banks with weaker risk management may struggle to keep pace.

S&P Global Ratings said repo-based loans would expose banks to greater fluctuations in lending rates, prompting commercial banks to improve their internal pricing mechanisms and strengthen interest rate risk management.

At the same time, the ratings agency said pricing loans based on interbank rates could improve product diversification and give banks greater flexibility in setting lending rates.

The move forms part of Chinese policymakers' efforts to improve the effectiveness and efficiency of monetary policy transmission through the banking system.