China's four largest banks scored higher in most global systemic importance indicators based on 2018-end data, according to an S&P Global Market Intelligence analysis, becoming more entwined with the global banking system.
Consequently, analysts said, the world is more exposed to domestic risks facing the Chinese lenders, such as bad debt and slowing economic growth, especially as they grow more complex. Bank of China Ltd., Agricultural Bank of China Ltd., Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. were on the 2018 list of 29 global systemically important banks, or G-SIBs, published by the international Financial Stability Board.
"Considering the fact that Chinese banks are more or less a proxy for the [Chinese] economy, the global banking system is facing more risks with the rise of Chinese banks," said Sam Theodore, a managing director of the financial institutions group at Scope Insights.
In a similar analysis based on data as of March 31, the three other Asian G-SIBs on the FSB list — Japan's Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc., Sumitomo Mitsui Financial Group Inc. — turned in mixed scores in global systemic importance.
The FSB is scheduled to release the 2019 list of G-SIBs, based on 2018-end data, in November.


Rising global systemic importance
According to S&P Global Market Intelligence's analysis, Bank of China scored higher in all 12 indicators measuring systemic importance of G-SIBs. China Construction Bank and Agricultural Bank of China reported gains in 10 indicators, while ICBC posted increases in eight.
All four Chinese banks reported increases in total exposures, payments and cross-jurisdictional activities in 2018. These indicators have a combined weighting of 46.67% of the final assessment of their systemic importance.
Chinese banks' growing size, as well as cross-jurisdictional claims and liabilities, indicate a continuous integration of the country's lenders into the global financial flow, Theodore said.
Meanwhile, overall risks posed by all G-SIBs have declined, as higher capital requirements discouraged most G-SIBs from expanding their systemic importance, recent research by the Bank of International Settlement found .
Theodore did not see any immediate impact posed by Chinese banks' increasing systemic risk metrics on the stability of global banking system. Risks include slowing economic growth in China, global trade uncertainties and Chinese banks' deteriorating profitability and asset quality, he said.
But in about three to five years, "global banking system will be much more heavily influenced by the state of the Chinese banking industry," he added.
A spokesperson of the FSB, which compiles the G-SIB list, declined to comment on the analysis. The FSB added that it is carrying out an overall evaluation to assess whether implemented reforms for so-called "too-big-to-fail banks" agreed by the G-20 are reducing systemic risks for the global banking system.
Earnings pressure, asset risk
Liu Zhiping, a banking analyst at Ping An Securities, believed Chinese banks are facing rising pressure on earnings and asset quality amid interest rate reform and economic uncertainties.
"The overall performance [of Chinese banks] will fall ... net interest margins would be under pressure," Liu said.
Executives of Chinese banks, including ICBC and Bank of China, previously warned that the introduction of new loan prime rates, which are new benchmark rates that aim to reduce borrowing costs for the real economy, is adding pressure to banks' profitability.
Meanwhile, large Chinese banks are also under increasing pressure from the government to rescue struggling smaller lenders, raising concerns over their asset quality.
In July, the Hong Kong-listed Bank of Jinzhou Co. Ltd. announced a restructuring that saw state-run financial institutions take stakes in the lender to help resolve its bad-loan problem, while Baoshang Bank Co. Ltd. was taken over by the central government due to rising liquidity and credit risks in May.
Yu Liang, a credit analyst at S&P Global Ratings, said in an August report that such "supported exits" of more small, struggling banks are expected to continue into next year.
"We expect regulators would arrange an orderly 'exit' if needed through a less-jolting medium, such as through restructuring or a merger with a larger institution," Yu said.
