After being stung by Russia sanctions, big banks in Britain are assessing their China risks to prepare for any future escalation of Western penalties against Beijing. The banks are examining how to mitigate exposure to sanctions by adjusting risk-management systems, looking at potential collateral consequences, and assessing ways to avoid being cut off from global trade finance markets. The work is prompted by the heightened tensions between Beijing and the West over Taiwan, which Beijing claims as its own, growing export controls, accusations of Chinese spying, and a security crackdown on companies.
The banks are also studying the impact of sanctions on businesses from steel to electric cars. They want to know how their exposure to Chinese firms could be affected if the United States or other countries decided to curb chip exports to deny Beijing access to advanced technology that might help its military advancements or human rights abuses. The preparations come as the Bank of England (BoE) unveils stress testing rules for the country’s largest lenders, with HSBC and Standard Chartered among those at most risk from exposure to Chinese credit.
While the BoE’s tests will be less severe than during the global financial crisis, they will still pressure some banks most reliant on international payments and foreign exchange settlements. They will force the big banks to reduce their overall exposure, which could trigger capital requirements. It could also raise the hurdle rate needed for a bank to qualify as systemically important and prompt regulators to impose additional capital buffers for those institutions.
Some big banks are adjusting their operations to be ready for more restrictive rules on dealing with Russian entities, including reviewing whether they are “controlled” by designated Russian politicians or other individuals. Others review their contractual commitments with counterparties to ensure they uphold these obligations. Businesses that have made these contractual commitments may need to reconsider how they define this term, and they should be aware that the recent Court decision on the definition of a “designated person” could make such agreements invalid.
The Bank of England’s rules will also require large British banks to carry out a series of “escalator tests” designed to assess the extent of their exposure to global risks and the ability to cope with those risks. Those tests could be triggered by a recession in China or a collapse in U.K. house prices.
The banks’ scenario planning>> involves sharing lessons learned from other sanctions frameworks, including those on Russia, and discussions about the effect any measures imposed on China might have, Neil Whiley, director of sanctions at lobby group U.K. Finance, told Reuters. He added that the banks convened fortnightly meetings for several months before drawing up a draft document that runs to tens of thousands of words. Whiley said the work was part of an ongoing effort to stay in touch with policymakers and did not reflect expectations or requests for more sanctions against China.