Exclusive-China's top banks tighten exposure to smaller peers to curb credit risk, sources say

investing.com:

(Reuters) — Some of China's top banks have sharpened scrutiny of smaller peers' asset quality and have tightened standards for interbank lending, three sources said, in an effort to curb credit risk as a deepening property debt crisis ripples through the economy.

Two of China's biggest state-owned banks and a leading joint-stock bank have stepped up reviews of smaller lenders over the past couple of months to identify those with poor asset quality and have a high risk of default, the sources said.

The two state-owned banks have decided to reduce interbank lending limits and set shorter maturity periods for smaller peers deemed high risk, said two of the sources.

All the sources, who spoke on condition of anonymity due to the sensitivity of the issue, have direct knowledge of the matter.

The move comes amid growing worries about the health of the smaller banks in the world's second-largest economy, as a deepening property sector crisis and ballooning local government debt make them the weak link in the financial system.

The cautious approach taken by some big banks in dealing with smaller peers could exacerbate capital woes for the latter as they have fewer other fundraising options, which could force Beijing to step in with more supportive measures.

While the larger Chinese banks mainly use customer deposits — a stable and long-term funding source — to make loans, in recent years smaller lenders have been aggressively borrowing from local rivals to raise funds.

China's mid-sized and smaller banks account for roughly half of the trading volume in the interbank lending market, data from the China Foreign Exchange Trade System (CFETS), which is overseen by the central bank, showed.

One of the sources, a senior official at