1.The development process of asset risk classification

In February this year, the China Banking and Insurance Regulatory Commission and the People's Bank of China officially issued the Measures for the Risk Classification of Financial Assets of Commercial Banks (hereinafter referred to as the Measures), which put forward further systematic, systematic and comprehensive management requirements for the risk management of banks' financial assets. In recent decades, China's economy has developed rapidly, the development of commercial banking business has shown diversification and the development progress has continued to accelerate, the asset structure of banks has undergone major changes accordingly, and the scale of non-credit asset business and off-balance sheet asset business has increased significantly, the scale of non-credit asset business and off-balance sheet asset business has increased significantly, such as investment business, interbank business, letter of guarantee, bill business, letter of credit, etc.With the new problems and risks brought about by development, the CBIRC and the People's Bank of China issued the Measures this time, while promoting the business development of banks, it is necessary to carefully and accurately identify the risk level of various assets, comprehensively improve risk management capabilities, and establish an effective risk prevention mechanism. The history of the relevant system of financial asset risk classification is summarized, and the relevant international and domestic laws and regulations are borrowed, as follows:

2.Key points of the Measures

The Measures specify the scope of financial asset risk classification, including all assets bearing credit risk, and the business scope is as follows:

*Excludes financial assets under the trading books and related assets formed by derivatives transactions

Refine the five-level classification standard

The Measures no longer emphasize the losses caused by the execution of guarantees in the Guidelines when classifying non-performing assets, but directly classify financial assets as non-performing assets based on the credit impairment that has occurred, and the concept of credit impairment of financial assets is derived from Accounting Standard for Business Enterprises No. 22 - Recognition and Measurement of Financial Instruments (Cai Hui [2017] No. 7), of which Article 40 has a clear definition:

The change in the credit status of the debtor should be judged in accordance with the above qualitative indicators, and the standard requires the impairment provision of financial instruments based on expected credit loss, and the measurement of expected credit loss cannot be used as the standard for credit impairment that has occurred.

2）The Measures not only formulate the five-level classification standard based on the debtor's ability to perform the contract, but also refine the criteria for dividing concerns to losses, and clarify that the same claim cannot be divided into categories, and the specific classification standards are as follows:

If the debtor is a member of an enterprise group in the joint sitting mechanism, the classification of its debts as non-performing does not necessarily lead to the classification of other members as non-performing, but the bank should initiate the assessment procedure in a timely manner, prudently assess the impact on other members, and decide whether to adjust the risk classification of other members' claims based on the assessment results. However, credit enhancement methods approved by the financial administration department under the State Council are excluded.

Clear requirements for upgrading non-performing assets to normal or concern categories have been formulated, except for retail financial assets, which first meet the definition of normal or concern and meet the following requirements at the same time:

• Overdue claims and related expenses have been fully repaid and are normally repaid for at least two consecutive repayment periods or within 6 months (whichever is longer);
• It is assessed that the debtor will be able to continue to perform the contract normally in the future;
• Financial assets in which the debtor has not incurred credit impairment in the Bank.

Clarify the definition of restructured assets and risk classification criteria

1）The Measures regulate the risk classification of restructured assets, and clarify the requirements in terms of definition, identification standards, setting observation periods, risk classification, classification upward and downward adjustments, and exit observation period standards. The definition of restructured assets is specified in detail from the two concepts of financial hardship and debt contract adjustment, firstly, the definition of restructured assets is:

Secondly, financial hardship circumstances include:

2）There are some relaxations and tightening aspects of the risk classification criteria for restructuring assets

Relaxation of standards:

• It is no longer mandatory that the initial classification of restructured assets be all non-performing is required;
• Restructured assets classified as non-performing are allowed to be adjusted upward during the observation period;

• Formulate detailed requirements for the identification of restructured assets and eliminate regulatory arbitrage space;
• Extension of the exit probation period and focus on the debtor's ability to perform;

The risk classification requirements for restructuring assets are as follows:

Clarify penetrating regulatory requirements

The Measures specify that asset management products and asset securitization products penetrate into the underlying assets, and the risks are classified according to the risk status of the underlying assets on a case-by-case basis, except for credit asset securitization products based on retail assets and non-performing assets, and the product risk classification is determined according to the worst classified assets among the underlying assets that cannot fully penetrate into the underlying assets.

Credit asset securitization products based on retail assets and non-performing assets should classify the risks of the products according to the expected profit and loss of investment on the basis of a comprehensive assessment of the risk profile of the final debtor and the characteristics of the structured product.

Reporting and Disclosure Requirements

The Measures impose financial asset risk management reports and information disclosure requirements on banks, including:

Transition period planning

The Measures will be implemented from 1 July 2023, setting a two-and-a-half-year transition period for transactions before the implementation date, giving banks relatively ample buffer time and reducing greater pressure on banks.

3.Impact and response plans

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