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Banks 'must prepare' for eurozone changes

By Wang Xiaotian (China Daily)

08:29, December 29, 2011

BEIJING - Chinese banks should prepare technically and strategically for a partial break-up of the eurozone, said an analyst at Bank of China Ltd (BOC) on Wednesday.

The biggest risk for Chinese lenders lies in securitized euro-denominated debt, said Li Jianjun, an international finance analyst at BOC, one of the four biggest State-owned lenders by market value.

"That will be a big problem, because banks have to clear up not only euro debt but also related debt if the situation worsens," he said.

An exit of some weaker members from the eurozone might be the worst-case scenario, but market participants are already preparing, even though government officials in the zone continue to deny the possibility of that outcome, Li said.

He said that although Chinese lenders have become more prudent since the start of the sub-prime crisis in the US, they still held such debt.

"BOC might not be the worst-affected Chinese bank in the worst-case scenario. It's still unclear how much the country's lenders will lose if some economies start to use their own currencies instead of the euro."

As the most internationalized Chinese lender, BOC was included on a list of 29 globally systemically important financial institutions in early November by the Financial Stability Board, an international policy coordination organization.

"Undoubtedly, the global foreign exchange market, which is valued at $4 trillion each day, will suffer great shocks if the eurozone partially breaks up and the whole trading system changes."

The Wall Street Journal reported last week that at least two global banks had taken steps to install back-up technology systems that could handle trading in the former European currencies.

The newspaper said that banking regulators in the UK and US had asked major banks to update their levels of preparedness in recent weeks.

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