Top regulator says China's banking system 'stable' despite fears of credit crunch

China's top regulator has reportedly said that the country's banking system is 'stable' despite the ongoing fears of credit crunch in the financial market.

Head of China Banking Regulatory Commission, Shang Fulin said that the issue with tight liquidity in the interbank market has started to ease and this situation will not affect the overall pattern of stable operations in the domestic banking sector BBC reports.

Chinese stocks hit a four-and-a-half-year low amidst fears over bad bank loans and as a result of which global markets too fell sharply.

According to the report, fears over bad loans led to a spike in interbank rates, which are the rates that banks charge each other on a daily basis and are a sign of how much faith that banks have in each other.

Shang said that some foreign institutions and industry players showed concern about risk in areas including local government debts adding that if right risk management measures are applied then risks can be controlled.

The report said that Chinese banks led by the state-owned institutions lent out record sums of money in an attempt to help maintain China's rapid growth rate during the global financial crisis additionally if China's growth slows fast, or if asset prices decline sharply, some borrowers may not be able to repay some of these loans.

Shang further said that Chinese financial institutions had excess reserves of 1.5 trillion yuan (244billion dollars) as of 28 June.

The report further added that some state-owned banks were accused of violating lending regulations and China's National Audit Office said that 28.4 billion yuan of loans had been issued by some banks for projects without proper procedures or necessary guarantees.