UPDATE 1-China bank regulator checking off-balance sheet risks at city banks - sources
* Regulator eyeing risks in wealth management products - sources
* Smaller city banks more reliant on WMPs for funding
* Checks are separate from c.bank quarterly assessment (Adds details)
SHANGHAI, March 30 China's banking regulator is inspecting off-balance sheet risks at smaller regional banks, two sources told Reuters on Thursday, as China steps up checks on financial institutions in an effort to control risky lending.
The China Banking Regulatory Commission (CBRC) is checking the size and potential risks from off-balance sheet activities including non-guaranteed wealth management products (WMPs), entrusted loans and entrusted investments, the sources said.
The CBRC's inspections of what are called "city commercial banks" have gotten under way at the same time as all banks prepare for quarterly Macro Prudential Assessments (MPA) by the People's Bank of China.
The central bank's MPA is a formal evaluation that assigns a score to each bank based on parameters believed to include asset quality, capital adequacy, the proportion of liquid assets and the stability of funding.
For the first time, the MPA will include off-balance sheet WMPs in the first quarter to give authorities a better sense of potential risks to the financial system.
In its inspections, the CBRC will take a close look at non-guaranteed WMPs that invest in non-traditional debt investments including those for local government financing vehicles, property and infrastructure projects, the sources said.
WMPs, often linked to shadow banking, have seen explosive growth in recent years even as authorities try to contain risks stemming from a rapid build-up in debt.
The CBRC, when contacted by Reuters, did not immediately comment.
China's city commercial banks generally have a weaker deposit base than bigger ones and often generate funds by selling WMPs at higher interest rates to retail investors.
China's banking regulator does regular inspections of banks; this round will focus on non-guaranteed WMPs that offer fixed returns and will also include checks on how banks make investment decision and isolate risks for off-balance sheet activity.
Banks' wealth management product portfolio totaled 26.28 trillion yuan ($4.04 trillion) at the end of June 2016. It had risen 42 percent in a year, and analysts estimate it climbed a further 4 trillion yuan in the second half of last year. (Reporting by Li Zheng and Elias Glenn; Editing by Richard Borsuk)