Administration of Capital Adequacy Ratios of Commercial Banks Procedures

(Promulgated by the China Banking Regulatory Commission on February 23 2004 and effective as of March 1 2004.)  

PART ONE: GENERAL PROVISIONS

Article 1: These Procedures have been formulated pursuant to laws and regulations such as thePRC Banking Regulation Law, the PRC Commercial Banking Law and the PRC Administration of Foreign-funded Financial Institutions Regulations in order to strengthen supervision and control of the capital adequacy ratios of commercial banks and promote the safe and steady operation of commercial banks.

Article 2: These Procedures apply to commercial banks established in the People's Republic of China, including Chinese-invested banks, wholly foreign-owned banks, and Sino-foreign equity joint venture banks.

Article 3: For the purposes of these Procedures, the term "capital adequacy ratio" means the ratio between the capital maintained by a commercial bank in compliance with these Procedures and the risk-weighted assets of the commercial bank.

Article 4: The capital adequacy ratio of a commercial bank shall be calculated on the basis of all types of loss reserves such as the full provision loan-loss reserve.

Article 5: The capital of a commercial bank shall withstand credit risks and market risks.

Article 6: A commercial bank shall simultaneously calculate the unconsolidated capital adequacy ratio and the consolidated capital adequacy ratio.

Article 7: The capital adequacy ratio of a commercial bank shall not be lower than 8% and its core capital adequacy ratio shall not be lower than 4%.

Article 8: The China Banking Regulatory Commission (hereafter, the CBRC) shall carry out supervision and review of the capital adequacy ratio and capital management of commercial banks in accordance with these Procedures.

Article 9: Commercial banks shall disclose information on their capital adequacy ratio in accordance with these Procedures.

PART TWO: CALCULATION OF CAPITAL ADEQUACY RATIO

Article 10: When a commercial bank calculates the consolidated capital adequacy ratio, it shall include the following institutions in the consolidated statements:

1. An investee financial institution in which the commercial bank holds more than half of the equity capital, including:

(1) an investee financial institution in which the commercial bank directly holds more than half of the equity capital;

(2) an investee financial institution in which a wholly owned subsidiary of the commercial bank holds more than half of the equity capital; and/or

(3) an investee financial institution in which the commercial bank and its wholly owned subsidiary jointly hold more than half of the equity capital.

2. Where a commercial bank does not hold more than half of the equity capital of the investee financial institution but one of the following circumstances exists between the investee financial institution and the commercial bank, the investee financial institution shall be included in the consolidated statements:

(1) under an agreement with the other investors, the commercial bank holds half or more than half of the voting rights in the institution;

(2) in accordance with the articles of association or an agreement, the commercial bank has the right to control the financial and management policies of the institution;

(3) the commercial bank has the right to appoint and remove the majority of members of the board of directors or a similar organ of power of the institution; or

(4) the commercial bank has half or more than half of the voting rights on the board of directors or a similar organ of power of the institution.

Institutions that may be excluded from the consolidated statements include: financial institutions that have been closed or declared bankrupt; financial institutions that have been put into liquidation after termination; financial institutions that have been slated for sale within a year and in which they hold more than half of the equity capital for the short term; offshore financial subsidiaries whose fund transfers are restricted due to exchange controls of the host country or other unexpected incidents.

Article 11: The formula for calculating the capital adequacy ratio of a commercial bank:

Capital adequacy ratio = (total capital - deductions)/(risk-weighted assets + 12.5 times capital charge for market risk)

Core capital adequacy ratio = (core capital -deductions) / (risk-weighted assets + 12.5 times capital charge for market risk).

Article 12: The capital of a commercial bank shall consist of core capital and supplementary capital.

Core capital shall consist of paid-up capital or ordinary shares, capital reserves, capital surplus, retained earnings and minority interests.

Supplementary capital shall consist of revaluation reserves, general provisions, preference shares, convertible bonds and subordinated term debt.

Article 13: The supplementary capital of a commercial bank shall not exceed 100% of the core capital; subordinated term debt included in supplementary capital shall not exceed 50% of the core capital.

Article 14: A commercial bank shall deduct the following items from its capital when calculating the capital adequacy ratio:

1. goodwill;

2. equity investments by the commercial bank in unconsolidated financial institutions; and

3. equity investments by the commercial bank in real property not for its own use and enterprises.

Article 15: A commercial bank shall deduct the following items from its core capital when calculating the core capital adequacy ratio:

1. goodwill;

2. 50% of equity investments by the commercial bank in unconsolidated financial institutions; and

3. 50% of equity investments by the commercial bank in real property not for its own use and enterprises.

Article 16: When a commercial bank calculates the risk-weighted assets of each loan, it shall first deduct special reserves from the loan book value; in respect of other types of assets, provision for diminution in value shall also be deducted from the book value of the corresponding assets.

Article 17: The benchmark for a commercial bank's risk weights for foreign claims shall be the external credit assessment result of the corresponding country or region. When the assessment results for one country or region by different assessment institutions are inconsistent, the lowest assessment result shall be selected.

1. In respect of claims on a government of another country or region, where the assessment for that country or region is AA- or higher, the risk weight shall be 0%; where the assessment is lower than AA-, the risk weight shall be 100%;

2. In respect of claims on a foreign commercial bank or securities company, where the assessment for the country or region in which it is registered is AA- or higher, the risk weight shall be 20%; where the assessment is lower than AA-, the risk weight shall be 100%; and

3. In respect of claims on public sector enterprises invested in by a government of another country or region, where the assessment for the country or region is AA- or higher, the risk weight shall be 50%; where it is lower than AA-, the risk weight shall be 100%.

Article 18: A commercial bank's risk weight for claims on multilateral development banks shall be 0%.

Article 19: A commercial bank's risk weight for local and foreign currency claims on the Chinese central government or the People's Bank of China shall be 0%.

A commercial bank's risk weight for claims on public sector enterprises invested in by the Chinese central government shall be 50%.

Article 20: A commercial bank's risk weight for claims on Chinese policy banks shall be 0%.

Article 21: A commercial bank's risk weight for claims on other commercial banks in China shall be 20%; the risk weight for claims of which the original maturity is four months or less shall be 0%.

Article 22: A commercial bank's risk weight for bonds privately offered by financial asset management companies invested in by the Chinese central government for the purpose of purchasing non-performing loans of state-owned banks shall be 0%.

A commercial bank's risk weight for other claims on financial asset management companies invested in by the Chinese central government shall be 100%.

Article 23: A commercial bank's risk weight for claims on enterprises or individuals and for all other assets shall be 100%.

Article 24: The risk weight for individual home mortgage loans shall be 50%.

Article 25: The following pledge objects have the function of mitigating risk:

1. cash in a specialized form such as a special account, sealed money or earnest money;

2. gold;

3. bank certificates of deposit;

4. treasury bonds issued by the Ministry of Finance of China;

5. negotiable instruments issued by the People's Bank of China;

6. bonds, negotiable instruments and acceptance bills issued by a Chinese policy bank or commercial bank;

7. enterprise bonds, negotiable instruments and acceptance bills issued by a public sector enterprise invested in by the Chinese central government;

8. bonds issued by a government of a country or region with an assessment of AA- or higher; bonds, negotiable instruments and acceptance bills issued by a commercial bank, securities company or government-invested public sector enterprise registered in such country or region; and

9. bonds issued by a multilateral development bank.

Loans pledged on an object listed in the above section shall be assigned the same risk weight as the pledge object or a risk weight for direct claims on the issuer or acceptor of the pledge object. In case of partially pledged loans, the portion protected by the pledge object shall receive a corresponding low risk weight.

Article 26: Guarantees provided by the following guarantors shall have the function of mitigating risk:

1. policy banks and commercial banks in China;

2. Chinese state authorities that, with the approval of the State Council, carry out on-lending for the use of loans from foreign governments or international economic organizations;

3. public sector enterprises invested in by the Chinese central government;

4. the government of a country or region with a assessment of AA- or higher, commercial banks registered in such country or region, and public sector enterprises invested in by the government of such country or region; and

5. multilateral development banks.

Fully guaranteed loans provided by a guarantor listed in the above section shall be assigned a risk weight for direct claims on the guarantor. In the case of partially guaranteed loans, the guaranteed portion shall obtain a corresponding low risk weight.

Article 27: Commercial banks shall make provisions for credit risks of off-balance-sheet businesses.

A commercial bank shall multiply the nominal principal amounts of the off-balance-sheet items by a credit conversion factor to arrive at the credit equivalents to the on-balance-sheet items, then determine the risk weight according to the nature of the counterparty to calculate the corresponding risk-weighted assets of the off-balance-sheet items.

Risk-weighted assets of exchange rate contracts, interest rate contracts and other derivatives contracts shall be calculated using the current risk exposure method.

Article 28: Commercial banks shall make provisions for capital against market risk.

Market risk is defined as the risk of losses in on and off-balance-sheet positions arising from movements in market prices. For the purposes of these Procedures, market risk is defined to include: the risks pertaining to interest rate-related instruments and equities in the trading book; foreign exchange risk and commodities risk throughout the bank.

Article 29: Commercial banks shall establish trading books in accordance with these Procedures, the market value shall apply to all items in such trading books.

The trading book is defined to include: a commercial bank's proprietary positions in financial instruments that are intentionally held for short-term resale or that are taken on by the bank with the intention of benefiting in the short-term from actual or expected differences between their buying and selling prices, or from other price or interest-rate variations; and positions in financial instruments arising from matched principal brokering and market making, or positions taken in order to hedge other elements of the trading book.

Article 30: Commercial banks whose total trading book positions are greater than 10% of the total on and off-balance-sheet assets or exceed Rmb8.5 billion shall require capital charge for market risk.

Article 31: Commercial banks that, according to these Procedures, do not require capital charge for market risk shall report their market risk positions to the CBRC every quarter.

Article 32: Commercial banks shall calculate the capital charge for market risk in accordance with the standardized measurement method specified in these Procedures. Commercial banks may use internal models to calculate the capital charge for market risk after examination and approval by the CBRC.

PART THREE: SUPERVISION AND INSPECTION

Article 33: The board of directors of a commercial bank shall be ultimately responsible for the management of its bank's capital adequacy ratio and shall be responsible for defining the objectives for managing the capital adequacy ratio, determining the risk appetite, and formulating and supervising the implementation of the capital plans. Where no board of directors has been established, the bank president shall undertake such responsibilities.

Article 34: The senior management personnel of a commercial bank shall be responsible for implementation of capital adequacy ratio management, including formulating rules for the management of their bank's capital adequacy ratio, perfecting the procedures for identifying, measuring and reporting credit risks and market risks, regularly evaluating the level of the capital adequacy ratio, establishing the corresponding capital management mechanisms, strengthening the inspection and auditing of capital evaluation procedures, and ensuring effective implementation of each supervision and control measure.

Article 35: Commercial banks shall report to the CBRC unconsolidated and consolidated capital adequacy ratios. Consolidated capital adequacy ratios shall be reported once every six months, and unconsolidated capital adequacy ratios shall be reported once per quarter. Where extraordinary matters affect the capital adequacy ratio, they shall be reported to the CBRC in a timely manner.

When a commercial bank reports a capital adequacy ratio to the CBRC, it shall simultaneously send a copy to the People's Bank of China.

Article 36: The CBRC shall carry out on-site and off-site supervision and control in respect of a commercial bank's capital adequacy ratio. The inspections shall mainly cover:

1. details on the formulation and implementation of the commercial bank's rules related to the capital adequacy ratio;

2. details on the capital planning and implementation in respect of the capital adequacy ratio maintained by the commercial bank as well as the capacity and measures for supervising and controlling the levels of capital;

3. details on the credit risk and market risk of the commercial bank;

4. whether or not the establishment of the trading book and the value applied to the items in such trading book by the commercial bank complies with these Procedures.

Article 37: In view of the risk status and risk management ability of a commercial bank, the CBRC may request a single bank to increase the minimum capital adequacy ratio standard.

Article 38: The CBRC divides commercial banks into three categories based on their capital adequacy ratio situation:

1. adequately capitalized commercial banks: where the capital adequacy ratio is no lower than 8% and the core capital adequacy ratio is no lower than 4%;

2. undercapitalized commercial banks: where the capital adequacy ratio is lower than 8% or the core capital adequacy ratio is lower than 4%; and

3. severely undercapitalized commercial banks with seriously inadequate capital: where the capital adequacy ratio is lower than 4% or the core capital adequacy ratio is lower than 2%.

Article 39: The CBRC supports the robust development of the business of adequately capitalized commercial banks. In order to prevent their capital adequacy ratio falling below the minimum standard, the CBRC may take the following intervening measures:

1. request the commercial bank to perfect its risk management rules;

2. request the commercial bank to increase its risk control capability;

3. request the commercial bank to strengthen its analysis and forecasting in respect of capital adequacy ratios; and/or

4. request the commercial bank to formulate a feasible capital maintenance plan and restrict the commercial bank from getting involved in certain high risk businesses.

Article 40: The CBRC may adopt the following corrective measures against undercapitalized commercial banks:

1. issue a regulatory opinion, the contents of which shall include: a description of the current status of the commercial bank's capital adequacy ratio, the corrective measures to be taken, and a detailed implementation plan for each measure;

2. request the commercial bank to formulate a feasible capital replenishment plan within two months of receiving the regulatory opinion from the CBRC;

3. request the commercial bank to restrict the speed of asset growth;

4. request the commercial bank to reduce the scale of risk assets;

5. request the commercial bank to restrict fixed asset purchases;

6. request the commercial bank to restrict the distribution of dividends and other income; and/or

7. strictly examine and approve or restrict the establishment of additional new institutions or the launch of new businesses by the commercial bank.

In addition to the abovementioned corrective measures, the CBRC has the right, in view of the risk levels and the implementation of the capital replenishment plan of the commercial bank, to request the commercial bank to stop all businesses other than low risk businesses and to stop examining and approving the establishment of additional institutions or launch of new businesses by the commercial bank.

Article 41: In the case of severely undercapitalized commercial banks, the CBRC may take the following corrective measures, in addition to the corrective measures set out in Article 40 hereof:

1. request the commercial bank to adjust its senior management; and/or

2. take over or facilitate the reorganization of the commercial bank in accordance with the law, to the extreme of closing.

When this kind of commercial bank is being disposed of, the CBRC shall also take into overall consideration external factors and adopt other necessary measures.

PART FOUR: INFORMATION DISCLOSURE

Article 42: The board of directors of a commercial bank is responsible for the disclosure of information in respect of its bank's capital adequacy ratio. Where no board of directors has been established, the bank president shall undertake such responsibilities. The contents of information disclosures shall be subject to the approval of the board of directors or bank president.

Article 43: Information disclosures in respect of a capital adequacy ratio shall mainly include the following five aspects: risk management objectives and policies; scope of the consolidated statements; capital; capital adequacy ratio; and credit risks and market risks. In the case of items involving commercial secrets that cannot be disclosed, the commercial bank may disclose the overall details of the item and explain the reasons why the special item cannot be disclosed.

Article 44: Information in respect of a capital adequacy ratio shall be disclosed by commercial banks within a period of four months from the end of each financial year. Where disclosures cannot be made on time for special reasons, an application for a postponement shall be made to the CBRC at least 15 working days in advance.

Article 45: A commercial bank shall report to the CBRC before disclosing information in respect of a capital adequacy ratio.

Article 46: A commercial bank shall publish the contents of the information that is required to be disclosed under these Procedures at major places of business and ensure that the shareholders and relevant interested parties are able to receive such information in a timely manner.

PART FIVE: SUPPLEMENTARY PROVISIONS

Article 47: These Procedures shall apply, mutatis mutandis, to the calculation, supervision, inspection and information disclosure in respect of capital adequacy ratios of wholly foreign-invested finance companies and equity joint venture finance companies. Branches of foreign banks in China shall refer to the risk weights specified in these Procedures to calculate renminbi risk-weighted assets.

Article 48: Appendices 1, 2, 3, 4 and 5 are integral parts of these Procedures. The relevant contents of these appendices is as follows:

1. Appendix 1: Definition of Capital

2. Appendix 2: On-balance Sheet Asset Risk Weights Table

3. Appendix 3: Credit Conversion Factors for Off-balance-sheet Items and Definitions of Off-balance-sheet Items

4. Appendix 4: Standardized Measurement Method for Capital Charge for Market Risk

5. Appendix 5: Contents of Information Disclosures

Article 49: These Procedures adopt Standard & Poor's AA- rating symbols, but there are no stipulations on the external credit assessment institution to be selected by a commercial bank. Commercial banks may select the assessment results of a assessment institution by themselves and maintain consistency.

Article 50: Claims on the government of another country or region include the claims on the government, central bank and other government equivalent organs in such country or region. The regulations of the local banking regulatory authority shall prevail in defining government equivalent organs.

Article 51: The term "equity capital" means capital with which participation in company management and voting rights on management decision-making are granted.

Article 52: The term "public sector enterprises" means operators involved in public utilities, including operators of industries such as water, electricity, heat and gas supply, postal services, telecommunications, and transportation. Public sector enterprises are mainly distributed among basic industries of the national economy and mostly shoulder the mission of providing services to the public. Such enterprises are often founded by the state through means of government financing and the scale of the investment is huge.

Article 53: Commercial banks shall reach the minimum capital requirements by January 1 2007 at the latest. During the transition period, commercial banks shall formulate and implement a feasible step-by-step plan for reaching the capital adequacy ratio standard to be reported to the CBRC. The CBRC shall take the corrective measures specified in Articles 40 and 41 hereof in view of the implementation status of the plan for reaching the capital adequacy ratio standard.

Article 54: The CBRC shall be responsible for the interpretation of these Procedures.

Article 55: These Procedures shall be implemented as of March 1 2004.

APPENDIX ONE: DEFINITION OF CAPITAL

1. Core Capital

Paid-up capital: The capital actually injected in a commercial bank by the investors as agreed pursuant to the articles of association or a contract or agreement.

Capital reserves: Including share premiums, reserves arising from non-cash asset donations received, reserves arising from cash donations and equity investments received, foreign currency capital contribution conversion differences, differences in prices in affiliated transactions, and other capital reserves.

Capital surplus: Including statutory surplus reserves, discretionary surplus reserves and statutory provident fund.

Retained earnings: The undistributed profits realized or losses not made up by a commercial bank from previous years.

Minority interests: When consolidating statements, minority interests in non-wholly-owned subsidiaries included in the core capital means the portion of net operating results and net assets of such subsidiaries that is not attributable to the parent bank by any direct or indirect means.

2. Supplementary Capital

Revaluation reserves: Revaluation reserves shall be the positive difference between the fair value and book value of fixed assets when a commercial bank, with the approval of the relevant state department, carries out revaluation of fixed assets. If the CBRC considers that the revaluated price is prudent, this type of revaluation reserve may be included in supplementary capital, but the portion included in supplementary capital shall not exceed 70% of the revaluation reserves.

General provisions: General provisions are provisions made based on a certain ratio of the balance of all outstanding loans and are used to make up potential losses not yet identified.

Preference shares: Shares issued by a commercial bank that give investors priority rights in profit distribution, distribution of surplus assets, etc.

Convertible bonds: Bonds issued by a commercial bank in accordance with statutory procedures that may be converted into ordinary shares of the commercial bank within a certain period pursuant to agreed conditions. Convertible bonds including supplementary capital must comply with the following conditions:

1. the bondholders' right of claim against the bank is placed after that of the depositors and other ordinary creditors, and such bonds are not secured or pledged against the bank's assets; and

2. bonds may not be resold on the initiative of the holder, and the issuer may not redeem the bonds without the prior consent of the CBRC.

Subordinated term debt: Subordinated debt with a minimum original term to maturity of over five years. With the consent from the CBRC, ordinary, unsecured subordinated term debt instruments issued by the bank that are not secured or pledged against the bank's assets may be included in supplementary capital, and during the last five years to maturity, the cumulative discount of the amount that may be included in supplementary capital is 20% per year. In the case of a subordinated bond with an initial term of 10 years, the amount to be included in supplementary capital in the sixth year will be 100%, 80% in the seventh year, 60% in the eighth year, 40% in the ninth year and 20% in the tenth year.

APPENDIX TWO: ON-BALANCE SHEET ASSET RISK WEIGHTS TABLE

 

APPENDIX THREE: CREDIT CONVERSION FACTORS FOR OFF-BALANCE-SHEET ITEMS AND DEFINITIONS OF OFF-BALANCE SHEET ITEMS

1. Credit Conversion Factors for Off-balance-sheet Items

 

The abovementioned off-balance-sheet items:

(1) Those that substitute loans, cover general guarantees of indebtedness, forward acceptances and endorsements with the character of acceptances.

(2) Certain transaction-related contingent liabilities, include bid bonds, performance bonds, prepaid bonds, indwelling bonds, etc.

(3) Short-term trade-related contingent liabilities mainly refer to documentary credits collateralized by the underlying shipments with priority to claim.

(4) Commitments with an original maturity of up to one year or commitments that can be unconditionally cancelled at any time include a commercial bank's intention letter for granting credit.

(5) Asset sale and purchase agreements where the credit risk remains with the bank include asset repurchase agreements and asset sales with recourse.

2. Risk Assets of Exchange Rate Contracts, Interest Rate Contracts and Other Derivatives Contracts

Exchange rate contracts, interest rate contracts and other derivatives contracts mainly include swaps, options, futures and precious metals trading. Risk assets with such contracts shall be calculated by the current exposure method. Risk assets of interest rate and exchange rate contracts consist of two parts: one part is the replacement cost obtained by marking to market and the other part is obtained by multiplying the total notional principal amount of its book by different factors. Factors can be split by the residual maturity as follows:

 

APPENDIX FOUR: THE STANDARDIZED MEASUREMENT METHOD FOR CAPITAL CHARGE FOR MARKET RISK

1. Interest rate risk

Interest rate risk covers the risk of holding or taking positions in debt securities (all fixed-rate and floating-rate debt securities, negotiable certificates of deposit, non-convertible preference shares, and convertible bonds that trade like debt securities), interest rate derivatives and debt securities derivatives in the trading book. The capital charge for interest rate risk consists of two parts: capital charge for specific risk and capital charge for general market risk.

(1) Specific risk

The capital charge for specific risk is graduated in five broad categories as follows:

Government: 0.00%

Qualifying:

(a) residual term to final maturity 6 months or less: 0.25%

(b) residual term to final maturity between 6 and 24 months: 1.00%

(c) residual term to final maturity exceeding 24 months: 1.60%

Other: 8.00%

(2) General market risk

The capital charge for general market risk consists of the following three parts:

(a) the vertical capital charge for the matched portion of weighted long and short positions in each time-band;

(b) the horizontal capital charge for the matched portion of weighted long and short positions across different time-bands; and

(c) the capital charge for weighted net long or short positions (absolute value) in the trading book.

The maturity method is used for measuring the capital charge for general market risk. Time-bands and weights for each time-band are set out in Table 1. Zones and the corresponding risk weights are set out in Table 2.

First, multiply the position at each time-band by the corresponding risk weight (as set out in Table 1) to calculate the weighted position at each time-band;

Second, multiply the matched portion of weighted long and short positions in each time-band by 10% to reach the vertical capital charge;

Third, offset the weighted long and short positions at each time-band to reach the net weighted position for each time-band; then multiply the matched portion of the weighted net positions of all time-bands of each zone by the first column of weights in Table 2 to reach the horizontal capital charge in each zone;

Fourth, offset the net weighted positions of all time-bands in each zone to reach the net weighted position for each zone; then multiply the matched portion of the weighted net positions of every two zones by the second column of weights in Table 2 to reach the horizontal capital charge across different zones; and

Fifth, offset the weighted net positions of all zones to arrive at the capital charge corresponding to the weighted net long or short positions of the whole trading book.

Table 1: Time-bands and Weights

 

Table 2: Zones and Weights

 

(3) Interest rate derivatives and debt derivatives

Interest rate derivatives cover derivatives contracts and off-balance-sheet instruments that react to changes in interest rates, e.g. interest rate futures, forward rate agreements (FRAs), interest rate and cross-currency swaps, interest rate options and forward foreign exchange positions. Debt derivatives consist of bond futures and bond options.

The abovementioned derivatives should be converted into positions in the relevant underlying and become subject to specific and general market risk charges as described above. Interest rate and currency swaps, FRAs, forward foreign exchange contracts, interest rate futures and futures on an interest rate index will not be subject to a specific risk charge. However, in the case of futures contracts where the underlying is a debt security, or an index representing a basket of debt securities, a specific risk charge will apply according to the credit risk of the issuer.

2. Equity risk

Equity risk means the risk of holding or taking positions in equities or equity derivatives in the trading book. Equities refers to all instruments that exhibit market behaviour similar to equities, including common stocks (whether voting or non-voting), convertible securities that behave like equities, and commitments to buy or sell equity securities.

(1) Specific risk and general market risk

The capital charge for specific risk is equal to the sum of various values, each of which is obtained by multiplying the absolute value of all types of equity positions in all different markets by 8%. The capital charge for general market risk is equal to the sum of various values, each of which is obtained by multiplying the net position of all types of equities (absolute value) in all different markets by 8%.

(2) Equity derivatives

Equity derivatives include forwards, futures and swaps on both individual equities and on stock indices.

The derivatives are to be converted into positions in the relevant underlying and the capital charges for specific and general market risks will apply according to those of the underlying.

3. Foreign exchange risk

Foreign exchange risk means the risk of holding or taking positions in foreign exchange (including gold) and foreign exchange derivatives.

(1) The capital charge for foreign exchange risk is equal to the overall net open position multiplied by 8%.

The overall net open position is measured by aggregating:

(a) the sum of the net short positions (the net position is the sum of the net short positions of all foreign currencies) or the sum of the net long positions (the net position is the sum of the net long positions of all foreign currencies) of a portfolio of foreign currency assets (excluding gold), whichever is the greater; plus

(b) the net position in gold.

(2) Foreign exchange derivatives are to be converted into positions in the relevant underlying and the capital charge for general market risk will apply according to that of the underlying.

4. Commodities risk

Commodities risk applies to commodities, commodity forwards, commodity futures and commodity swaps.

For the purposes of these Procedures, a commodity is defined as a physical product that is or can be traded on a secondary market, e.g. precious metals (excluding gold), agricultural products and minerals (including oil), etc.

(1) The capital charge for commodities risk is equal to the sum of the following two items:

(a) the sum of the absolute value of the net position in each commodity multiplied by 15%; and

(b) the sum of the gross positions in each commodity (the absolute value of long plus short) multiplied by 3%.

(2) Commodity derivatives should be converted into notional commodities positions and the capital charge be applied in accordance with the above method.

5. Options risk

(1) Banks that handle purchased options only may use the simplified approach.

(a) In the case of long cash and long put or short cash and long call, the capital charge will be the market value of the underlying security multiplied by the sum of specific and general market risk charges for the underlying less the amount the option is in the money (if any) bounded at zero.

(b) In the case of long call or long put, the capital charge will be the lesser of the market value of the underlying security multiplied by the sum of specific and general market risk charges for the underlying and the market value of the option.

(c) The capital charges for specific and general market risks of the underlying instruments shall be calculated in accordance with the following table:

 

(2) Commercial banks that write options may use the Delta-plus method.

Capital charges calculated by the Delta-plus method shall be composed of the following three parts:

(a) The market value of the underlying multiplied by the delta to reach the delta-weighted option position. The delta-weighted option position shall then be included as a position for the underlying in the calculation of capital charges.

(b) The capital charge for Gamma risk.

Gamma impact = 1/2 x Gamma x VU²

Of which:

if the underlying is a bond: VU = the market value of the underlying X the risk weights set out in Table 1;

if the underlying is an interest rate: VU = the market value of the underlying X the assumed changes in corresponding yield set out in Table 1;

for options on equities, equity indices, foreign exchange and gold: VU = the market value of the underlying X 8%;

for options on commodities: VU = the market value of the underlying X 15%.

Individual gamma impacts corresponding to the options on the same underlying will be summed, resulting in a net gamma impact for each underlying. The total gamma capital charge will be the sum of the absolute value of the net gamma impacts that are negative.

(c) The capital charge for Vega risk.

The capital charge for vega risk of an underlying = a proportional shift in volatility of ¡À 25% X the sum of the vegas for all options on the underlying.

The total capital charge for vega risk will be the sum of the capital charges for vega risk of all the underlying.

APPENDIX FIVE: CONTENTS OF INFORMATION DISCLOSURES

1. Objectives and policies of risk management

Commercial banks shall disclose the following:

(1) overall strategy for risk management;

(2) organizational structure of relevant risk management work;

(3) scope and types of reported and measured risks; and

(4) policies to guard against risk and specific implementing measures.

2. Scope of consolidated statements

Commercial banks shall disclose the scope of consolidation for calculating the capital adequacy ratio, and the following shall be disclosed item by item:

(1) financial institutions included in consolidated statements; and

(2) financial institutions not included in consolidated statements.

3. Capital

Commercial banks shall disclose details on their capital item by item:

(1) End-of-period figures for core capital, specifically including:

(a) paid-in capital or ordinary shares;

(b) capital reserves;

(c) surplus capital;

(d) retained earnings; and

(e) minority interests.

(2) End-of-period figures for supplementary capital, specifically including:

(a) revaluation reserves;

(b) general provisions;

(c) preference shares;

(d) convertible bonds; and

(e) subordinated term debt.

(3) End-of-period figures for capital.

(4) Deductions from capital, including:

(a) goodwill;

(b) equity investments by the commercial bank in unconsolidated banks; and

(c) equity investments by the commercial bank in real property not for its own use, non-bank financial institutions and enterprises.

(5) Deductions from core capital, including:

(a) goodwill;

(b) 50% of equity investments by the commercial bank in unconsolidated banks; and

(c) 50% of equity investments by the commercial bank in real property not for its own use, non-bank financial institutions and enterprises.

(6) The maturity, conditions and seniority of subordinated term debt.

(7) Increases or reduction in registered capital, division or merger during the reporting period.

(8) Major equity investment activities during the reporting period.

4. Capital Adequacy Ratio

Commercial banks shall explain the bank's capital plans and methods for evaluating the capital adequacy ratio, focusing on the disclosure of relevant factors that affect the capital adequacy ratio, and disclosing the following item by item:

(1) total on-balance-sheet risk-weighted assets;

(2) total off-balance-sheet risk-weighted assets;

(3) total risk-weighted assets;

(4) capital charge for market risk;

(5) unconsolidated core capital adequacy ratio and capital adequacy ratio; and

(6) consolidated core capital adequacy ratio and capital adequacy ratio

5. Credit risk and market risk

(1) Credit risk

(a) credit risk management and control policies;

(b) organizational structure and division of duties for credit risk management;

(c) the name of the external assessment institution used when calculating risk weights, and the reasons and consistency for such choice;

(d) end-of-period figures of credit risk exposure;

(e) figures for the non-performing loans at the beginning and end of the period;

(f) methods for provisioning and statistical methods for general provisions, special provisions and specific provisions;

(g) in respect of general provisions, special provisions and specific provisions, figures for the beginning of the period, figures for current provisions, figures for current recovering, figures for current write-offs and end-of-period figures;

(h) the main principles to identify qualifying collaterals and the internally determined ratio of the value of collaterals to the amount of loan principals;

(i) relevant principles for managing secured loans.

(2) Market risk

(a) market risk management and control policies;

(b) risks pertaining to interest rate-related instruments and equities in the trading book;

(c) foreign exchangerisk and commodities risk throughout the commercial bank; and

(d) the effects of movements in exchange rates and interest rates on the bank's profitability and financial situation.