Banking rules set new capital adequacy ratios
June 01, 2011 | BY
Candice MakNew standards will help stabilise banking sector growth
New stringent banking requirements may affect the operational and fund-raising modes of domestic lenders in the short-term, but they will help stabilise the development of the banking market.
On May 3, the China Banking Regulatory Commission (CBRC) released new capital requirement regulations that reflect the regulator's toughened stance on minimising risks during the country's credit expansion. The Guiding Opinion on the Implementation of New Regulatory Standards by China's Banking Sector (关于中国银行业实施新监管标准的指导意见), which takes effect on January 1 2012, is based on the requirements set forth in the Basel II and Basel III agreements and brings China more in line with international standards.
Overall, the opinion is stricter on lenders' capital adequacy, provisions, leverage and liquidity conditions.
What is key is that it sets forth new adequacy ratios for domestic banks.
The CBRC will set the minimum capital adequacy ratio at 11.5% for banks of systematic importance, and at 10.5% for those of non-systematic importance.
The CBRC has stated that banks of systematic importance will have to meet the new standards by the end of 2012. Those of non-systematic importance have until 2016. The CBRC is aiming to complete the details of the application of standards by the third quarter of this year.
The liquidity leverage ratio is set at 4%, a percent higher than the 3% required by Basel III. Michael Mei, a Shanghai-based partner at Llinks Law Firm, said that the 4% was “necessary and viable” since most domestic banks had already reached this ratio.
Additionally, the core tier-one adequacy ratio is set at 5%, 0.5% higher than Basel III. “The CBRC always pays close attention to the supervision of capital quality and this ratio is remarkably higher than the minimum standard in Basel III,” said Mei.
The new law will cause lenders to raise funds to meet the new requirements, but since most of China's major banks are already close to meeting them, the country's economy will not be affected.
“Within a relatively short period of time, investors might be affected,” said Mei. “But from a long-term perspective, the new law is favourable to the long-term stable development of domestic banks.” CM
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