Measures for the Administration of the Leverage Ratio of Commercial Banks

(Promulgated by the China Banking Regulatory Commission on June 1 2011 and effective as of January 1 2012.)

Order of the CBRC [2011] No.3

Part One: General provisions

Article 1: These Measures have been formulated pursuant to the PRC Law on the Regulation of the Banking Sector and the PRC Law on Commercial Banks in order to effectively control the degree of leverage of commercial banks and ensure the safe and stable operation of commercial banks.

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

Article 3: For the purposes of these Measures, the term “leverage ratio” means the ratio between a commercial bank's Tier 1 capital that complies with relevant provisions and the balance of its adjusted on-balance-sheet and off-balance-sheet assets.

Article 4: Both a commercial bank's consolidated and unconsolidated leverage ratios may not be less than 4%.

Article 5: The China Banking Regulatory Commission (the CBRC) shall conduct monitoring inspections of the leverage ratios of commercial banks and their management thereof in accordance herewith.

Article 6: The CBRC shall monitor the overall status of the leverage ratios of the banking industry on an ongoing basis and strengthen its analysis and prevention of the systemic risks of the banking industry.

Part Two: Calculation of the leverage ratio

Article 7: The formula for calculating the leverage ratio of a commercial bank is set forth below:

Article 8: Tier 1 capital and Tier 1 capital deductions are the Tier 1 capital and Tier 1 capital deductions used by commercial banks when calculating their capital adequacy ratio in accordance with relevant CBRC provisions.

Article 9: The formula for calculating the balance of adjusted on- and off-balance-sheet assets is set forth below:

Balance of adjusted on-and off-balance-sheet assets = balance of adjusted on-balance-sheet assets + balance of adjusted off-balance-sheet items – Tier 1 capital deductions

Article 10: The balance of adjusted on-balance-sheet assets shall be calculated by the following methods:

(1) exchange rate, interest rate and other derivative products shall be calculated by the current exposure approach as shown in the Appendix hereto; and

(2) other on-balance-sheet assets shall be included in the balance of adjusted on-balance-sheet assets after deduction of the allocations to the reserve made for such assets.

When calculating the balance of adjusted on-balance-sheet assets, a commercial bank shall ignore the credit risk mitigation factors of mortgaged/pledged property, guarantees and credit derivatives.

When calculating the balance of on-balance-sheet assets, a commercial bank may, in accordance with the Guidelines for Measuring the Regulatory Capital of Commercial Banks for the Purposes of Credit Risk Mitigation issued by the CBRC, apply netting when adjusting repurchase and derivatives transactions.

Article 11: The balance of adjusted off-balance-sheet items shall be calculated by the following methods:

(1) among off-balance-sheet items, unconditional revocable undertakings shall be calculated at 10% of the credit conversion factor; and

(2) other off-balance-sheet items shall be calculated at 100% of the credit conversion factor.

The term “unconditional revocable undertaking” means an undertaking in respect of which it is stated in writing in an agreement that the commercial bank may revoke it unconditionally at any time without prior notice with such revocation not giving rise to any dispute, legal action or causing the bank to incur any costs.

Article 12: When a commercial bank calculates its consolidated leverage ratio, the scope of consolidation and the calculation method shall be determined in accordance with relevant CBRC provisions for the calculation of the consolidated capital adequacy ratio.

Part Three: Oversight of the leverage ratio

Article 13: The board of directors of a commercial bank shall bear ultimate responsibility for managing the leverage ratio. Senior management of the commercial bank shall be responsible for the actual management of the leverage ratio.

Article 14: A commercial bank shall set a target leverage ratio not lower than the minimum regulatory requirement and effectively control its degree of leverage.

Article 15: A commercial bank shall, as required by the CBRC, regularly submit its consolidated and unconsolidated leverage ratio statements.

Consolidated leverage ratio statements shall be submitted once each half year and unconsolidated leverage ratio statements shall be submitted once each quarter.

Article 16: A commercial bank's leverage ratio information disclosure shall, at minimum, include its leverage ratio level, Tier 1 capital, Tier 1 capital deductions, balance of adjusted on-balance-sheet assets, balance of adjusted off-balance-sheet items, balance of adjusted on- and off-balance-sheet assets, etc.

A commercial bank shall disclose information on its leverage ratio within four months after the end of each financial year. If, for a special reason, it is unable to punctually make the disclosure, it shall apply to the CBRC for an extension at least 15 working days in advance.

A commercial bank shall display in its main place of business the information of which the disclosure is required by these Measures and ensure that shareholders and relevant interested parties can obtain relevant information in a timely manner.

Article 17: If the leverage ratio of a commercial bank falls below the minimum regulatory requirement, the CBRC may take the following rectification measures:

(1) require the commercial bank to supplement its Tier 1 capital within a specified period of time;

(2) require the commercial bank to control the speed of growth of its on- and off-balance-sheet assets; and

(3) require the commercial bank to reduce the size of its on- and off-balance-sheet assets.

If it fails to rectify the matter by the specified deadline, or its acts seriously jeopardise its stable operations or harm the lawful rights and interests of depositors or other customers, the CBRC may, depending on the circumstances, take the following measures in accordance with the PRC Law on the Regulation of the Banking Sector:

(1) order it to suspend part of its business and cease approving its launching of a new business;

(2) restrict its distribution of extra dividends and other income;

(3) cease approving its establishment of new (sub-)branches;

(4) order the controlling shareholder(s) to transfer equity or place restrictions on the rights of relevant shareholders;

(5) order it to make changes to its directors and/or senior management personnel or place restrictions on their rights; and

(6) take other measures as specified in laws.

In addition to the foregoing measures, the CBRC may impose administrative penalties on the commercial bank in accordance with the law.

Part Four: Supplementary provisions

Article 18: With respect to policy banks, financial asset management companies, rural cooperative banks, rural credit cooperatives, financial companies of enterprise groups, lease financing companies, automobile financing companies and consumer financing companies, matters shall be handled with reference to these Measures.

Article 19: Systemically important banks determined by the CBRC shall meet the minimum leverage ratio requirements by the end of 2013 and non-systemically important banks shall meet the minimum leverage ratio requirements by the end of 2016. Banks that do not meet the minimum leverage ratio requirements during the transitional period shall formulate a plan for meeting the requirements and report the same to the CBRC.

Article 20: The CBRC is in charge of interpreting these Measures.

Article 21: These Measures shall be effective as of January 1 2012.

Appendix: Method for calculating the current exposure value of exchange rate, interest rate and other derivative products

Exchange rate, interest rate and other derivative products, in the main, include forwards, futures, swaps and options. Derivative open positions shall be calculated using the current exposure approach and be included in the balance of on-balance-sheet assets. The specific formula therefor is set forth below:

current exposure value = replacement cost calculated at the fair value + nominal principal × fixed coefficient.

The fixed coefficients for derivative products of different remaining periods are shown in the table below: