Why banks should prepare for tighter regulation
May 04, 2012 | BY
clpstaff &clp articles &New liquidity measures could force banks to adjust their asset-ability structures and strictly manage funding sources and balance sheets
The China Banking Regulatory Commission (CBRC) is looking to introduce regulatory parameters governing liquidity risks in the banking sector. It will issue liquidity risk rules, which would regulate bank deposits and loans more strictly.
“Banks with larger retail deposit bases will probably be in a better position compared to banks that have traditionally relied more on wholesale funding,” said Jack Wang of King & Wood Mallesons.
The Commission is hoping the new rules will bring the sector in line with international standards. The parameters include a liquidity coverage ratio, which sets the standards on highly liquid assets held by banks to meet short-term obligations. They also include a net stable funding ratio, which measures medium and long-term funding of assets of banks.
“The requirements will compel banks to re-adjust their asset-liability structure and reduce the amount of medium and long term loans,” said Kai Yin of JT&N, a Beijing-based domestic firm. “Banks would also have to allocate a certain amount of capital to cover the liquidity requirements,” he added. Finding the right source of funding could be a challenge.
The international standard for the liquidity coverage ratio is no less than 100% for the high quality liquid assets to net cash outflow over 30 days. The same also applies to net stable funding ratios. Yin suggested that 100% for both ratio standards would also apply to China.
“This is likely to put pressure on the business models of some banks. Banks will have to manage their balance sheets much more tightly,” said Paul McBride of King & Wood Mallesons.
The parameters would also mean borrowers seeking bank financing would need to think differently. “They have to think about their target investor base and how their financing may be sitting on the books from a capital perspective. This will feed into structuring and in turn pricing,” said McBride.
Banks have been facing increasing credit and liquidity risks this year. Some commercial banks have extended the refinancing plan of convertible bond issuance or share offerings. The CBRC issued a Consultation Draft on the Measures for Liquidity Risk of Commercial Banks (Trial Implementation) (商业银行流动性风险管理办法(试行)征求意见稿)in October 2011 to manage these risks.
Practitioners expect the implementation of the Measures to be delayed until July 2012, instead of January 2012 as previously thought. However, there is no confirmed date from the CBRC.
China Banking Regulatory Commission, Guiding Opinion on the Implementation of New Regulatory Standards by China's Banking Sector (中国银行业监督管理委员会关于中国银行业实施新监管标准的指导意见)
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