2011-02-23 09:18

Criteria for capital adequacy, leverage and liquidity addressed

BEIJING - The China Banking Regulatory Commission (CBRC) confirmed on Monday evening that it is drafting a slew of new rules to set tougher criteria for capital adequacy, provisions, leverage, and liquidity conditions for lenders.

The country's banking regulator told the China Securities Journal that the new regulations would be published soon to better contain financial risks.

Some local media reported earlier that the new regulatory plan had been approved by the State Council and was in the final consultancy stage.

The CBRC will add leverage and liquidity ratios into the regulatory parameters, while setting the provision ratio on outstanding loans to 2.5 percent, with a period of grace for two years for the larger banks and five years for small and medium-sized lenders, the newspaper reported on Tuesday.

Guo Tianyong, an economist and director of the Research Center of the Chinese Banking Industry, at the Central University of Finance and Economics, said the coordinated implementation of the four tools is an inevitable trend. "However, new capital regulatory parameters - especially the 2.5 percent provision ratio - will put considerable pressure on banks in the long term."

He said leverage restrictions in China will not be as useful as in Western countries, because financial derivatives only account for a small proportion of the banking business. However, in the long run, the restrictions will become a powerful addition to the financial supervision system.

The required leverage ratio - that is, the ratio of core capital to total assets - will be set at 4 percent, one percentage point higher than required by the Basel III agreement, the new global regulatory standards on bank capital adequacy and liquidity, it said.

The regulator will require systemically important banks - that is, those which are considered fundamental to the well-being of the industry as a whole - to realize the leverage ratio by the end of 2012, while other lenders would have to achieve the goal by the end of 2016.

Concerning liquidity parameters, banks will have to maintain the liquidity coverage ratio and net stable funding ratio above 100 percent, according to the China Securities Journal, which quoted the CBRC.

The new rules will also encourage banks to continue increasing their capital adequacy ratio. Currently the CBRC requires lenders to have a capital adequacy level of at least 8 percent. The government-required level for major banks is 11.5 percent.

The weighted average capital-adequacy ratio among Chinese banks reached 12.2 percent by the end of 2010, 0.8 percentage points higher than a year ago, according to the CBRC.

The core capital adequacy ratio increased by 0.9 percentage points to 10.1 percent over the same period.

But Chen Ye, an analyst at the Anbound Group, a private industry think tank, said according to the highest level set by the CBRC, the capital-adequacy requirement for systemically important banks will be as high as 14 percent, indicating that they will still need to find ways to fill the capital gap.

Spurred by the regulator's higher capital-adequacy requirement and shrinking credit due to the central bank's 'prudent' monetary stance, Agricultural Bank of China, China Minsheng Bank, and Industrial Bank, announced plans at the beginning of the year beginning to raise more than 86 billion yuan ($13 billion) in total.

China Everbright Bank announced on Feb 20 that it will issue no more than 12 billion shares on the Hong Kong market to raise funds. Meanwhile, Huaxia Bank will probably raise around 20.8 billion yuan, with Citic Bank gaining 26 billion yuan this year.

Earlier media reports said another major player, China Merchants Bank, was gearing up to raise more than 30 billion yuan on the capital markets to bridge the gap between its capital-adequacy ratio and the target set by the regulator.

At their annual work conference in January, the People's Bank of China, the central bank, and the CBRC called for tighter control of financial risks. The CBRC has already passed down a document urging tighter risk control in its offices nationwide.