China’s Banking Regulators Commit to Launch of a “Chinese Edition” of Basel III by 2024

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China’s top banking regulators have released the draft version of new regulations that seek to create a domestic set of standards reflecting the Basel III Accord’s capital adequacy requirements for depository institutions.

On February 18, the China Banking and Insurance Regulatory Commission (CBIRC) and the People’s Bank of China (PBOC) jointly issued the draft version of the “Commercial Bank Capital Management Measures” (商业银行资本管理办法(征求意见稿)), for the solicitation of opinions from the public.

CBIRC and PBOC said the purpose of the Measures is to “further improve the capital regulation of commercial banks, drive banks to improve their risk management levels, and raise the quality and efficiency of banks in serving the real economy.

“In recent years, with changes to economic and financial conditions and the business models of commercial banks, certain new problems have arisen during the implementation of the “Commercial Bank Capital Management Measures (Trial Version),” and it is now necessary to adjustment them to new conditions,” an official from CBIRC said.

“At the same time, the Basel Committee has further promoted regulatory reform in the post-crisis period, and has successively issued a series of prudential regulatory requirements as the minimum standard for global capital regulation. It will carry out ‘regulatory consistency’ (RCAP) assessments in the future, to ensure the timeliness, comprehensiveness and consistency of implementation by all members.

“Based on the actual conditions of China’s banking sector and the latest achievements of international regulatory reforms, CBIRC has revised the “Commercial Bank Capital Management Measures (Trial)”, which will help spur banks to continue to improve the refinement of risk measure and guide banks to better serve the real economy.”

The trial version of the “Capital Management Measures for Commercial Banks” were first issued in June 2012 and came into effect on January 1, 2013.

“The release of the ‘Measures’ was a milestone event for China’s banking sector,” said a source from big state-owned lender Bank of China (BOC). “It was a key measure for fulfilling the need for the steady expansion of rules, regulations, management, standards and other institutional requirements.

“The new regulations fully absorb and learn from major accomplishments in the reform of international financial regulation, and correspond to China’s national conditions and financial development level.

“They raise the applicability of international rules to the process of Chinese-style modernization, and deeply implement the development concept of the path of financial development with Chinese characteristics.”

CBIRC officials said their data indicates that following the implementation of the Measures, the capital adequacy levels of the Chinese banking industry hashadremained stable without any major volatility.

“Disparities in the asset types of individual banks have led to small changes in capital adequacy ratios, which is embodied by differentiated regulatory requirements, in line with expectations,” said a CBIRC official.

Three key principles for amendment of capital regulations

A CBIRC official said that the main contents of the revisions to the Measures include

  • Creaing a differentiated capital regulatory system.
  • Revising and reconstructing the risk-weighted asset measurement rules under the first pillar.
  • Improving and adjusting the supervision and inspection regulations of the second pillar.
  • Comprehensively upgrading the information disclosure standards and content under the third pillar.

Three principles guide the latest round of amendments to the Measures:

  1. Upholding a fundamental focus on risk. “Risk weighting is the cornerstone of maintaining prudential capital regulation. The setting of risk weighting should objectively reflect the intrinsic risk of of on- and off-balance sheet businesses, so that the capital adequacy ratio can accurately reflect the bank’s overall risk level and ability to operate sustainably.
  2. Stressing the need for “comparison between the same type and the same categories.” “There are a large number of banks in China with major differences. In order to improve the suitability of supervision, it is proposed that we classify and treat them differently in terms of capital requirements, risk-weighted asset measurement and information disclosures, emphasizing analysis of and comparison between banks of the same quality and the same type.”
  3. Maintaining the overall stability of capital levels. A CBIRC official said that this would involve “balancing the relationship between capital supervision and social credit costs and macroeconomic stability, and take into account the overlapping effects of relevant regulatory requirements to maintain the stability of the overall capital adequacy level of the banking sector.”

Chinese banks to be divided into three regulatory tiers

In order to achieve differentiated regulation of Chinese banks, CBIRC’s latest revisions to the Measures outline a differentiated capital regulatory system, dividing banks into three separate tiers based on the scale of their operations and risk levels, while mandating corresponding capital regulatory schemes.

The Measures stipulate that “first-tier commercial banks” will be subject to international capital regulatory requirements. These banks include commercial banks with a larger volume of assets and cross-border operations that satisfy any of the following conditions:

  • On- and off-balance sheet assets at the end of the previous year of 500 billion yuan or more.
  • A balance of overseas claims and debts at the end of the previous year of 30 billion yuan or more, accounting for 10% or more of on- and off-balance sheet assets adjusted for the consolidated statement at the end of the previous year.

Second-tier banks will be subject to simplified regulatory requirements, and are categorised as those that satisfy the following conditions:

  • On- and off-balance sheet assets at the end of the previous year of 10 billion yuan or more.
  • A balance of overseas claims and debts that is greater than 0.

A third tier consists of commercial banks with assets of less than 10 billion yuan that focus on serving counties and small and micro enterprises, and will be subject to more simplified capital requirements.

A CBIRC official said that differentiated capital regulation does not reduce capital requirements, but will spur the financial vitality of small and medium-sized banks and reduce bank compliance costs under the precondition of preserving the overall stability of the banking sector.

“Implementing differentiated capital regulation fully takes into account the actual situation of the large number of commercial banks in China and their different levels of risk management,” said Tian Jimin (田继敏), head of the risk management department at big state-owned lender Agricultural Bank of China (ABC).

“On the one hand, it is conducive to driving large and medium-sized banks to improve the refinement of risk measurements, but on the other hand, it does not lighten capital supervision.

“The capital measurement burden of small banks is moderately reduced, which is more in line with the actual business needs of small banks.”

Expected outcomes and impacts

Tian Jimin said that the impact of the revised Measures would primarily be in two areas, the first being the impact on measurement results, with large banks, such as ABC, expected to see a decline in risk-weighted assets.

“Overall, this will help large banks accurately measure risks and strengthen risk management,” he said.

Tian also sees the Measures having an impact on bank operations and management.

“The purpose of the revision of the capital measurement rules is not to simply change the risk measurement method, but to increase sensitivity to risks by enhancing the refinement and accuracy of measurement, so as to be more prudent, as well as accurately and objectively reflect real risks and capital needs, and enhance the ability to withstand risk.

“Under the new rules, banks will fully apprehend the risk fundamentals, consolidate the basis for capital management, formulate feasible capital plans, and enhance operational stability.”