August 15, 2011 / 10:43 AM / 7 years ago

China drafts new rules on bank capital adequacy

BEIJING (Reuters) - China’s banking regulator on Monday published new rules on banks’ capital requirements as part of efforts to implement Basel III guidelines to help lenders rein in risks.

The rules were announced by the China Banking Regulatory Commission and confirmed an earlier report by Reuters.

Under the new rules, which are open to public review, major Chinese banks, or systematically important ones, are subject to a minimum capital adequacy ratio of 11.5 percent while others must keep a minimum capital requirement of 10.5 percent.

The CBRC also said that big banks must set a counter-cyclical additional requirement of up to 2.5 percent, if credit growth is abnormally strong, which means the required capital base could be raised to as high as 14 percent for major lenders.

The regulator said major banks must meet the new capital requirement by the end of 2013 and other lenders must achieve the goal by the end of 2016.

“The strong capital strength has laid a solid foundation for Chinese banks to prevent a possible hard hit from the latest round of financial crisis and guarantee the stable performance of the sector,” the agency said in a statement on its website, www.cbrc.gov.cn

The weighted-average capital adequacy ratio (CAR) of Chinese banks rose to 12.2 percent at the end of June from 11.8 percent three months ago, the banking regulator said.

In general, a higher capital adequacy ratio is seen to be good for the financial system as it forces lenders to set aside more cash for rainy days, to the benefit of depositors. The downside is that it could crimp profitability.

In reality, the minimum level for the capital adequacy ratio holds little meaning for banks because the weighted average ratio among them was already 12.2 percent at the end of June.

It added that the core capital adequacy ratio of Chinese banks was at 9.92 percent at the end of June.

The banking regulator also told banks to guard against possible risks resulting from the unprecedented lending spree over the past years to shore up the economy amid the financial crisis.

“In recent years, with bank lending surging at a fast pace, loans are increasingly concentrated on some particular sectors and the mid-long term loans are taking up a rising proportion,” the agency said.

“That could lead to mounting systemic risks and must not be neglected,” it added.

China’s bank lending hit a 7-month low in July, as Beijing kept a tight grip on monetary policy to quell quickening consumer inflation.

The banking regulator also said it would increase the risk weightings for bonds issued by domestic banks to 25 percent from the current 20 percent.

Risk weightings for bank loans being extended to medium-to small-sized firms will be reduced to 75 percent from 100 percent.

Reporting by Aileen Wang and Kevin Yao; Editing by Jacqueline Wong

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