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China’s Bank Regulators Stockpile Some Props Just In Case

Around the world, central bankers, bank regulators and finance ministry officials are working on national implementations of the international rules strengthening capital requirements announced by the Basel Committee on Banking Supervision earlier this month and which are due to be presented to G20 leaders at their Seoul summit in November for ratification. The China Banking Regulatory Commission says its version will be announced at the end of the year after the Seoul summit and that it expects the new rules to have limited impact on Chinese banks in the near term.

Regulators have already started on constraining the big banks’ risk-taking in response to concerns about their lending fueling asset bubbles that, should they burst, could leave the banks carrying mountains of bad debts, especially if the shadow secondary banking system blows up. China’s banks made a record $1.4 trillion in new loans last year, and they have previous when it comes to lending standards. The government had to pour billions of capital into the big four banks earlier in the decade to clean up bad-debt encrusted balance sheets.

The current capital requirements on the big banks (11.5% capital adequacy ratios) and small and middle-sized bank (10%) are stricter than the new Basel rules will require and China’s banks already meet them for the most part. The commission says, as of June 30, China’s banks averaged 11.1% capital adequacy ratios and 9% core ratios. Yet the commission is likely to give itself the option of making the capital adequacy ratios stricter yet when the it announces its new rules at the end of the year.

These will mirror the structure of the new Basel capital adequacy hierarchy, a core (“Tier 1”), capital adequacy ratio, an overall ratio, which can count some riskier assets as capital, a new additional capital buffer depending on economic conditions and an extra buffer for banks considered to be systemically important. The Basel rules propose an eventual overall ratio of 7%, a capital buffer of 2.5% and leave the extra for the systemically important banks to be determined. China’s new rules are likely to set the core ratio as 8% and the overall ratio at 10%. So no nominal change (as state media is emphasizing), and most Chinese banks as we have said are already there, which is why the commission can make the point that its new rules will have little impact in the near term.

However, word is that the capital buffer, which regulators would have a lot of flexibility over imposing on individual banks, could be set at up to 4% with an extra 1% for systemically important banks. In theory, the big four state owned banks could be looking at an effective 15% capital adequacy ratio, though things would have to be pretty rocky for the regulators to imposing it to its full extent. What is more interesting is that the regulators think they need to tuck that much in their back pockets just in case.

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