4 May 2011
On 27 April, 2011 the China Banking Regulatory Commission (CBRC), the PRC regulator for banking financial institutions, issued official guidelines for implementing Basel III requirements in its Guidelines for Implementing New Regulatory Standards in the PRC Banking Industry (the CBRC Guidelines).
The CBRC Guidelines expressly set out detailed requirements on capital adequacy ratios, a leverage ratio, liquidity requirements and provision ratios that PRC banks should comply with and also provide for different transition periods within which the requirements must be satisfied.
Generally speaking, the requirements and the timelines to satisfy such requirements as provided in the CBRC Guidelines are stricter than that under Basel III. A brief summary of the CBRC Guidelines is set out below.
Capital adequacy ratios
First, the calculation mechanism for capital adequacy ratios has been changed to be more sophisticated.
Secondly, different capital adequacy ratios are set out by referring to different classes of regulatory capital of banks. The capital adequacy ratios in respect of core tier one capital shall be 5 per cent, the adequacy ratio for tier one capital shall be 6 per cent and the overall capital adequacy ratio shall satisfy 8 per cent.
In addition, a regulatory requirement for two capital buffers has also been introduced by the CBRC Guidelines: a 2.5 per cent reserve excess capital conservation buffer and a 0-2.5 per cent countercyclical capital buffer.
Last but not least, an additional capital requirement of 1 per cent is imposed on systemically important banks. CBRC will definite the term “systemically important banks” and set out assessment methods and a continuous assessment framework in its future regulations. Such assessment will likely take into account the size, interconnectedness, complexity and substitutability of the banks. Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank and Bank of Communications shall definitely fall within the ambit of systemically important banks.
As a supplement to capital adequacy ratios, a leverage ratio is introduced, which requires that the tier one capital should take up at least 4 per cent of the adjusted on-and off-balance sheet assets of the relevant bank.
CBRC aims to establish a multi-dimensionally liquidity risk control standards and will set out various ratios for supervisory purposes. The CBRC Guidelines provide that the liquidity coverage ratio and the net stable finance ratio must not be lower than 100 per cent.
The loan provision ratio (being the ratio of loss reserve against the amount of loans) shall be 2.5 per cent, or the provision coverage ratio (being the ratio of loss reserve against the amount of bad debts) shall be 150 per cent, whichever is higher.
To facilitate the implementation of the requirements set out in the CBRC Guidelines, CBRC will update and issue a series of banking regulations in 2011 and commence the implementation of the Chinese version of Basel III from 2012. The systemically important banks are required to satisfy the new regulatory requirements by the end of 2013 while the non-systemically important banks must achieve the same by the end of 2016 (note that in respect of the provision ratios, the deadline for certain banks which encounter significant difficulties may be postponed to the end of 2018).
Hong Sun, Partner
Joyce Zhou, Associate
Norton Rose LLP, Shanghai