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Breakingviews-China's bank rules promise safety, not stability
August 19, 2011 / 9:41 AM / 6 years ago

Breakingviews-China's bank rules promise safety, not stability

By John Foley

HONG KONG, Aug 19 (Reuters Breakingviews) - Lenders will end up well padded against bad debts under new plans -- a good job, since lots are coming. But the distortions that promote risky lending remain. With capital scarce, banks may also push more loans through China’s worryingly large “shadow” banking system.

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-- China’s bank regulator published new rules for lenders on Aug. 15, proposing tougher requirements for capital held against risky assets, and a reassessment of risk weightings for certain kinds of loan. Banks deemed “systemically important” would have to hold Tier 1 capital equivalent to 9.5 percent of their risk weighted assets by 2013, while others would require ratios of 8.5 percent by 2016, the China Banking Regulatory Commission said.

-- China’s banks are currently measured using a Capital Adequacy Ratio, which is roughly equivalent to Tier 2 capital in other regimes, and a Core Capital Adequacy Ratio, analogous to the widely used Tier 1 capital. Core capital can include equity, retained earnings and preference shares, minus some deductions. The new rules would also introduce a third measure equivalent to equity Tier 1 capital.

-- The CBRC said that big banks must set an additional counter-cyclical capital requirement of 2.5 percent when credit growth is abnormally strong.

-- The core capital ratio of China’s banking system stood at 9.9 percent at the end of June. Banks are expected to record a 20 percent rise in earnings for 2011, state media outlet Xinhua reported on July 29.

-- Banks have lent heavily in the past three years in order to sustain economic growth. For 2011, the central bank directed lenders to disburse 7-7.5 trillion yuan ($1.1-$1.2 trillion) of loans, compared with just under 8 trillion yuan ($1.2 trillion) in 2010, and 9.6 trillion yuan ($1.5 trillion) in 2009. New loans in July 2011 totalled 493 billion yuan ($77 billion), a seven-month low.

-- Reuters story: China drafts new rules on bank capital adequacy [ID:nL3E7JF0Z9]


Backdoor bank rescue [ID:nLDE7500KC]

One country, two systems [ID:nN02223507]

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

-- For previous columns by the author, Reuters customers can click on [FOLEY/]

(Editing by Peter Thal Larsen and Sarah Bailey)


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