China to move forward with tougher bank rules

Updated: 2012-11-20 22:39

By Wang Xiaotian (China Daily)

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China will not follow other economies in delaying implementation of tougher capital requirements on banks, a senior banking regulator said on Tuesday.

Instead, the country will allow banks to introduce new instruments to raise capital, said Wang Zhaoxing, vice-chairman of the China Banking Regulatory Commission.

Wang said China will not follow in the footsteps of the United States, Europe or any other economies that have considered postponing the adoption of tougher banking requirements called for by global regulatory standards.

"China has promised to anticipate the establishment of the global financial supervision system and adopt the international standards," Wang said. "More importantly, we took the domestic situation and our own development needs into consideration when we drafted the rules."

He said regulators want to improve the ability of banks to manage risk and encourage banks to improve their business structures.

"It will be a Chinese version of capital criteria, tailored to suit Chinese banks' balance sheets, risk and business models."

The banking regulator also expects the new rules to help banks improve their capital quality. The stricter criteria will call for larger banks to have a capital adequacy ratio of 11.5 percent and non-systemically important ones to have a ratio of 10.5 percent.

Wang said regulators will soon release guidelines to encourage banks to develop capital instruments that will help them replenish their capital. Those are likely to come out before the end of the year.

"Banks will not maintain the pace of expansion they have seen in the past 20 or 30 years, when they piled up profits very easily and rapidly."

The State Council announced in June that the new rules will take effect at the beginning of 2013.

The new requirements will follow the Basel II and Basel III recommendations on banking laws, both of which were issued by the Basel Committee on Banking Supervision, a global group of central bank governors.

The US has decided to delay its adoption of the Basel III rules, while leaders in Europe have intensified their debate over whether the rules should go into effect next year.

Beijing, for its part, had once planned to put the new rules into effect at the beginning of this year. The country later decided, though, to postpone the change to July, instead responding to a further weakening in the economy by adopting looser monetary policies and banking regulations.

Chen Dongsheng, chairman and CEO of Taikang Life Insurance Co Ltd, said regulators' attempts to encourage financial innovation will be thwarted so long as interest rates are not set according to market conditions. That, in turn, will lead to distortions in the prices of all sorts of financial instruments.

Banks have seen their profits increase at a slower pace as interest rates become more liberalized and interest margins narrowed earlier this year. Large banks have begun trying to replenish their stores of capital by selling subordinated bonds while preparing to meet next year's stricter standards.

In the first 10 months of the year, 13 banks issued 60 billion yuan ($9.62 billion) worth of subordinated bonds in the inter-bank bond market.

Zhou Xiaochuan, governor of the People's Bank of China or the central bank, said on Tuesday that the government will be "unswerving" in its push to reform interest rates so that they better reflect market conditions.