Chinese banks Basel III
concerns are growing as counsel outline how the China Banking Regulatory Commissions (CBRC)
implementation of Basel III will limit Chinese banks
In June the CBRC issued its Regulation Governing Capital of Commercial Banks.
The requirements stipulated are much higher than those
specified under Basel II and Basel III.
Implementation of the regulation is
expected to fundamentally change Chinese banks means of
Eversheds Kingsley Ong said
that due to an ongoing global financial crisis and fears of a
slowing economy, Chinese banks had focused more on achieving
larger capital buffers than on issuing new loans in the
Under the CBRCs rules,
Chinas systematically important financial institutions
(SIFIs) must maintain a capital adequacy ratio of 11.5% - one
percent more than the 10.5% stipulated under Basel III. Other
financial institutions must maintain a 10.5% capital
One Shanghai-based lawyer said
Chinese banks had used a lot of subordinate note offerings to
satisfy their core capital requirements. But this activity
would not qualify under Basel III principles.
The counsel also noted that CBRC
regulations previously took account of 100% of loans to SMEs in
a banks core capital.
In the new regulations, the
percentage has been reduced from 100% to 75% so that Chinese
banks will be encouraged to make more loans to small or medium
private enterprises, which is in line with the central
governments call to support the economy instead of the
real estate or insurance markets, he said.
Nonetheless, the lawyer conceded the
CBRC had also given Chinese banks a 10-year transitional period
to close non-qualified capital instruments. This takes a
lot of pressure off the PRC banks, he said.
The CBRC may also allow Chinese
banks to issue preferred shares in the future. This would be a
new instrument in China.
Ong believed that, on paper, most
Chinese banks already meet Basel III standards, both for the
core Tier 1 capital requirement of 4.5 and overall capital
requirement of 10.5%.
Indeed, local market participants
did not expect any drastic banking reforms, such as the
proposed rules in Europe and the UK, to be
China bank reform:
what to expect
Chinas securities and
commercial banking laws stipulate that commercial banking must
be segregated from investment banking, which is similar to the
former US Glass-Steagall Act. Chinese banks are therefore
generally well-capitalised, with no major political pressure
for local regulators to separate proprietary trading (as in the
Volcker rule) or conduct any major structural reform of the
banking industry. Domestic lawyers predicted that Chinese
regulators are likely to observe how international reforms
develop before implementing any policy.
Even so, as Chinese banks
increasingly operate in a globalised market, it will be hard to
avoid being affected by US, EU and UK regulations. Overlapping
extra-territorial rules will only increase costs and
administrative burden on banks, which will make them
uncompetitive, or make the markets in which they operate in
Financial services professionals
have observed a trend of Chinese banks moving their operations from London to
Luxembourg to escape regulations and perhaps downsizing
their presence in New York to circumvent Dodd-Frank.
But lawyers doubt that Chinese banks
will leave the US, UK or EU completely.
Ong did not believe that EU, UK and
US bank reforms would deter Chinese banks interest in
international expansion. Like any other business
decision, they will balance the costs of more stringent
regulatory compliance burdens against business
opportunities, he said.
Roy Zhang, partner at King &
Wood Mallesons, said that Chinese banks needed to expand their
coverage. Chinese banks must go abroad to finance their
big clients looking abroad and familiarise themselves with the
international environment, he said.
But the Shanghai lawyer warned that
Chinese banks may readjust their operations in the US as a
result of Dodd-Frank and other post-crash
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