Chinese banks may face capital stress after Basel III accord

 

Chinese banks may face substantial stress in capital after the implementation of Basel III accord, the norm stipulated by G-20, a former deputy governor at the People’s Bank of China has said.

Banks of systematic importance will face a financing gap of 400 billion to 500 billion yuan (USD 77.51 billion) in the next five years, Wu said while delivering an opening speech at the fifth Annual China Bankers Forum.

Chinese banks are currently able to meet the new standard of the Basel III framework, the new global banking requirements agreed by G-20 leaders at the end of last year, with core capital adequacy ratio of most banks reaching 9 per cent, Wu said.

But a capital gap will grow as China’s banks lending scales expand at a relatively rapid pace, Xinhua quoted her as saying.

Nearly 20 trillion yuan in new loans were extended over the past two years as part of the government’s crisis-combating stimulus package.

In July, China’s new lending stood at 492.6 billion yuan. To fill the new capital gap, Chinese banks would need more market financing, or they would seek government financial support that ensures government holding in the banks, Wu said.

China’s banking regulator announced earlier this week that it is drafting tougher capital rules for Chinese lenders to meet the Basel III standard.

The new rules will keep the minimum capital adequacy ratio for banks of systematic importance at 11.5 per cent, while raising the ratio for banks of non-systematic importance to 10.5 per cent.

Basel III: the main points

 

The new rules, known as Basel III, will require banks to hold top-quality capital totalling 7% of their risk-bearing assets

 

Banks will have to raise hundreds of billions of euros in fresh capital under new regulations designed to prevent the repeat of another financial crisis.

The new rules, known as Basel III, will require banks to hold top-quality capital totalling 7% of their risk-bearing assets, a big increase from 2%, but banks are being given more time than expected to comply with the rules – in some cases until 2019.

 

The main points

 

Basel III: Banks will have to increase their core tier-one capital ratio to 4.5% by 2015. In addition, they will have to carry a further “counter-cyclical” capital conservation buffer of 2.5% by 2019. Any bank that fails to meet the new requirements is expected to be banned from paying dividends to shareholders until it has improved its balance sheet.

 

Financial supervision: The G20 wants closer supervision of systemic risk at local and international levels.

 

Derivatives: The G20 has called for greater standardisation and central clearing of privately arranged, over-the-counter contracts by the end of 2012.

 

Hedge funds: US reforms are in line with the G20 pledge that funds above a certain size should be authorised and obliged to report data to supervisors. A draft EU law includes private equity groups and restrictions on non-EU fund managers seeking European investors.

 

Accounting: The G20 wants common global accounting rules by mid-2011.

 

Credit rating agencies: The G20 wants them registered and supervised by the end of 2009. The EU has adopted a law mandating registration and direct supervision that takes effect this year. US legislation passed this year includes similar provisions.

 

Pay: The G20 has endorsed principles designed to stop bonus schemes in banks from encouraging too much short-term risk-taking.

 

What are the Basel-III norms?

Indian banks are unlikely to be affected but may face some negative impact due to shifting some deductions from Tier-I & Tier-II capital to common equity, says RBI Governor Subbarao.

What are the Basel-III norms?

These are rules written by the Bank of International Settlement’s Committee on Banking Supervision (BCBS) whose mandate is to define the reform agenda for the global banking community as a whole. The new rule prescribes how to assess risks, and how much capital to set aside for banks in keeping with their risk profile.

What are the changes which have been made to the way in which capital is defined?

Going by the new rules, the predominant component of capital is common equity and retained earnings. The new rules restrict inclusion of items such as deferred tax assets, mortgage-servicing rights and investments in financial institutions to no more than 15% of the common equity component. These rules aim to improve the quantity and quality of the capital.

What do these new rules say?

While the key capital ratio has been raised to 7% of risky assets, according to the new norms, Tier-I capital that includes common equity and perpetual preferred stock will be raised from 2-4.5% starting in phases from January 2013 to be completed by January 2015. In addition, banks will have to set aside another 2.5% as a contingency for future stress. Banks that fail to meet the buffer would be unable to pay dividends, though they will not be forced to raise cash.

How different is the approach now?

The new norms are based on renewed focus of central bankers on macro-prudential stability. The global financial crisis following the crisis in the US sub-prime market has prompted this change in approach. The previous set of guidelines, popularly known as Basel II focused on macro-prudential regulation. In other words, global regulators are now focusing on financial stability of the system as a whole rather than micro regulation of any individual bank.

How will these norms impact Indian banks?

According to RBI governor D Subbarao, Indian banks are not likely to be impacted by the new capital rules. At the end of June 30, 2010, the aggregate capital to risk-weighted assets ratio of the Indian banking system stood at 13.4%, of which Tier-I capital constituted 9.3%. As such, RBI does not expect our banking system to be significantly stretched in meeting the proposed new capital rules, both in terms of the overall capital requirement and the quality of capital. There may be some negative impact arising from shifting some deductions from Tier-I and Tier-II capital to common equity.

 

Indian banks won’t face problems adjusting to Basel III: RBI

However, as the phase-in time allowed is long enough, these banks should be able to make a comfortable adjustment to the enhanced requirement, the RBI Governor said in a statement.

The Reserve Bank of India (RBI) Governor D. Subbarao said on Friday that Indian banks were well capitalised and can comfortably adjust to the new Basel III norms on capital, liquidity, disclosures and risk management.   “At the aggregate level Indian banks will not have any problem in adjusting to the new capital rules both in terms of quantum and quality,” Subbarao said in his Inaugural Address at ‘BANCON 2010’ in Mumbai today.   “We expect to have a more accurate picture when banks review their Basel III compliance position following the publication of the final Basel III rules scheduled around the year end,” he added.   Indian banks are comfortably placed in terms of compliance with the new capital rules, Subbarao said, adding that a few individual banks may fall short of the Basel III norms and will have to augment their capital.   However, as the phase-in time allowed is long enough, these banks should be able to make a comfortable adjustment to the enhanced requirement, the RBI Governor said in a statement.   The central bank chief also said that there was a strong case to review and recast the country’s banking legislation.   “The current statutory arrangement we have is a baffling plethora of laws governing different segments of the banking industry,” Subbarao said referring to a slew of legislations governing Indian banks.   However, he added that notwithstanding this wide array of legislations of varying vintage, the statutory arrangement has served the system well by helping maintain an orderly banking system.