Challenges despitedelay in capital rules

PUBLISHED : Friday, 08 June, 2012, 12:00am
UPDATED : Friday, 08 June, 2012, 12:00am


While mainland regulators have eased pressure on banks to fast-track improvements to meet tougher international rules regulating capital and liquidity, the next few years will still pose significant challenges, analysts say.

Banks in the Group of 20 nations, including China, are required to meet so-called Basel III standards by January 1, 2019, to address systemic risks that came to light during the global financial crisis that started in 2008.

Beijing had planned to make mainland banks comply earlier, but Premier Wen Jiabao has effectively gave them breathing space.

The delay signals Beijing's wish to encourage lending and avoid a squeeze on capital just when economic growth is slowing, analysts say.

Chinese authorities had originally intended to start phasing Basel III in on January 1, and wanted it completed before the end of next year for systemically important banks, and before the end of 2016 for the others.

Now they say Basel III will start to be phased in on January 1 of next year. But Wen's speech did not spell out whether Chinese banks would need to comply with the tougher capital standards ahead of the Basel III deadline.

The 21st Century Business Herald said yesterday that all Chinese banks would be required to meet the regulation by the end of 2016, citing people familiar with the matter.

'The new changes will give Chinese banks more time to comply, so the chances of lots of banks rushing to raise capital are pretty small,' said Sheng Nan, a senior analyst at CCB International.

Fang Jian, a China managing partner with law firm Linklaters, said fund-raising was difficult under current market conditions, and that could slow the flow of capital in the world market.

'The delay is a realistic choice,' Fang said.

In other aspects, China's Basel III implementation could still be stricter than international standards, analysts say.

For example, China has in the past required important banks to maintain core capital, which mainly consists of equity, at 8.5 per cent or more when measured against risk weighted assets. It has required other banks to hold the measure at 7.5 per cent or more, with some saying regulators have asked them to maintain at least 8 per cent.

International standards require only 7 per cent.

The new rules lower the risk weighting for loans to small and medium-sized enterprises, and personal loans, encouraging banks to lend more to businesses and consumers.

They also lower risk weighting for 'real claims of the public sector'. Analysts say it is unclear whether local government debt will be included. Sheng said that if so, it would signal a shift toward supporting more investment by local governments.


The OECD estimates that the implementation of Basel III will decrease annual GDP growth by up to this much